Authored by Michaela Aspell and Emma Newnham
Draft guidance for consultation
ASIC has released a draft regulatory guide on the sustainability reporting regime and is seeking feedback from stakeholders by 19 December 2024. The guidance follows the finalisation of the Australian Accounting Standards Board’s Sustainability and Climate-related Disclosure Standards S1 and S2. The consultation draft includes an overview of sustainability reporting, covering report preparation, content, and how to refer to sustainability-related information outside of the report. It also outlines ASIC's administration of the reporting requirements, including its approach to relief and special considerations.
We expect submissions will respond to the following issues
Approach to granting sustainability reporting relief
Some entities are looking to, or already are, seeking relief from sustainability reporting requirements due to different factors such as entity structure and existing global sustainability reporting obligations in their primary jurisdictions.
ASIC sets out in its proposed guidance the broad considerations it will have regard to when assessing whether to grant relief. However, the proposed guidance does not include key policy approaches that would be very helpful to those considering whether to apply for relief (for example, whether ASIC would be willing to grant relief to recognise reporting obligations in other jurisdictions). ASIC provides very helpful guidance in other contexts of the factors that would make it more likely to decide an application favourably (e.g. Regulatory Guide 108.29). It would be helpful if ASIC could take a similar approach for sustainability reporting.
Enforcement of the disclosure regime
ASIC recognises there will be a period of transition as reporting entities build up their sustainability reporting capabilities and says it will take a “proportionate and pragmatic approach to supervision and enforcement”.
ASIC have previously commented on enforcement action being more likely to be taken when seeing misconduct of a serious nature – such as misconduct causing harm to investors or other primary users of the information.
It would be helpful if ASIC could include that same commentary in the proposed guidance, as well as some commentary on what it means by “proportionate and pragmatic” and “misconduct of a serious nature”. It would also be helpful if ASIC could include some commentary on how its approach to enforcement will change over the transition period of the regime.
Forward-looking climate statements
ASIC has reiterated in the proposed guidance that forward-looking climate statements must be relevant, faithful, comparable, verifiable, timely and understandable (as set out in Appendix D of AASB S2). However, ASIC’s current guidance relating to forward-looking financial statements warns against making statements that look forward more than two years (see Regulatory Guide 170), at least without independent or objectively verifiable sources of information, because ASIC believes that such statements are unlikely to have a reasonable basis and will therefore be deemed to be misleading.
Forward-looking climate statements that include long term timeframes well beyond two years are an essential part of sustainability reporting and include, for example, greenhouse gas emissions reductions targets, assumptions in climate scenario analysis, and the anticipated effects of climate-related risks and opportunities on the business model, value chain, financial position, financial performance and cash flows.
Further guidance from ASIC on how entities can make forward-looking climate statements that are relevant, faithful, comparable, verifiable, timely and understandable while also not being misleading is critical.
Concerns about whether entities have a reasonable basis for setting the type of ambitious targets and action that is required to limit global warming to the Paris Agreement target of well below 2°C, may prevent reporting entities from committing to those targets. Recent review by the World Resources Institute shows that updated 2024 targets by governments put the world on a pathway to up to 3°C of warming by the end of 2100. This will have catastrophic implications for the world’s climate – including around four times as many severe heatwaves and around twice as many heavy precipitation events (IPCC AR6 Summary for Policymakers).
Technical guidance for climate-related assessments
There is currently limited resources, data and guidance on what best practice climate-related assessments look like (i.e., for undertaking scenario analysis and climate-related risk and opportunity assessments). While some entities will have prepared voluntary climate disclosures prior to the commencement of the mandatory reporting regime, uplift in detail and analysis will be necessary for most to comply with the new mandatory standards and legislation.
Additional information on undertaking climate-related scenario analysis and quantifying risks and opportunities would help entities as they plan for future reporting periods, and to have confidence in their approach for preparing information as part of forward-looking statements.
For example, the New Zealand External Reporting Board who oversees the implementation of the New Zealand climate disclosure regime has published guidance on undertaking work related to disclosure, including for transition planning, climate risk reporting and scenario analysis. We consider similar guidance would be useful for Australian reporting entities.
Modified liability period
ASIC is promoting a grace period from liability which includes the following:
Financial years commencing between 1 January 2025 and 31 December 2025: A statement made in sustainability reports or accompanying auditor’s reports relating to climate and which, at the time it is made, is about the future.
Financial years commencing between 1 January 2025 and 31 December 2027: A statement made in sustainability reports or accompanying auditor’s reports relating to scope 3 GHG emissions, scenario analysis and transition plans.
The modified liability period is a break from private litigation (including class actions) in relation to a limited range of matters and not the full report. Private litigants can challenge forward-looking statements in the second reports of the first reporting group, and in all reports of the second and third reporting groups.
We encourage all entities that will be covered under the mandatory sustainability reporting regime, or those looking to voluntarily report under the standards, to review the proposed guidance and make a submission to ASIC. We will also be making a submission and would be happy to discuss including any issues/concerns you may have.
Getting started on sustainability reporting early is the best way to minimise challenges and maximise opportunities for all reporting entities, whether Group 1, 2 or 3. Owl Advisory and the KWM team can help you with all stages of reporting including understanding legislative requirements, undertaking a climate-related risk and opportunity assessment, reviewing existing reporting compared to the updated standards, and board and organisational upskilling on the new climate-disclosure regime.
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