Sustainability reporting in the wake of Regulatory Guide 280

Amendments to the Corporations Act 2001 (the Act) in September 2024, established Australia’s framework for climate-related financial disclosures and sustainability reporting. Following significant public consultation, ASIC have now released Regulatory Guide 280, providing guidance for entities that are now required to prepare and lodge sustainability reports under the new provisions within Chapter 2M of the Act.

Amendments to the Corporations Act

The amendments, containing a suite of new reporting requirements and obligations for applicable entities, phase-in over a period of four years beginning 1 January 2025.

The purpose of these amendments is to establish an ‘enduring framework for future-sustainability related financial disclosures,’ intended to:

1. improve disclosure, thereby assisting investors in understanding and financing new opportunities; and
2. support regulators to assess and manage systematic risks to the financial system as a result of climate change and understand efforts taken to mitigate its effects.

The sustainability reporting requirements detailed in Chapter 2M intersect with the various other financial reporting regimes encompassed within the Act. Importantly, these new requirements have been released in conjunction with the Australian Accounting Standards Boards (AASB) S1 and S2 (September 2024) which sets out both the general requirements for disclosures, alongside mandatory Australian Sustainability Reporting Standards (ASRS).

Reporting entities must now prepare a sustainability report for a financial year consisting of the following:

1. Climate statements.
2. Notes to the climate statements.
3. The directors’ declaration about the climate statements and the notes.

Entities must then have their report audited and obtain the requisite auditor’s report. Notably, this imposes an additional duty on directors to assist the auditor in the conduct of the audit.

The Regulatory Guide

The Regulatory Guide found here addresses:

1. Reporting entity thresholds.
2. Steps to assist with preparation and the content of a sustainability report.
3. ASIC’s role in the enforcement and administration of the sustainability reporting requirements.
4. How the sustainability reporting requirements interact with other reporting obligations and disclosure.

Reporting thresholds

The phased implementation approach of the regime beginning in January 2025 is as follows:

An important note regarding the consolidated assets limb is that the AASB direction is calculated based on the value of an entitiy’s assets and not ‘assets under management.’

Entities that need not comply and are therefore not subject to the regime change are those that are exempt entirely from lodging financial reports under Chapter 2M of the Act. This includes small and medium-sized businesses and asset owners that fall below all of the above size thresholds, and that are not NGER reporters.

What is required to be disclosed?

A Climate Statement

The Guide defines a ‘Climate Statement’ as those which are required by AASB S2. Supplementary guidance issued by the AASB provides that the climate-related disclosure requirements are those related to material financial risks and opportunities, governance, strategy, risk management, metrics and targets, including information about Scope 1, Scope 2 and Scope 3 greenhouse gas emissions.

The relevant mandatory S2 standard and calculation methods are detailed in full within S2 itself. There are also expanded reporting requirements applicable to asset managers, commercial banking organisations and insurance companies, in relation to financed emissions.

Fortunately, the AASB has recognised that making such disclosures for certain businesses will be difficult, especially in respect of gathering emissions and quantitative data in order to provide forward facing financial forecasts on the anticipated effects of climate-related risks. As such, ASIC have instructed that entities may utilise the reasonable and supportable information available to them as at the date of the report, provided it can be obtained without undue cost or effort. Further, in reporting Scope 3 emissions, entities are not expected to provide exact data or detailed information applying the same ‘reasonable and supportable’ threshold test.

Finally, reporting entities must use a minimum of two climate scenarios that are referable to temperature increases set out in the Climate Change Act. The two mandated scenarios currently are:

1. An entity’s resilience using scenarios that contemplate rapid global decarbonisation in the near term (i.e., a ‘lower warming’ scenario of 1.5⁰C); and
2. More pronounced climate impacts over the medium to long term (i.e., a ‘higher warming’ scenario of well exceeding 2.5⁰C).

Climate Statement notes

The relevant framework for the notes is somewhat broad and expected to be adapted as the ASRS’s are expanded. The Regulatory Guide highlights that ASIC does not expect reporting entities will need to include notes whilst this process continues, as statements which are prepared in accordance with AASB S2 will generally be sufficient to meet the requirements.

Directors’ declaration

The Regulatory Guide provides further details surrounding the requirement under the Act, which is  being phased in over the first three years of the regime. Initially, for the first two years however, directors of reporting entities are required to declare that ‘in their opinion the entity has taken reasonable steps to ensure the substantiative provisions’ of the sustainability report are complicit with the Act and AASB S2. After this initial phase and from 1 January 2028, directors will then face a higher standard whereby the declaration is required to state that ‘the substantiative provisions are in accordance’  with the Act and AASB S2.

Modified liability framework and ‘soft’ initial approach

Climate-related financial disclosures will be subject to the current legal framework in various areas including directors’ duties, misleading representation provisions and reporting requirements. This is however subject to some caveats outlined below:

1. The application of misleading and deceptive conduct provisions in respect of Scope 3 emissions, scenario analysis and transition plans disclosures will be limited to regulator-only actions for a fixed period of three years.
2. The modified liability is also extended to cover all forward-looking statements for the first financial year for Group 1 entities.
3. This modified liability extends to statements made in an auditors’ report or review of a sustainability report for the same periods.

This ‘soft’ approach means, for example, that an investor or group of investors cannot bring a civil action alleging that a protected statement in a sustainability report is misleading or deceptive within the above timeframes. A further benefit of this initial approach is that enforcement investigations by the regulator are only likely where ASIC sees misconduct of a ‘serious or reckless nature’, or where a reporting entity fails to prepare a sustainability report for the financial year. ASIC submits “we will take a proportionate and pragmatic approach to supervision and enforcement as the requirements are being phased in.”

Risk advisory and insurance considerations

Given the nature of the liability framework, this poses additional risk considerations for both directors and reporting entities. This should be considered in the context of risk management and steps should be taken to formulate a comprehensive mitigation strategy.

Consideration for directors

By imposing additional obligations on directors of reporting entities, the regime has direct implications on existing directors’ duties, which, per the above will inevitably be subject to the same legal framework. The most important considerations for directors will be how the new regulations impact their duty to act in good faith, in the best interests of the corporation, and, to exercise their powers with due care and diligence.

To avoid inadvertent breaches of such, the Regulatory Guide provides that directors should:

• Understand the sustainability reporting obligations.
• Understand climate-related risks or opportunities that could reasonably be expected to affect the entities prospects including its access to cash flows, its access to finance and cost of capital over the short, medium and long term.
• Require the establishment of systems that identify, assess and monitor any material financial risks and opportunities relating to climate.
• Apply a critical lens to the disclosures proposed in the sustainability report, such as questioning the appropriateness or completeness of methodologies, inputs and assumptions.
• If relying on special knowledge, advice and/or third party expertise in the preparation of the report, make an independent assessment of the information/advice provided using their own independent skill and judgment.

Whilst we do expect that losses resulting from certain breaches of these duties will be transferrable to a well-constructed Directors & Officers policy of insurance, directors should take the utmost responsibility in ensuring this is the case.

Considerations for entities

1. ‘Materiality’

In order to limit possible actions arising from errors and omissions, it is recommended that entities keep in mind ‘materiality’ in the context of their disclosures. ASIC’s guidance requires that information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports. This includes financial statements and climate-related financial disclosures and statements which provide information about a specific reporting entity.

Reporting entities intending to declare no material circumstances or climate related financial risks should do so with the above in mind, given the somewhat subjective nature of potential forward-looking impacts.

2. Contracting

Entities should seek positive indemnities where possible in reliance of third parties in the preparation of their reporting.

3. Compliance and implementation

Entities should utilise the phase-in and modified liability framework to develop and implement rigid compliance mechanisms.

4. Additional disclosures outside of sustainability reporting

ASIC now ‘encourages’ entities to adopt AASB S1 and S2 definitions and disclosure principles when making disclosures outside the sustainability report, such as those set out in the OFR and prospectuses, rather than stating that they ‘should’ do so

5. Adequacy of insurance

Entities should seek advice as to the adequacy of their insurance programme to ensure that financial losses and statutory enquiries arising from breaches of duty, acts, errors & omissions, misrepresentations and professional negligence in respect of their disclosures and sustainability reporting fall within the scope of cover provided by their policies.

Contact your Bellrock Advisor for guidance on sustainability reporting risks and ensuring appropriate insurance coverage.