Summary
Cut through the green tape
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Details
Deep dive
Background
The government of Australia has set a target of reducing the country’s 2005 level of greenhouse gases by 43% by 2030 and achieving net zero emissions by 2050. Financial markets are key to funding the investments needed to attain these goals. However, to accurately assess climate-related risks and opportunities and other related due diligence, investors require consistent data on climate risks and opportunities and the measures companies are implementing to achieve their climate goals. Climate-related financial disclosures serve as a key mechanism for businesses to share this information with investors. Well-structured disclosures help integrate the financial impacts of climate change into the investment decision process. The new sustainability disclosure mandate has followed the publication of a Sustainable Finance Roadmap also in 2024 and are both in line with the Powering Australia policy of the Australian government which seeks to create jobs, lower pressure on energy bills, and increase the production of renewable energy.
Which companies are affected?
Against the above background, the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 passed by the Australian Parliament in September 2024 mandates large listed and unlisted companies in Australia to produce an annual Sustainability Report disclosing their Scope 1 and Scope 2 emissions and other climate-related statements specified in the legislation. As part of its regular reporting obligations, the sustainability report will be included in the company's annual report to be submitted to the Australian Securities and Investments Commission (ASIC). The new mandate for annual sustainability reporting, which is contained in Schedule 4 of the above-mentioned Act, is to be implemented in phases starting with large companies and moving progressively to smaller companies defined according to criteria listed below:
1 January 2025: Group 1 companies defined as those meeting at least two of the criteria below
Consolidated revenue of $500 million or more.
Consolidated gross assets of $1 billion or more.
Workforce of 500 employees or more
1 July 2026: Group 2 companies defined as those meeting at least two of the criteria below:
Consolidated revenue of $200 million or more.
Consolidated gross assets of $500 million or more.
Workforce of 250 employees or more.
1 July 2027: Group 3 companies defined as those meeting at least two of the criteria below:
Consolidated revenue of $50 million or more.
Consolidated gross assets of $25 million or more.
Workforce of 100 employees or more.
Cost implications
According to a policy impact analysis conducted by the Australian Treasury, at least 1800 Australian companies will be affected by the new regulation mandating annual disclosures on climate-related risks and opportunities. Implementing the regulation is projected to initially cost companies between 1.0 million to $1.3 million annually, stabilizing and reducing over time to between $500,000 and $700,000 annually. However, the report also notes that effectively implementing the mandatory climate risk disclosure regime in Australia will ensure a thorough identification of climate-related financial risks both within individual companies and across the broader economy. Moreover, it will enhance risk management practices and increase transparency around entities' decarbonization strategies. Consequently, capital will be allocated more efficiently, aligning with the transition to net zero. Though not easily quantifiable from the point of view of companies, the benefits are projected in the report to eventually exceed the costs.
Penalties for non-compliance
Companies required to prepare a sustainability report are also expected to maintain for seven years records detailing the process of preparing the report. These records include details of methods and other evidence backing up the statements made in the sustainability report. A breach of the record-keeping requirement is considered both a fault-based offense (with a maximum prison term of two years) and strict liability (with a maximum penalty of 60 penalty units). Moreover, the legislation considers the failure of auditors of sustainability reports to carry out an audit following auditing standards both a fault-based offense (with a maximum prison term of two years) and strict liability (with a maximum penalty of 60 penalty units).
