These businesses will need to include a separate sustainability report within their annual report, which will be formally adopted by the company’s board. This move follows the 2021 UN Climate Change Conference (COP26) in Glasgow, which emphasised mandatory climate-related financial disclosures as essential for tackling climate change.
Such disclosures aim to make a company’s climate-related risks, opportunities, metrics, and targets transparent to investors and stakeholders. While the laws do not dictate specific actions companies must take against climate change, they enable regulators and stakeholders to monitor progress towards internationally agreed net-zero targets.
The Australian Accounting Standards Board is developing detailed content requirements for the sustainability reports, aligning them with global standards established after COP26. Companies will need to disclose their scope 1, 2, and 3 greenhouse gas emissions. Scope 1 emissions are direct emissions from a company’s operations, scope 2 are indirect emissions from the energy the company uses, and scope 3 emissions encompass the broader supply chain, including suppliers and business activities they fund.
Currently, the National Greenhouse and Energy Reporting (NGER) Scheme mandates that companies with significant climate impact report their emissions, energy production, and energy consumption to the government annually. The new sustainability reporting requirements, however, will be broader in scope, affecting more businesses. They will apply to all companies under the NGER scheme, investment trusts and funds (including superannuation funds) with assets exceeding A$5 billion, and other companies meeting two out of three size thresholds: assets above A$25 million, revenue above A$50 million, or 100 or more employees.
Initially, the sustainability report will focus on climate-related issues, with potential future expansions to include other environmental disclosures, such as nature and biodiversity impacts. For the first few years, the Australian Securities and Investments Commission (ASIC) will enforce the laws, excluding private plaintiffs, including climate advocates, from court actions. Companies found to have misleading disclosures without taking reasonable steps to ensure accuracy could face civil penalties, which for large companies can reach hundreds of millions of dollars.
Directors will face new pressures as the sustainability report becomes part of the annual report, carrying significant legal implications. Initially, directors must declare whether they believe the company has taken reasonable steps to comply with the law. Later, they must confirm compliance with the Australian Accounting Standards Board’s sustainability standards and the accuracy of all required disclosures. Directors’ statutory duty to ensure legal compliance in annual reporting will extend to the sustainability report, with personal liability for defects in mandatory corporate disclosure documents enforced by ASIC, carrying maximum civil penalties of $1,565,000 for individuals.
These laws will change sustainability governance, making directors personally responsible for the company’s sustainability disclosures. This responsibility will elevate sustainability issues in boardroom discussions, bringing climate-related risks and opportunities to the forefront of governance. Directors will need to thoroughly understand and question the data and assumptions behind these disclosures, fostering greater awareness and sensitivity to the company’s climate impact.
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