Treasury has announced proposed implementation of mandatory climate reporting requirements for large businesses and financial institutions commencing from 1 July 2024 in Australia.
The proposed climate reporting regime forms part of Australia’s broader sustainable finance framework and net zero transition commitments of 43 per cent reduction in emissions by 2030 (relative to 2005 levels), and net zero by 2050.
A second consultation paper on the proposed disclosure framework was released by Treasury on 27 June 2023, which reflects feedback from industry groups, investors, and regulators on the first consultation paper released in December 2022. It is now open for a second round of feedback, including public consultation.
In this article, Aon, in consultation with the Institute of Sustainable Futures at University of Technology Sydney (UTS), provides an overview of the proposed disclosure framework, explores why it is important, and shares insights on the opportunities this change presents to the Australian market.
Why is this important?
Australia’s evolution from a voluntary climate disclosure environment to a mandatory one will require not only changes in legislation but will also lead to a fundamental shift in competency requirements of regulated entities, and a transfer of where climate responsibilities sit within an organisation.
Whilst the disclosure of climate-related risks and opportunities has not been mandatory in Australia until now, since 2017 many organisations have opted to make climate disclosures aligned with the four-pillared approach of TCFD (Taskforce on Climate Related Financial Disclosures). There are currently around 180 Australian businesses listed as official supporters of TCFD. These voluntary disclosures differ in content, depth and rigour however and thus suffer from a lack of comparability and transparency.
Climate disclosures – where they are made – currently form part of an organisation’s sustainability reporting, with responsibility typically sitting with ESG and sustainability groups.
The move to a mandatory disclosure environment will likely be accompanied by a regulator-led review of organisational competencies to meet the new requirements. It may also drive a shift in where ‘climate’ responsibilities sit within an organisation – potentially moving from ESG/sustainability groups to risk teams – as the new framework will require disclosures to move from an organisation’s sustainability report to the annual financial report. Risk teams will need to ensure they have the skills required to meet these obligations.
The announcement from Treasury was timed to coincide with the long-awaited release of two International Sustainability Standards Board (ISSB) global sustainability standards regarding general sustainability disclosures, and climate related disclosures. These are positioned to become the global benchmark standards for sustainability and climate reporting. With the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, and the Reserve Bank of Australia all expressing support for the ISSB standards, it is highly likely they will be integrated into Australia’s financial markets.
Treasury’s climate-related financial disclosure draft aligns with the core principles of the ISSB standards: governance, strategy, risk management and metrics and targets.
Mandatory climate reporting in Australia would bring the country in line with counterparts in New Zealand, the United Kingdom, European Union, Japan, Brazil, Hong Kong, and Singapore.
Who needs to disclose?
A three-tiered approach is proposed, depending on the scale of the entity and its connection with the wider economy. All organisations that are currently required to report under the National Greenhouse and Energy Reporting (NGER) Act as a “Controlling Corporation” will be eventually required to undertake climate disclosures from the reporting period commencing 1 July 2027.
These requirements will be phased in three cohorts:
Cohort 1 (2024/25 reporting period) – Any NGERS entity that fulfils at least two of the following:
- > 500 employees
- Consolidated gross assets > $1 billion,
- Consolidated annual revenue > $500 million
Cohort 2 (2026/27 reporting period) – Any NGERS entity that fulfils at least two of the following:
- > 250 employees
- Consolidated gross assets > $500 million
- Consolidated annual revenue > $200 million
Cohort 3 (2027/28 reporting period) – Any NGERS entity that fulfils at least two of the following:
- > 100 employees
- Consolidated gross assets > $25 million
- Consolidated annual revenue > $50 million
It is unclear which reporting requirements relate to entities that are not currently required to report under NGERS but still fulfil the cohort requirements. It is also yet unclear what the reporting requirements of subsidiaries are and whether reporting can be consolidated at a group level, or whether standalone subsidiary reporting is required.
Unlisted entities that are not already covered by NGER reporting requirements are also likely to be required to disclose after the initial three-year phase is complete.
Where will disclosures be found?
It is proposed that climate disclosures be set out in the company’s annual report. For listed entities, this will be in the Operating and Financial Review (OFR) within the Directors’ Report.
Listed entities are also given the option of reporting metrics and targets standards in a separate report, provided it is referenced in the Directors’ Report. This is similar to the current approach of sustainability reporting, where metrics and targets are often housed in a ‘databook’ on a website in order to keep the report slim.
What will need to be disclosed?
Disclosures are initially proposed to include information on:
- Strategy (scenario analysis and transition planning)
- Risks and opportunities
- Metrics and targets (greenhouse gas (GHG) emissions and industry-based metrics)
This framework is broadly consistent with the core elements of the TCFD framework. Entities already making voluntary disclosures against this framework should be well placed to adapt to the mandatory reporting environment. Aon further explores how to approach TCFD disclosure in our article, Climate Disclosures: Value Beyond Compliance.
Looking to GHG emissions, Treasury indicates that all scopes are in. Using the GHG Protocol corporate standard definition, scope 1 emissions are defined as direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.
Treasury proposes that entities will only be required to disclose material scope 3 emissions from their second reporting year onwards. Initial disclosure only requires scopes 1 and 2. It is also suggested that from the third reporting year, entities will transition from qualitative to quantitative climate scenario analysis.
There is currently a lack of detail on metrics and targets, but it is likely these will align with the global ISSB-suggested industry-based disclosure requirements. These requirements, as they relate to the insurance industry can be viewed in Appendix B of [draft] IFRS S2 Climate-related Disclosures.
There remains significant data and methodology gaps in climate risk and carbon emissions quantification. The recent breakup of the Net Zero Insurance Alliance (NZIA) raises questions over where the industry now sits in terms of a standard for the quantification of insurance-based emissions. Similar (but less pronounced) issues have impacted other industry groups under Mark Carney’s broad GFANZ (Glasgow Financial Alliance for New Zero). If there is insufficient data or methodology in place for scope 3 emissions quantification by the time entities are required to disclose scope 3, it is unclear how entities should quantify scope 3 in this instance.
Likewise, physical climate risk quantification can take many different forms and it comes with high uncertainty. For example, the ISSB suggestion is for insurance industry members to disclose the projected change in the Probable Maximum Loss (PML), both now and under future climate scenarios. Quantification of this risk metric requires complex risk modelling and is unlikely to be comparable across entities.
Treasury does not yet specify which climate scenario framework should be used. It is proposed that entities be required to explore two climate scenarios: one aligned with less than two degrees of warming by 2100, and another unspecified.
It is clear there remains much work to be done before quantitative physical, transitional and emissions disclosures can be included in a way that can be openly assured and verified. According to Treasury’s draft, there will initially be ‘limited’ assurance over scope 1 and 2 disclosures, and ‘reasonable’ assurance over governance disclosures.
What are the litigation risks?
The Government proposes to introduce civil penalty provisions into the Corporations Act, which would see penalties for organisations for either a failure to disclose, or for inadequate disclosure.
Enforcement for misleading or deceptive conduct or ‘similar claims’ (colloquially known as greenwashing), in respect to scope 3 emission disclosures or forward-looking disclosure statements (such as scenario analyses and transition plans), will be limited to regulator-only action, for a period of three years from the reporting period commencing 1 July 2024.
There have been calls from the Australian Institute of Company Directors, the Australian Banking Association, the Insurance Council of Australia and the Business Council of Australia for a ‘safe harbour’ provision to protect litigation risks against directors on forward-looking climate disclosure statements. However, it appears Treasury has not adopted the safe harbour approach in their second draft, perhaps out of concern that any disclaimers against forward-looking statements then render these unusable. Instead, they have opted for a ‘regulator-only’ approach which may come with a series of warnings prior to penalties.
Regulation drives innovation
In a recent paper, Aon and the Institute of Sustainable Futures at UTS, explored the evolution of climate regulation across jurisdictions in the Asia Pacific region, highlighting several historical cases where regulation drives innovation.
This is particularly the case for the insurance industry. For example, there is demand for new products and services around directors and officers cover, vehicles to support credible transition pathways for hard to abate sectors, innovative new risk transfer solutions for carbon offsetting and building resilience to climate risks, and products supporting better physical climate risk quantification. This will no doubt all continue to grow.
Aon is at the forefront driving analytical and product innovation in these areas for our clients. Talk to our specialists for more information.
 Treasury Ministers, 2023, Maximising investment opportunities and managing climate risks | Treasury Ministers
 Prime Minister of Australia, 2022, Australia Legislates Emissions Reduction Targets | Prime Minister of Australia (pm.gov.au)
 Treasury, 2023, Climate-related financial disclosure: Second consultation | Treasury.gov.au
 Task Force on Climate-related Financial Disclosures, 2023, Supporters | Task Force on Climate-Related Financial Disclosures (fsb-tcfd.org)
 International Financial Reporting Standards Foundation, 2023, IFRS – IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
 International Financial Reporting Standards Foundation, 2023, IFRS – IFRS S2 Climate-related Disclosures
 Australian Prudential Regulation Authority, 2022, APRA Deputy Chair Helen Rowell – Remarks to the Australian Sustainable Finance Summit | APRA
 Australian Securities & Investments Commission, 2021, 21-349MR ASIC welcomes new International Sustainability Standards Board and updated climate-related disclosure guidance | ASIC
 Reserve Bank of Australia, 2022, Financial Stability Review (rba.gov.au)
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 Treasury, 2023, Climate-related financial disclosure: Second consultation | Treasury.gov.au
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 Financial Times, 2023, Insurance industry turmoil over climate alliance exodus | Financial Times (ft.com)
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 International Sustainability Standards Board, 2022, Volume B17—Insurance (ifrs.org)
 Financial Review, 2023, Labor’s climate disclosure will backfire, business warns (afr.com)
 Aon, 2023, Climate Change and Financial Risk: The impacts of rapidly evolving regulation across APAC (aoninsights.com.au)