Brace for Impact: Preparing for Australia's Mandatory Climate-Related Disclosures

Enterprise carbon accounting is about to take centre stage

Amidst growing concerns about climate change and its impact on global economies, the Australian Government has taken a significant step towards ensuring transparency and accountability in corporate environmental practices. With the release of the exposure draft of the Treasury Laws Amendment Bill 2024: Climate related financial disclosure (Draft Bill), Australian organisations are on the brink of a new era of mandatory climate-related financial reporting.

What this means is that sustainability initiatives will no longer be a sideline business concern; they are now front and centre in the corporate landscape. The Draft Bill proposes mandatory, internationally aligned climate-related financial disclosures, placing organisations under increased scrutiny and accountability.

Make no mistake: this upcoming regulation must be taken seriously. Mandatory disclosure will mean that companies not only face significant additional scrutiny but also carry a financial penalty if requirements are not addressed appropriately. While Scope 3 disclosure may be deferred initially, it's still a big change from the familiar territories of Scope 1 and 2 activities.

Additionally, as companies gear up to meet these reporting requirements, they must also prepare for additional scrutiny from their value chain, including customers, investors, and other stakeholders. The pressure to demonstrate environmental responsibility and sustainability practices will be greater than ever before.

Let's take a closer look at Australia's impending mandatory climate-related financial disclosures - implications, challenges, and opportunities.

ESG reporting - what will the Draft Bill be scrutinising?

This Bill, if enacted, will bring significant changes to how companies, registered schemes, and superannuation entities disclose their environmental impact and sustainability practices.

The National Greenhouse and Energy Reporting Scheme (NGER) is the go-to for emissions reporting in Australia. Under the NGER scheme, specific greenhouse gases, including carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulphur hexafluoride (SF6), and certain hydrofluorocarbons and perfluorocarbons, are mandated to be reported. This framework ensures comprehensive coverage of both direct (Scope 1) and indirect (Scope 2) emissions.

While Scope 3 emissions are not currently under the NGER umbrella, Australia's National Greenhouse Accounts offer additional pathways for disclosure.

The Draft Bill proposes a phased approach to introducing mandatory climate-related financial disclosures over a four-year period. The reporting obligations will be determined based on various criteria, including revenue, assets, number of employees, and existing reporting obligations under the National Greenhouse and Energy Reporting Act 2007. The proposed groups for reporting obligations are as follows:

1. First group: Entities meeting specific revenue, asset, and employee thresholds for the financial year commencing between 1 July 2024 and 30 June 2026
2. Second group: Entities meeting revised thresholds for the financial year commencing between 1 July 2026 and 30 June 2027
3. Third group: Entities meeting further revised thresholds for the financial year commencing on or after 1 July 2027

This will apply to approximately 2,000 Australian organisations. The phased approach aims to provide them with sufficient time to adapt to the new reporting requirements.

What will these organisations need to do?

The Draft Bill outlines specific requirements for the sustainability report of a financial year. If enacted, organisations must adhere to these regulations, which include:

• Climate statements - a detailed overview of the organisation's climate-related activities and performance during the reporting period. These statements will be crucial in assessing the organisation's environmental impact and progress towards sustainability goals.
• Notes to climate statements - any necessary notes to provide additional context or explanation.
• Directors' declaration - an explicit statement of compliance with international sustainability reporting standards. Additionally, they must express their opinion on whether the climate statements, related environmental sustainability statements (if applicable), and accompanying notes align with the requirements outlined in the Act.
• Statements on environmental sustainability - the Minister may direct that the annual sustainability report includes statements relating to 'matters concerning environmental sustainability.' While the term 'environmental sustainability' is not explicitly defined in the Draft Bill, it reflects the government's recognition of the evolving landscape of sustainability reporting. This provision allows for flexibility in adapting reporting requirements to meet international standards and evolving government priorities.

These proposed measures aim to enhance transparency, accountability, and consistency in climate-related financial reporting, ensuring that organisations fulfil their obligations while aligning with global sustainability standards and best practices.

Unpacking the climate statement - key disclosures

In accordance with the Draft Bill's provisions, an organisation's climate statement serves as a crucial document for communicating its climate-related performance and commitments. Here's what needs to be included:

• Material climate risks and opportunities - an outline of any significant climate risks and opportunities encountered by the organisation during the financial year. These disclosures are determined in alignment with sustainability standards, shedding light on factors that may impact the organisation's operations, finances, and long-term sustainability.
• Climate change metrics and targets - anything related to greenhouse gas emissions across scopes 1, 2, and 3. By quantifying emissions and setting targets, organisations can track their progress in reducing environmental impact and achieving sustainability objectives.
• Governance policies and climate metrics - governance policies pertaining to climate risk and opportunities must be disclosed. Additionally, any climate metrics and targets mandated by sustainability standards should be clearly articulated. This ensures that stakeholders understand the organisation's approach to climate governance and its commitment to mitigating climate-related risks.
• Greenhouse gas emissions reporting - comprehensive data on the entity's greenhouse gas emissions must be provided. This includes emissions for the specified reporting period as outlined by sustainability standards or for the entire financial year.

These disclosures within the climate statement enable stakeholders to assess an organisation's environmental performance, governance practices, and commitment to addressing climate change.

What's happening with Scope 3 reporting?

Addressing Scope 3 emissions can be tough for many organisations, as they often constitute the largest portion of their emissions profile. To alleviate the initial reporting burden, the Draft Bill proposes transitional arrangements aimed at easing the disclosure requirements for Scope 3 emissions.

Exemption for first reporting period
To mitigate the complexities associated with Scope 3 emissions reporting, companies will be exempt from the obligation to report Scope 3 greenhouse gas emissions for the initial reporting period. This exemption aims to provide organisations with time to develop robust measurement frameworks and data collection methodologies for comprehensive Scope 3 reporting.

Limited immunity for transitional period
During the transitional period spanning from 1 July 2024 to 30 June 2027, the Draft Bill offers limited immunity regarding disclosures related to Scope 3 emissions or scenario analysis made in their sustainability reports. This immunity will protect organisations from certain legal actions.

Important considerations
While the exemption and immunity provisions offer temporary relief, organisations must recognise the significance of Scope 3 emissions and the inevitable, upcoming reporting obligations. Despite the postponement of Scope 3 reporting requirements, organisations are urged to allocate resources and prioritise preparations for comprehensive emissions disclosures.

Although the exemption might be seen as a relatively small step, it still underscores the government's recognition of the complexities involved in Scope 3 emissions reporting. However, businesses are encouraged to approach this exemption with diligence and foresight, understanding that Scope 3 disclosures represent a steep change from Scope 1 and 2 activities. Proactive planning and strategic resource allocation will be essential to navigate the landscape of climate-related disclosures effectively.   

Conclusion - where to from here?

As Australia moves towards mandatory climate-related financial disclosures, organisations face a pivotal moment in their sustainability journey. The proposed Draft Bill underscores the government's commitment to enhancing transparency and accountability in emissions reporting, setting the stage for a new era of climate disclosure standards.

While the transitional arrangements offer temporary relief for Scope 3 emissions reporting, it's essential for organisations to recognise the wider implications. Mandatory disclosure brings heightened scrutiny and regulatory oversight, requiring diligent preparation and resource allocation to ensure compliance.

As the deadline for compliance approaches, now is the time for organisations to seize the opportunity and proactively engage with the upcoming requirements.

Book a meeting with us to discuss how our innovative, cutting-edge software can help you meet the upcoming climate-reporting requirements.