Prepare for the imminent introduction of mandatory sustainability reports, phased in from financial years beginning on or after 1 July 2024

Treasury has released its final consultation on the implementation of mandatory climate-related financial disclosures in Australia. The consultation includes a policy position statement, policy impact analysis, exposure draft legislation and exposure draft explanatory memorandum.

The proposals largely follow previous proposals but respond to feedback received on previous consultations and also clarify a number of matters.

Following scope changes announced in this consultation, the policy impact analysis includes Treasury estimates that 1800 entities will be captured. Although costs will vary depending on the size of the entity,  Treasury calculates the new requirements would add between $1.0 million to $1.3 million (per entity) in initial transition costs, gradually reducing to ongoing costs of $500,000 to $700,000 per year (depending on the entity’s size and circumstances).

In summary, the proposed legislation would have the following features:

Scope

• Entities which lodge financial reports under Chapter 2M of the Corporations Act 2001 will be captured, subject to size thresholds (based on their levels of assets, revenues and employees) and a phased in approach, with three groups first reporting from financial years beginning on or after 1 July 2024  (Group 1), 1 July 2026 (Group 2) and 1 July 2027 (Group 3)
• In addition, all entities who are required to report under Chapter 2M of the Corporations Act 2001 and who report under the National Greenhouse and Energy Reporting Act 2007 (NGER) will be required to report in either Group 1 or Group 2 even if they do not meet the size threshold criteria 
• A new threshold would include within Group 2 asset owners (such as superannuation funds and other funds) that have $5 billion or more in assets under management
• Entities in Group 3 would only be required to make disclosures if they face material climate-related risks or opportunities, and where this is not the case, would be able to comply by disclosing a statement that they do not have material climate-related risks and opportunities
• Concessions introduced would see consolidated groups being able to elect to only prepare one sustainability report for the Australian consolidated group.

Reporting requirements

• The introduction of a new “sustainability report” would form a fourth report as part of the annual report, alongside the directors’ report, financial report and auditor’s reports. The auditor’s report on the sustainability report would be separate from the report on the financial report
• The sustainability report would include a climate statement, notes to the climate statement, any statements prescribed by the regulations and a directors’ declaration
• The climate statement would include material climate-related financial risks and opportunities, metrics and targets related to climate (including Scope 1, Scope 2 and Scope 3 greenhouse gas emissions) and climate-related governance or risk management processes, controls and procedures.  Scope 1 and Scope 2 emissions would be determined in accordance with NGER, whereas Scope 3 emissions would be determined in accordance with the Corporate Value Chain (Scope 3) Accounting and Reporting Standard under the Greenhouse Gas Protocol
• The sustainability report would comply with sustainability standards set by the AASB (and any requirements in the regulations), would be given to members (with some exceptions) and laid before the annual general meeting (where held).

Assurance requirements

• Climate statements related to Scope 1 and Scope 2 emissions included in sustainability reports from 1 July 2024 would be subject to review
• All climate disclosures included in sustainability reports made from 1 July 2030 onwards would be subject to audit
• The policy position statement indicates the Auditing and Assurance Standards Board (AUASB) will “set out a pathway for phasing in requirements over time”.

Other considerations

• The introduction of a temporary ‘modified liability’ framework which provides limited immunity from liability for statements in sustainability reports relating to Scope 3 emissions and scenario analysis, in relation to financial years commencing between 1 July 2024 and 30 June 2027
• The seven year record keeping requirement applying to financial records would be extended to information explaining or used in preparing the sustainability report. Similar requirements apply to audit information for the auditor.

The introduction of mandatory climate-related financial disclosures represents a major change in Australia’s corporate reporting framework. As most entities reporting under the Corporations Act 2001 will be captured (unless part of a consolidated group), entities must understand the requirements and prepare for their imminent introduction.

Respond to ASIC’s focus areas for December 2023 reporting periods

ASIC has announced its focus areas for 31 December 2023 financial reporting. 

Consistent with ASIC’s recent move to an integrated financial reporting and audit surveillance process, the focus areas include both financial reporting and auditing aspects of the financial reporting process. Furthermore, the focus areas highlight elements of financial reports and audits where ASIC has identified the most significant and common instances of non-compliance with Australian Accounting Standards or issues that are emerging as more significant challenges for preparers.

Unlike in previous periods, ASIC has issued a separate media release highlighting key points and a new financial reporting and audit web page providing more detail. The latter page is expected to be updated each six months.

The key overall considerations raised by ASIC include:

• An emphasis on directors ensuring adequate resources, skills and expertise is applied in the financial reporting process and that underlying estimates and assessments are reasonable and supportable. The detailed focus areas call out a need for “robust position papers with appropriate analysis and conclusions referencing relevant accounting standards”
• A need for auditors to focus professional judgement and scepticism on areas of the financial report preparation process most reliant on estimates and are uncertain
• The importance of clear disclosures about uncertainties, key assumptions and sensitivity analyses to investors. ASIC notes uncertainties may change from period to period and documenting and updating the information supporting the judgement is expected.

Consistent with the recently released integrated surveillance report, the key focus areas highlighted by ASIC include:

• Impairment and asset values
• Provisions
• Subsequent events
• Disclosures in the operating and financial review (OFR)
• The impact of AASB 17 Insurance Contracts.
  

Updated AASB 1056 and Corporations Instruments available for superannuation fund financial reporting

In late December 2023, the AASB published a revised version of AASB 1056 Superannuation Entities, which applies to annual reporting periods beginning on or after 1 July 2023 that end on or after 31 December 2023. The revised standard does not change the financial reporting requirements applying to superannuation entities but makes the standard a legislative instrument under the Corporations Act 2001. This was required as registrable superannuation entities are required to prepare and lodge audited financial reports under the Corporations Act 2001 for financial years ending on or after 30 June 2024 (see our June 2024 superannuation entity model financial report for more information).

In addition, ASIC has released ASIC Corporations (Amendment) Instrument 2023/142 which amends a number of other instruments to permit registrable superannuation entities (and corporate collective investment vehicles or CCIVs) to take advantage of relief available to other entities reporting under the Corporations Act 2001, such as the ability to round amounts in the financial report and directors’ report.

Government commits funding for implementation of mandatory climate-related financial disclosures

The Federal Government Mid-Year Economic and Fiscal Outlook (MYEFO) confirms the Government’s commitment to legislate mandatory standardised climate-related financial disclosure requirements and commits funding of $81.6 million to the AASB, AUASB, ASIC and other bodies to support the implementation of the new requirements.

In addition, a further $1.2 million has been committed to support the replacement of the AASB, AUASB and Financial Reporting Council with a new body responsible for corporate reporting standards related to accounting, auditing and assurance and climate sustainability. The Treasurer announced the new body is expected to be in place by 1 July 2026.

IASB discontinues its projects on common control and extractives

Over its November and December 2023 meetings, the IASB decided to discontinue the following projects:

• Business combinations under common control. Based on feedback received (summarised in this agenda paper), the IASB decided to discontinue this project without developing requirements for recognition and measurement, and without exploring disclosure-only requirements. A project summary is expected to be published in the second quarter of 2024
• Extractive activities. Based on research findings, the IASB decided to discontinue the project without developing new or amended recognition, measurement or disclosure requirements. A project summary was published in December 2023 and a maintenance project added to the pipeline to remove the temporary nature of the exemption in IFRS 6 Exploration for and Evaluation of Mineral Resources from application of certain aspects of the accounting policy ‘hierarchy’ in paragraphs 11-12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Updated SASB Standards released

In late December 2023, the ISSB announced targeted amendments made to the SASB Standards, designed to enhance their international applicability. 

The SASB Standards seek to create a standardised baseline of sustainability issues across 77 industries and are designed to provide guidance on the application of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.

In Australia, the AASB decided to remove references to the SASB Standards from IFRS S1 and IFRS S2 when it developed its proposals in Exposure Draft ED SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information based on those standards. This was partially due to the SASB Standards being seen as “US-centric and not representative of the Australian or global market”.  Although the ISSB completed its project to amend and internationalise climate-related SASB Standards as part of the issue of IFRS S2, the AASB did not include the amended requirements in ED SR1 because of consultative timeframe and due process concerns.

However, the Basis for Conclusions on ED SR1 notes that entities can make additional voluntary disclosures using SASB Standards if they wish to do so.