Australia’s climate disclosure law shows ‘high ambition’ for sustainable finance

Traditionally considered a climate laggard, Australia should soon be brought closer to leaders in the field, such as the EU, by proposed government legislation

Australia’s biggest companies will be subject to mandatory climate disclosure reporting from July 2024 under draft legislation published by the government in January, as Canberra pursues a “high ambition” approach to its sustainable finance agenda. 

The proposed framework targets a broad spectrum of businesses and financial entities, and imposes international climate-related financial disclosure standards on Australia’s private sector for the first time.

It comes as Australia’s Labor government works to transform the country’s reputation as a global climate laggard. In 2022, it legislated national greenhouse gas emissions reduction targets, including achieving net zero by 2050, and is now spearheading efforts to develop a broader sustainable finance strategy to meet its climate goals. 

Kristy Graham, chief executive of the Australian Sustainable Finance Institute, which represents banks, superannuation funds, insurance companies and other financial bodies, says: “Mandatory disclosure, together with the broader Australian government sustainable finance agenda, will help bring Australia into line with global trends and ensure we remain an attractive destination for foreign capital.”

But a step up in climate-related financial disclosure requirements will require a “major skills uplift across the economy”, according to Graham. 

Tom Wainwright, sustainable corporates lead at Australian non-profit Climateworks Centre, agrees. He says the requirements “represent a significant shift for many companies” but that it will form “the starting point [for Australia’s] broader sustainable finance strategy”.

The proposed climate disclosure requirements align with International Sustainability Standards Board benchmarks, with some adaptations for the Australian market under draft local standards. These adaptations include using greenhouse gas emission measurement methodologies that align with existing Australian legislation, and a “climate first” approach tailored to climate-related financial disclosures rather than the ISSB’s broader sustainability lens. 

Step by step

The draft legislation outlines a progressive introduction of the new requirements over a four-year period.

Organisations that meet two of three criteria, including at least A$500mn ($330mn) in consolidated revenue, A$1bn or more of gross consolidated assets or 500 or more employees, will be required to disclose as “Group 1” reporting entities from July 1 as part of the 2024-25 financial year. 

Under the “Group 2” reporting tier, the thresholds are A$200mn or more in consolidated revenue, A$500mn or more in consolidated gross assets, and 250 or more employees, with disclosures starting from the 2026-27 financial year. 

The smallest “Group 3” entities will begin reporting from the 2027-28 financial year based on A$50mn or more in consolidated revenue, $25mn or more in consolidated gross assets or 100 or more employees. 

The draft legislation requires all groups to disclose their Scope 1 and 2 greenhouse gas emissions in their first reporting year before publishing Scope 3 emissions in the subsequent year. This must be accompanied by the release of an annual sustainability report, including a climate statement covering material climate risks and opportunities. Reporting entities must also secure an assurance report from a third-party auditor. 

Qualitative scenario analysis will be required from the first year of reporting, while quantitative analysis will follow from the 2027-28 financial year for all reporting entities. 

Experts have welcomed the proposals and say it will put Australia on an even climate policy footing with advanced economy peers, such as the EU, the UK, Japan and New Zealand. 

Hannah Meade, a director of climate change advisory firm Ndevr Environmental, says: “I think this is one of the biggest movements in the right direction [for Australian climate policy] probably ever. This is going to put us on an even playing field, globally.”

Kristy Graham at ASFI says the framework will support better management of climate risks and opportunities across the economy, along with better transparency and standardisation of information. 

Alarm bells ringing

The government’s draft climate-related financial disclosure regime includes more entities than envisaged during earlier consultation periods in 2023. More superannuation and investment management groups now fall within the reporting perimeter of the latest proposal, which requires entities with A$5bn or more in funds under management to report as part of Group 2 from 2026.

This development has raised alarms in some quarters of the financial services market – as has the looming 2024 reporting timeline for larger reporting entities.

“There are possibly some big panic stations for some of those entities that are in Group 1. Most of them should have a good understanding of their Scope 1 and 2 emissions but it’s the climate risk side of things [that could be more difficult],” says Ndevr Environmental’s Meade. 

AustralianSuper, the country’s largest superannuation fund, declined to comment for this story but published a detailed submission as part of an earlier consultation on new national climate reporting requirements. 

While supporting the push for standardised disclosure of climate-related financial risks, it noted that superannuation funds faced challenges in meeting the requirements given their “dual responsibilities” as “investors and reporting entities”. 

The fund also called for a minimum 12-month transition period for Group 1 entities once the government finalised the legislation.

Allan Gray, an investment management group with A$9bn in assets under management, noted in a public submission that mandatory climate-related financial disclosures would impose “unnecessary costs and risks” and that existing continuous disclosure rules were sufficient to impart companies’ climate-related risks. 

A spokesperson for the firm declined to comment. 

Safe harbour period

Meanwhile, businesses, including many smaller and mid-sized entities, that report greenhouse gas emissions under Australia’s National Greenhouse and Energy Reporting Act will be brought into the Group 2 reporting cohort even if they do not meet the proposed climate-related disclosure regime’s thresholds.

Some of these organisations could find it “significantly more challenging to meet the reporting requirements” of Australia’s draft climate-related financial disclosure regime, according to research from law firm Corrs Chambers Westgarth. 

The liability framework introduced in the proposals uses existing legislation to include provisions for misleading and deceptive conduct, general disclosure obligations and director’s duties. 

But the draft legislation proposes a safe harbour period to shield reporting entities from civil action not brought by the regulator for disclosures linked to Scope 3 emissions and various forward-looking statements linked to scenario analysis. This would apply for a fixed three-year period from July 2025 to June 2028. 

The private sector has welcomed the safe harbour proposal, although some experts believe it could be misused. 

Climateworks Centre’s Wainwright says: “The safe harbour arrangements are vulnerable to misuse, and will require oversight to avoid greenwashing as companies grow their capabilities and capacity with the flexibility the arrangement provides.”

The draft legislation is open for consultation until February 9. The government is expected to move quickly once this period ends, to enable the July 2024 reporting deadline.