Australia is moving forward with mandatory climate-related financial disclosure requirements, introducing significant changes in how companies report climate-related risks and opportunities. As outlined in the government’s policy statement, this framework will amend the Corporations Act and be enforced through standards set by the Australian Accounting Standards Board (AASB) and the Australian Auditing and Assurance Standards Board (AUASB). Here’s a comprehensive look at what businesses need to prepare for, including critical deadlines and compliance phases for directly affected entities, as well as indirect implications for businesses below reporting thresholds.

Who Must Comply: Key Entities

The new requirements apply broadly to large entities, primarily categorised by size and type:

1. Large Companies and Financial Institutions: Businesses meeting specific size thresholds under Chapter 2M of the Corporations Act will be required to report on climate-related risks and opportunities. This applies to both listed and unlisted companies and financial institutions.
2. Asset Owners: Superannuation entities and registered investment schemes managing over $5 billion must also comply. This requirement acknowledges the significance of these entities within Australia’s financial sector and their critical role in managing climate risk.
3. NGER-Reporting Entities: Companies that report under the National Greenhouse and Energy Reporting (NGER) Act, regardless of size, must disclose their climate risks due to their established emissions profiles​.

Entities exempt from Corporations Act reporting requirements, such as small and medium enterprises (SMEs) below specific size thresholds and registered charities, are generally exempt from these new obligations.   To be exempt the entities must have annual revenue less than $50 million, gross assets less than $25 million, and less than 100 employees. However, smaller entities may still feel an indirect impact if they work closely with large reporting entities (see more below).

Phased Implementation Timeline

The government has structured a phased framework rollout based on company size and emissions levels, allowing for gradual adaptation. The implementation timeline is as follows:

• Group 1 (Beginning January 2025):
  • Targeting the largest entities, those meeting at least two of three criteria: annual revenue over $500 million, gross assets above $1 billion, or 500 or more employees.
  • These entities must prepare and lodge climate disclosures covering governance, strategy, risk management, and Scope 1 and Scope 2 greenhouse gas emissions starting from their first financial year beginning on or after 1 January 2025.
• Group 2 (Beginning July 2026):
  • This phase applies to entities with annual revenues over $200 million, assets exceeding $500 million, or at least 250 employees. This includes additional NGER-reporting companies and asset owners with over $5 billion in managed assets.
  • These entities must adhere to the same disclosure standards as Group 1.
• Group 3 (Beginning July 2027):
  • Smaller entities meeting lower thresholds of annual revenue ($50 million), gross assets ($25 million), and employees (100 or more) enter compliance in 2027.
  • Group 3 businesses only need to disclose climate-related information if it presents material risks or opportunities for the reporting period. A simple statement to that effect will suffice​if no material risks are identified.

Reporting Content and Scope

The mandated disclosures require businesses to provide information in several critical areas:

• Governance and Strategy: Companies must outline how climate risks are integrated into business strategy and oversight processes.
• Risk Management: Details on how climate risks are identified, assessed, and managed are required.
• Metrics and Targets: Reporting on Scope 1 (direct) and Scope 2 (indirect energy-related) emissions is mandatory from the first year of reporting. Scope 3 emissions (emissions occurring up and down the supply chain) will be phased in from the second reporting year, providing companies time to prepare.

This Scope 3 requirement has implications for smaller businesses within the supply chain of larger entities. Large companies may seek emissions data from their suppliers and partners to fulfil their own reporting obligations. As a result, even businesses below the mandatory threshold might be asked to track, quantify, and share emissions data to help larger clients meet compliance needs. Building capabilities to capture and report on emissions data could streamline interactions with larger reporting entities, adding a layer of operational readiness and transparency for smaller companies.

Assurance Requirements and Liability

The framework introduces assurance requirements for disclosed climate data to ensure accuracy and reliability:

• Starting in 2024, Scope 1 and Scope 2 emissions data will require independent assurance from auditors with climate expertise.
• By 2030, all climate disclosures will be subject to assurance, and a phased approach will allow businesses time to comply fully.

To mitigate legal exposure, the government will provide limited liability on Scope 3 emissions and certain forward-looking statements for three years (2025-2028). Only regulators can initiate actions on misstatements related to Scope 3 disclosures during this period, limiting remedies to injunctions and declarations. This temporary relief allows businesses to develop robust reporting practices without immediate legal risks​​.

Considerations for Small and Medium Enterprises

While SMEs are not directly affected by the new requirements, there may be strategic value in preparing for indirect demands:

• Supply Chain Reporting Demands: Larger, compliant entities could ask smaller suppliers, vendors, and service providers to provide emissions-related data, particularly for Scope 3 emissions reporting. Preparing systems to capture relevant emissions data can help meet such requests with minimal disruption.
• Client Relationship and Competitiveness: Large companies may prefer working with smaller partners that can readily provide reliable environmental data. Smaller businesses that proactively track primary emissions data or adopt sustainable practices may be more attractive partners, particularly in sectors with robust climate reporting expectations.
• Potential for Future Regulations: While SMEs are currently exempt, regulatory trends suggest that climate-related reporting requirements could expand. Building reporting capacity now could ease future transitions should the mandates extend to include smaller companies.

Key Takeaways

The phased introduction of mandatory climate-related financial disclosures represents a significant regulatory shift for Australian businesses, with both direct and indirect impacts. Large companies, asset owners, and significant emitters must integrate climate-related financial risks into their reporting processes to ensure transparency and meet regulatory expectations. Meanwhile, smaller businesses can benefit from establishing foundational emissions-tracking processes to support client relationships and prepare for possible future regulations.

Early compliance strategies, robust reporting frameworks, and engagement with specialised auditors will be crucial for businesses directly impacted. By implementing reliable data collection and reporting practices, companies can fulfil regulatory obligations, minimise legal risks, and ensure continuity in their partnerships within the evolving regulatory landscape.