Australia Takes a Bold Step Towards Climate Transparency with New Sustainability Reporting Law
Australia has taken a significant leap forward in corporate sustainability with the finalization of a groundbreaking law aimed at enhancing transparency in climate-related financial reporting. The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 has officially received Royal Assent, marking a crucial milestone in the country’s ongoing efforts to align its financial sector with global sustainability goals and climate commitments.
A Game-Changer for Business Accountability
This new legislation introduces a mandatory framework for climate-related financial disclosures, compelling businesses operating in Australia to provide detailed insights into their exposure to climate-related risks and their management strategies. The move signals a broader global trend toward increased corporate accountability in addressing environmental concerns, ensuring that sustainability is not just a corporate buzzword but an integral part of business operations.
What Businesses Need to Know
Mandatory Climate Disclosures
The legislation mandates that certain businesses must disclose how climate-related risks could impact their operations, governance structures, and financial performance. These disclosures must be integrated into their annual financial reports, offering stakeholders a clearer view of the company’s climate risk management strategy.
Scope of Applicability
Initially, the regulation will apply to larger businesses, particularly those listed on the stock exchange and others deemed to have significant exposure to climate-related risks. This includes sectors such as energy, resources, and manufacturing, but could expand as the regulatory framework matures.
Disclosure Standards and Frameworks
The legislation aligns with widely recognized global reporting standards, making it easier for companies to integrate these disclosures into their existing reporting structures. While the exact reporting frameworks are still being developed, they will focus on key areas such as governance, strategy, risk management, and performance metrics.
Timelines for Implementation
Businesses will have a clear timeline for the roll-out of these new requirements. Companies must ensure that they are well-prepared to meet these standards within the specified deadlines, including implementing the necessary internal processes to capture and report relevant data.
Importance of Data Accuracy and Governance
As businesses begin to adopt these new regulations, there will be a greater emphasis on data integrity, accuracy, and governance. Companies will need to establish strong systems for tracking and reporting climate-related data, ensuring that disclosures reflect their actual environmental performance and risk exposure.
Key Changes in Sustainability Reporting: What Businesses Need to Know
Australia has introduced a significant shift in corporate sustainability reporting, requiring entities to disclose their climate-related risks, opportunities, and transition plans. These new requirements align with the Australian Sustainability Reporting Standards (ASRS), developed by the Australian Accounting Standards Board (AASB), ensuring greater transparency and accountability in financial markets.
New Sustainability Reporting Standards
In September 2024, two key reporting standards were introduced:
AASB S1 – General Requirements for Disclosure of Sustainability-related Financial Information (Voluntary)
This standard provides a framework for reporting sustainability-related financial information, offering guidance on how entities should structure and present disclosures. While not mandatory, AASB S1 is designed to help businesses enhance transparency and meet the increasing expectations of investors and stakeholders.
AASB S2 – Climate-related Disclosures (Mandatory)
AASB S2 establishes mandatory climate-related disclosure requirements, ensuring that businesses report on how climate risks could impact their financial position, operations, and long-term strategy. This includes detailed reporting on greenhouse gas emissions, scenario analyses, and transition planning.
Alignment with International Standards
These standards closely follow the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards, ensuring Australian businesses are aligned with global best practices. This consistency will help companies attract international investment and enhance their credibility in the global market.
What This Means for Businesses
With these new reporting obligations, businesses must:
Assess and disclose climate-related financial risks as part of their annual reporting obligations.
Develop transition plans to demonstrate how they will adapt to a low-carbon economy.
Implement governance structures to oversee climate-related disclosures and ensure compliance.
Enhance data collection and reporting processes to meet the required standards.
Preparing for the Transition
Entities should start reviewing their internal sustainability reporting capabilities and engage with financial and compliance teams to ensure a smooth transition. Early preparation will be critical to meeting the disclosure requirements and avoiding potential regulatory risks.
With the introduction of the ASRS framework, Australia is taking a proactive approach to integrating sustainability into corporate reporting. Businesses that embrace these changes will not only comply with regulatory expectations but also strengthen investor confidence and long-term resilience in an evolving economic landscape.
Long-Term Benefits and Competitive Advantage
While the implementation of these regulations may seem challenging at first, there are long-term benefits for businesses that embrace sustainability reporting. Not only will this help companies mitigate climate risks, but it will also position them as leaders in transparency, potentially attracting investors who are increasingly focused on environmental, social, and governance (ESG) factors.
Aligning with Global Sustainability Trends
Australia’s new law mirrors similar global initiatives aimed at improving corporate climate disclosures. Countries like the United States, the United Kingdom, and members of the European Union have already implemented or are in the process of establishing mandatory climate-related financial reporting frameworks. By aligning with international best practices, Australia is positioning itself as a leader in sustainable finance and responsible corporate governance.
Who Needs to Report and When?
As part of the evolving regulatory landscape, new reporting requirements for climate-related disclosures will be introduced in a phased approach beginning January 1, 2025. Reporting entities will be categorized based on their size and emissions, ensuring a structured transition toward enhanced transparency.
Group 1: Large entities with revenue exceeding $500 million will commence reporting in January 2025.
Group 2: Medium-sized entities with revenue over $200 million will begin reporting in July 2026.
Group 3: Smaller entities with revenue exceeding $50 million will be required to report starting July 2027.
To comply with these regulations, organizations must integrate climate-related disclosures within their annual reports and adhere to sustainability assurance standards.
New Assurance Requirements
Starting in 2025, sustainability reports will be subject to independent assurance, aligning with the rigor applied to financial audits. To facilitate this transition, new assurance standards have been introduced:
ASSA 5000 – General Requirements for Sustainability Assurance Engagements
ASSA 5010 – Timeline for Audits and Reviews of Sustainability Reports
By 2030, all climate-related financial disclosures will require full reasonable assurance, reinforcing accountability and accuracy in reporting.
Regulatory Oversight and Guidance
The financial regulator will provide guidance and temporary reporting relief during the transition phase. Early enforcement efforts will emphasize education and compliance support, prioritizing assistance over penalties to help entities adapt to the new framework effectively.
These measures are designed to enhance corporate transparency, promote sustainable business practices, and align with global sustainability reporting standards.
How Businesses Can Prepare
With new sustainability reporting regulations on the horizon, organizations must take proactive steps to ensure compliance and align with industry best practices. The transition to mandatory climate-related disclosures necessitates a structured and strategic approach to data management, reporting, and assurance.
Key Strategies for Compliance and Readiness
Conduct a Comprehensive Gap Analysis
Evaluate existing sustainability reporting practices to identify deficiencies.
Benchmark current disclosures against the new regulatory requirements to determine necessary adjustments.
Implement Robust Data Collection and Reporting Systems
Develop and integrate comprehensive frameworks for tracking and reporting climate-related financial data.
Ensure alignment with the Australian Sustainability Reporting Standards (ASRS) to facilitate compliance.
Engage with Sustainability Assurance Professionals
Collaborate with industry experts and external auditors to enhance the credibility of disclosures.
Ensure compliance with evolving assurance standards to build stakeholder confidence.
Stay Informed on Regulatory Developments and Best Practices
Monitor updates from regulatory bodies and industry organizations to remain compliant with new requirements.
Participate in knowledge-sharing forums, training sessions, and government consultations to stay ahead of industry trends.
Strategic Benefits of Early Adoption
Organizations that proactively integrate sustainability reporting practices will gain several advantages:
Enhanced Investor Confidence: Transparency in climate-related financial disclosures attracts responsible investors and improves access to capital.
Strengthened Corporate Governance: Proactive compliance demonstrates a commitment to sustainability and regulatory responsibility.
Competitive Market Positioning: Companies with strong ESG (Environmental, Social, and Governance) credentials can differentiate themselves in the marketplace.
Long-Term Business Resilience: Improved risk management and sustainability strategies contribute to corporate longevity and resilience in a transitioning economy.
Liability Framework for Climate-Related Financial Disclosures in Australia
As climate change becomes an increasingly critical issue, businesses are facing greater expectations to disclose climate-related risks and financial information. In Australia, these disclosures operate within a distinct legal framework that integrates provisions from key legislative acts, ensuring transparency, accountability, and protection against misleading representations.
Modified Liability for Climate-Related Disclosures
Climate-related disclosures fall under the broader legal structure governing financial reporting, including director responsibilities and restrictions on misleading statements. To facilitate the transition to comprehensive climate disclosure, a modified liability framework has been introduced, offering temporary protections for specific disclosures.
Scope 3 Emissions
Scope 3 emissions refer to indirect emissions occurring within an organization’s value chain. During the initial three-year period, liability for these disclosures will be limited to regulatory actions, shielding entities from private litigation while they refine reporting methodologies.
Transition Plans and Scenario Analysis
Forward-looking statements concerning an organization’s climate risk mitigation strategies, such as transition plans and scenario analyses, will also be covered under the modified liability framework. This provision allows businesses to develop and disclose climate resilience strategies without immediate exposure to extensive legal risks.
Auditor Reports
Sustainability disclosures within auditors’ reports are also included in the modified liability framework. For the first financial year, statements made in these reports will be subject to limited liability provisions, promoting accuracy while allowing for initial adjustments.
Future Liability Framework
Following the three-year transitional period, organizations will be held to the pre-existing legal standards, meaning full liability for misstatements or omissions will apply. This phased approach aims to balance the need for accurate climate-related financial disclosures with the practical challenges businesses face in adapting to evolving reporting standards.
By establishing a structured liability framework, Australia is ensuring that businesses can disclose climate-related risks responsibly while fostering transparency and regulatory compliance.
Treasury Consultation and Proposed Extensions
In January 2025, the Australian Treasury issued a consultation paper proposing to extend modified liability settings for voluntary sustainability reports. If approved, this will include:
Voluntary Reports: Sustainability reports voluntarily prepared by organizations will also fall under modified liability conditions, provided they meet specific requirements, such as compliance with the AASB S2 Climate-Related Disclosures standard, which is modeled on international frameworks.
ASIC Relief: Reports required as part of an ASIC relief order will similarly benefit from the transitional liability settings.
This extension will provide a clearer legal structure for organizations not mandated to report, ensuring that they can disclose climate-related information without the same degree of legal risk during the initial reporting period.
Assurance Requirements
Just as financial reports are subject to audit under the Corporations Act, sustainability reports will also require assurance by an external auditor. The Australian Auditing and Assurance Standards Board (AUASB) has approved new standards for sustainability assurance, namely ASSA 5000 and ASSA 5010, which set out requirements for audits and reviews of sustainability reports. These new standards focus on ensuring that sustainability disclosures, including climate-related data, are accurate, complete, and reliable.
Limited Assurance (Initial Year): The first financial year after the introduction of these new standards will only require limited assurance.
Mandatory Reasonable Assurance (By 2030): By 2030, reasonable assurance will be mandated for all entities.
Expanded Requirements: The new standards under ASSA 5000 include 212 requirements, double the number of the existing ASAE 3000 standard, leading to increased audit efforts and compliance costs.
AASB S2 and Mandatory Disclosures
AASB S2 mandates climate-related disclosures for Australian companies, requiring entities to disclose key climate-related risks and opportunities that could affect their cash flows, access to finance, or cost of capital over different time horizons (short, medium, and long term). These disclosures must cover four core areas:
Governance: Details of who oversees climate-related matters, their skills, and the frequency of oversight.
Strategy: How the organization plans to adapt to and mitigate climate-related risks, including using climate scenarios for decision-making.
Risk Management: A comprehensive process for identifying and managing climate-related risks.
Metrics and Targets: Quantitative data on emissions (Scope 1, 2, and 3) and targets aligned with the organization’s transition goals.
Notably, Scope 3 emissions will be exempt from reporting in the first year of disclosures, providing companies some leeway before fully committing to more detailed reporting.
Conclusion
The evolving landscape of climate-related financial disclosures in Australia reflects a commitment to transparency and accountability in addressing climate risks. With the introduction of modified liability frameworks and assurance standards, Australia is paving the way for more comprehensive climate reporting. Businesses must be proactive in understanding the legal and reporting requirements to ensure they are prepared for the upcoming changes, especially as regulators sharpen their focus on climate risks and disclosures.
Partnering with ESG reporting service providers like EcoActive can help businesses navigate these complex regulations, ensuring accurate, compliant, and reliable sustainability reporting. EcoActive offers tailored ESG solutions, data management services, and reporting frameworks that align with evolving disclosure standards, helping organizations streamline compliance while enhancing their sustainability strategies.
By preparing early for the expanded liability and assurance requirements, businesses can gain a competitive advantage in building trust with investors, customers, and regulators while contributing to global sustainability efforts.
Ready to elevate your ESG strategy? Connect with EcoActive for expert guidance on CSRD compliance, ESG reporting, and sustainability integration.
info@ecoactivetech.com
+1 (703) 338-8896
