Australia: Mandatory Climate Disclosure-October Update

By: Jim Bulling and Ben Kneebush

As previously discussed in our post, the Australian Treasury has proposed to introduce mandatory climate-related financial disclosure standards in Australia. This will have a profound impact on the financial services industry, as financial services entities (including superannuation funds) will be captured by this disclosure framework. Under a phased implementation, reporting commences on 1 July 2024 for certain large entities.

Depending on the corporate structure, it is possible that mandatory reporting will also apply to foreign financial services providers operating in Australia. In any event, foreign fund managers should begin familiarising themselves with these standards as they will inevitably be asked to provide information that is relevant for Australian superannuation funds’ own climate-related reporting obligations.

Greenhouse Gas (GHG) Emissions

The most significant requirement proposed by the Treasury is that entities must disclose Scope 1, 2 and 3 emissions. Given the nature of financial services entities, Scope 1 (direct emitting activities) and Scope 2 (indirect energy consumption) emissions reporting are expected to be relatively straightforward. On the other hand, Scope 3 (emissions along a company’s value chain) emissions reporting is anticipated to be the most challenging requirement for financial services entities.

Scope 3 Emissions

The Treasury notes that Scope 3 emissions are to be calculated in line with the international GHG Protocol accounting framework. The GHG Protocol outlines 15 categories of upstream and downstream Scope 3 emissions.

Studies have indicated that Scope 3, category 15 ‘Investments’ emissions can comprise over 99% of total emissions in the financial services sector. This is because financial services entities inherently invest in a wide range of assets (e.g. listed equity, unlisted equity, real estate etc.) that generate emissions which are deemed to be along the entity’s value chain. As these emissions are not under the operation or control of the entity, and originate from complex and diverse sources, financial services entities will inevitably find it challenging to obtain reliable and accurate emissions data.

Liability for Misleading Disclosure

The Treasury has proposed a one-year exemption and three-year modification to liability for reporting Scope 3 emissions. Financial services entities should use this time to build capability for Scope 3 emissions reporting.

Along with the general prohibition against making misleading financial reports, the Treasury has proposed that the disclosure requirements will be civil penalty provisions in the Corporations Act.

In addition, directors should be aware of the increased exposure for misleading disclosure and breaches of directors’ duties.

To understand these issues in greater detail, please see our recent paper here.