We need a better approach to conceptualising corporate climate reporting with a perspective on the incoming obligations in the context of Australia’s broader environmental law.
About $1.3 million per year. That’s how much the federal government says it will cost companies to comply with the incoming mandatory climate disclosure regime. Those costs are expected to stabilise to around $500,000-$700,000 a year on average.
About 1800 entities are believed to be captured by the climate reporting obligations as drafted.
Some of these companies are already reporting on climate opportunities and risks for their business voluntarily in accordance with internationally established regimes, and the most prudent of the others are budgeting and preparing for mandatory reporting now.
Good advice should be explaining what’s required in simple terms and how businesses can stand to benefit from it, instead of thinking it’s all doom and gloom.
The question everyone should be asking their lawyers is: “so what?”
Some important real-world factors have been overlooked in the cacophony of legal updates that have generally focused on details such as when the first obligations to prepare a “sustainability report” take effect (1 January 2025, ICYMI), or the provenance of accounting and auditing standards that will govern the climate reporting process.
Those standards will prescribe the methodology for data collecting and reporting so that we aren’t comparing apples with apple orchards.
It’s part of the point that the “so what” of climate reporting will be very different from one company to the next. Working out whether the mandatory reporting regime applies to your business is a matter for legal and technical advice.
Briefly, it depends on the scale of the business and whether it has existing reporting duties under the NGER scheme (as laid down by the National Greenhouse and Energy Reporting Act 2007 (Cth)). There’s complexity that needs to be worked through like what counts and how to count it, particularly when it comes to companies whose operations in Australia form part of a matrix of interconnected global operations.
But explaining the architecture of the legal framework or the mechanics of reporting won’t help businesses understand what they can do to ready themselves for compliance or predict what the commercial consequences of complying with the disclosure obligations are likely to be.
It doesn’t help companies understand how they can make themselves look (and be) better when it comes to their climate knowledge and footprints. It also doesn’t help educate the public as to why the reporting requirements are actually a good thing.
Why mandatory disclosure is a good thing
Mandatory climate reporting is a good thing not least because it will result in a better-informed market.
It’s going to encourage more discerning investment when it comes to evaluating options with ESG considerations in mind. It also provides another incentive for businesses to compete in the race to net zero carbon emissions, thereby bringing any differences between competitors into starker relief.
What’s set to be uniform is that the climate disclosures will be published in a sustainability report, which some say would be better called a climate report.
Mandatory climate reporting is going to encourage more discerning investment when it comes to evaluating options with ESG considerations in mind
The sustainability report is to form part of a company’s annual report. In the simplest terms, it will include climate statements and explanatory notes as well as a director’s declaration. It will be submitted to ASIC and be available on the company’s own website.
It’s been almost two years since climate disclosures went to public consultation in late 2022 and about 12 months since a second round of public consultation occurred in June 2023.
We need to be conscious that the history of a best-practice climate reporting regime extends well beyond this – for instance, ASIC’s first round of surveillance on voluntary climate disclosures among ASX-listed companies occurred in 2019.
The point is, although climate reporting obligations have been ventilated for some time, some advocates have continued – as recently as this year – to say that the time for the commencement of mandatory reporting should be pushed back.
Some lawyers say it shouldn’t commence until mid-way through 2026 (two years from now) and that extending the proposed corporate and director immunities would be better.
We’re not so sure that moving at a glacial pace and risking falling any further behind our UK, EU or NZ counterparts makes good sense or good law. It’s unlikely to serve the interests of investors and consumers who want access to concise and verified information. It’s also destined to do the opposite of expediting whole of environment (WOE) conservation efforts.
It already looks like the auditing requirements of the disclosure regime won’t apply until 2030. We’re not getting any closer to net zero by wanting to do less for longer.
Instead of complaining that businesses haven’t had time to upskill to report on sustainability matters – as if feigning surprise is suddenly an alibi – time and resources might be better spent helping businesses upskill. Still, the clippety-clop of a hobby horse isn’t hard to recognise, even if the habits of lobbyists can be hard to correct.
Quite often there’s a tendency for talk about climate to feel so unique that it appears detached from and outside historical reference points such as previous legal reforms that might otherwise lend perspective.
We’re not getting any closer to net zero by wanting to do less for longer.
To take one, let’s recall that the GST was a significant legal reform with broad implications that John Howard said would “never, ever” be introduced in 1995 before passing the law four years later in 1999. Not every new regime is an exercise in love’s labour’s lost, and the GST was almost certainly a bigger shift than climate reporting should be.
It begs the question: GST is to birthday cake as climate reporting is to…what?
Admittedly, there hasn’t been a lot of outright opposition to mandatory climate reporting so far. At least any opposition has failed to gain much traction in providing a reasonable counterargument for why climate disclosures should not be mandated. It’s hard to think of a compelling reason against introducing them.
Regularising mandatory reporting as proposed is substantively consistent with existing directors’ duties in relation to climate change, which have been well documented in Australia at the corporate level since about 2016.
The imposition of duties on directors over and above what appears in legislation reflects societal and political expectations of enthusiastic governance.
Unsurprisingly, ASIC has made it clear that solid corporate governance around climate change risk generally leads to better disclosures. This is because robust internal governance systems improve information flows within an organisation.
They enable active engagement and informed oversight by the board so that controls are appropriate and adapted to meet pressure points. It’s essential that directors have self-correcting structures in place to be able to properly assess, manage and disclose climate risks and opportunities to regulators and the market. Ultimately, it also minimises the risk of future liability for inaccurate disclosures.
As indicated above, the incoming mandatory regime is already consistent with best corporate practice and various clients’ voluntary climate reporting. According to a KPMG report published in 2023, out of the 94 companies in the ASX100 that report on sustainability, almost 80 per cent were already reporting under the international voluntary climate disclosure regime.
Treasury has said this drops to less than 70 per cent for the ASX200. Nevertheless, statistics like these make the suggestions of lobbyists that there’s a skills or capacity deficit in the Australian corporate market – that warrants years’ long delays to corporate action on climate – a bit harder to swallow.
Not wanting to report on climate is very different from not being able to. If anything, the mandating of climate reporting should cure inequity in a market that’s littered with inconsistent and sometimes incomplete environmental disclosures to investors and consumers, particularly in relation to climate change risks.
Standardising the reporting should assist with making things fairer, especially for model companies who are already incurring the costs of reporting on climate disclosures on their own accord in the pursuit of transparency, accountability, and self-improvement.
As Treasury has put it, mandatory reporting is necessary to price climate-related risks and opportunities, value assets and allocate capital efficiently. This doesn’t mean that real-world complications cannot be foreseen.
Companies might need longer to report
For instance, the proposed four-month window between the end of a financial year and the date by which a company’s sustainability report is due to ASIC probably doesn’t allow enough time for this to be done and is likely unrealistic for some companies.
Let’s hope the federal government doesn’t lose its nerve on mandatory climate reporting.
Consequently, our firm’s submission to the Senate Committee on the reforms (all submissions are available here) pragmatically suggested an amendment under which climate-reporting would be due nine months after the end of the reporting period instead.
This isn’t seeking to delay the implementation of the regime itself. Rather, it is intended to extend the time companies have to submit more accurate and comprehensive sustainability reports in respect of the previous financial year.
Let’s hope the federal government doesn’t lose its nerve on mandatory climate reporting.
The states are moving on net zero targets
Within the last 12 months, the states of NSW, Queensland, and Victoria have followed the Commonwealth’s lead in enshrining their own net zero carbon emissions targets by 2050 into legislation.
Interim targets before then include a minimum 70 per cent reduction in emissions by 2035. Similar commitments are being made by Tasmania and South Australia. It’s worth noting that South Australia’s best-in-class uptake in renewable energy has been recognised by the UN along with other leaders in areas of Scotland, Canada and Spain, for example.
Australia’s focus on reducing energy costs and supporting renewable energy development (in line with the theme discussed in our April column around a Future Made in Australia) was plain in the Treasurer’s May 2024 budget.
The baffling delays on the EPBC
Less evident in recent times though has been the government’s previously strong stomach for reforming Australia’s principal environment law, the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act), which still doesn’t expressly consider climate change impacts at all.
It’s baffling that all the progress on net zero targets coincides with the news this year that the Commonwealth has indefinitely deferred its proposed wholescale changes to the EPBC Act. This is the case despite the aging legislation being widely criticised for years now for not adequately protecting WOE, especially for failing to address climate change or restore losses to biodiversity.
So much was recognised in the recent “Living Wonders” case, on whether fossil fuel projects should be approved by the minister having regard to climate change, in which a green group’s appeal was rejected by the Full Court of the Federal Court earlier this month.
The appeal court’s decision is effectively confirmation that the climate change impacts of a project don’t have to have any bearing on whether it should be approved or not by Australia’s Environment Minister.
The Court’s decision was unanimous, with the majority’s judgment indicating that the case raised the question of whether the legislative scheme (the EPBC Act) is “fit for purpose”. The judges also commented on the “ill-suitedness” of the EPBC Act to “the assessment of environmental threats such as climate change and global warming”.
This gives further colour to the federal government’s decision to defer the proposed overhaul of the EPBC Act. Notwithstanding this change, the government appears committed to more administrative changes like the introduction of a new federal EPA (to be called “Environment Protection Australia”). Paul Keating might say that’s all tip and no iceberg.
As for mandatory reporting on WOE, we see the potential for more outrage (feigned and actual) when corporate disclosures on nature-related risks and opportunities are introduced in coming years, provided the government holds course on that front.
This means there’ll be plenty more elbow room for hand-wringing and pearl-clutching in the face of meaningful legal progress. Meanwhile, untrained eyes can continue to forego the benefits of more self-conscious business that accord with broader ESG priorities, or risk missing out on opportunities arising from the corporate, energy and environment revolutions. Two words: So what?