House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Chapter 4: Climate-related financial disclosure

Outline of chapter

4.1 Schedule 4 to the Bill generally requires entities that lodge financial reports under Chapter 2M of the Corporations Act and meet certain minimum size thresholds, or have emissions reporting obligations under the NGER scheme, to make disclosures relating to climate in accordance with relevant sustainability standards made by the AASB. The amendments phase-in the new obligations for climate-related financial disclosures over a period of 4 years.

4.2 Climate-related financial disclosures will be subject to similar assurance requirements to those currently in the Corporations Act for financial reports and will require entities to obtain assurance from an auditor. The extent and level of assurance required will be set out in Australian assurance standards for climate disclosures, developed by the AUASB.

4.3 These amendments ensure that relevant entities disclose information about their exposure to material climate-related financial risks and opportunities, including their climate-related plans, greenhouse gas emissions and governance processes, in accordance with the relevant sustainability standards made by the AASB. The new requirements build on the existing annual financial reporting framework through inclusion of a new 'sustainability report' that is required to be prepared by certain entities.

4.4 Businesses, investors, regulators and the public will have a clear and common understanding of obligations for entities to disclose climate-related financial risks and opportunities, in line with international standards.

4.5 All legislative references in this Chapter are to the Corporations Act unless otherwise specified.

Context of amendments

4.6 Climate change is recognised internationally as presenting material risks to the global financial system – risks which need to be managed by capital markets, regulators and corporations. These include the physical risks of climate change and the transition risks associated with the market, regulatory and technological changes brought on by efforts to mitigate climate change.

4.7 Efforts to mitigate and adapt to climate change also present opportunities for entities: for example opportunities to gain cost advantages over competitors through improved energy efficiency; to innovate and develop new products and services that improve comparative advantage; or to gain access to new markets as a result of low-emissions credentials. Improved disclosure will help investors understand and finance these opportunities.

4.8 Improving climate-related financial disclosures will support regulators to assess and manage systemic risks to the financial system as a result of climate change and efforts taken to mitigate its effects. In-scope entities will be required to disclose information about their climate-related financial risks and opportunities in line with AASB sustainability standards in the annual report.

4.9 The ISSB has developed a global baseline for sustainability and climate-related financial disclosure reporting standards, which aims to improve consistency and comparability across entities reporting. The ISSB issued draft standards for consultation in 2022 and released the final standards (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures) in June 2023.

4.10 It is important that Australia's financial and sustainability-related reporting frameworks are internationally aligned to support Australian entities that operate across jurisdictions: minimising compliance costs for companies and maximising comparability for users. International alignment with the ISSB standards will also support Australia's reputation as an attractive destination for international capital and help draw the investment required for the transition to net zero. For example, because investors have clear visibility of the steps entities are taking to reduce their exposure to climate-related risks and embrace relevant opportunities.

4.11 The proposed AASB sustainability standards are intended to align with the ISSB standards as much as possible, with modifications where necessary or appropriate to apply these standards in the Australian context. For example, incorporating Australia's national greenhouse gas emissions estimation methodologies and international climate change commitments.

4.12 The Government is taking a 'climate first, but not only' approach to mandatory disclosure requirements and these amendments will establish an enduring framework for future sustainability-related financial disclosures.

Summary of new law

4.13 The amendments set out new climate-related financial reporting requirements for entities, leveraging the existing financial reporting regime under Chapter 2M of the Corporations Act. Chapter 2M provides for record-keeping, financial reports and audit requirements.

4.14 The amendments include a new 'sustainability report' for a financial year that entities will need to prepare, in addition to their financial reports.

4.15 The sustainability report for a financial year consists of:

•

the climate statement for the year;

•

notes to the climate statement;

•

any statements prescribed by the regulations for the year;

•

notes to those prescribed statements (if any); and

•

the directors' declaration about the compliance of the statements and notes with the relevant sustainability standards.

4.16 The climate statements must be prepared in line with the relevant sustainability standards issued by the AASB.

4.17 A phased-in approach is used for the obligation to prepare a sustainability report, starting with a relatively limited group of very large entities that expands to apply to progressively to other large entities.

4.18 The size thresholds that determine the year in which entities are required to commence climate reporting are based on existing concepts in the Corporations Act and Regulations. That is, consolidated gross assets, consolidated revenue and employee thresholds which apply to the company or entity and any entities it controls at the end of the financial year.

4.19 In addition, NGER entities that are required to prepare and lodge financial reports under Chapter 2M of the Corporations Act are required to make climate-related financial disclosures. Those NGER entities that meet this criterion and that are above the publication threshold will commence reporting in Group 1, and the balance will commence reporting in Group 2.

4.20 Small and medium entities, below the relevant size thresholds (unless they are NGER controlling corporations) are not required to make climate related financial disclosures. Neither are entities that are exempt from lodging financial reports under Chapter 2M.

4.21 A modified liability approach will apply for a transitional period to ensure that reporting entities, auditors and directors are allowed time to develop experience and practice to report in line with the required standards. After this period, the existing liability arrangements will apply.

Detailed explanation of new law

Part 1 – Climate-related financial disclosures

New sustainability reporting requirements

4.22 These amendments incorporate climate-related financial disclosures as part of a new annual sustainability report, added to the existing obligations to prepare annual financial reports under Chapter 2M of the Corporations Act. This will ensure that climate-related financial disclosures are reported in the same context as the financial statements and directors report for the financial year.

4.23 In general, the amendments aim to replicate existing reporting obligations for annual financial reporting, including who must prepare annual financial reports, recordkeeping, presentation of reports at AGMs, provision of financial reports to members and the public, role of the regulator, legal liability and audit and assurance.

4.24 Some modifications have been made to requirements for the annual sustainability report compared to annual financial reporting obligations. These modifications are made where the Government considers there is little benefit to applying the requirements equally to the sustainability report (for example reducing the scope of entities who must prepare sustainability reports because the report may be of limited use to investors) or where it is necessary to encourage more fulsome disclosures while the regime is in its infancy (for example transitional modified liability settings and audit and assurance requirements).

New definitions

4.25 To support the amendments, the following definitions are included in section 9 of the Corporations Act:

•

'climate statements' refers to annual climate statements under section 296A and 296B;

•

greenhouse gas emissions (Scope 1, Scope 2, Scope 3 and financed emissions) are defined by sustainability standards made by the AASB. Broadly:

o

Scope 1 greenhouse gas emissions are direct greenhouse gas emissions that occur from sources that are owned or controlled by an entity.

o

Scope 2 greenhouse gas emissions are indirect greenhouse gas emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by an entity. Purchased and acquired electricity is electricity that is purchased or otherwise brought into an entity's boundary. Scope 2 greenhouse gas emissions physically occur at the facility where electricity is generated.

o

Scope 3 greenhouse gas emissions are indirect greenhouse gas emissions (not included in Scope 2 greenhouse gas emissions) that occur in the value chain of an entity, including both upstream and downstream emissions, including financed emissions. Scope 3 greenhouse gas emissions include the Scope 3 categories in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011).

o

Financed emissions are the portion of greenhouse gas emissions of an investee or counterparty attributed to the loans and investments made by an entity to the investee or counterparty. These emissions are part of Scope 3 Category 15 (investments) as defined in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011).

•

'substantive provision' of a sustainability report means anything required to be included in such a report except for the directors' declaration about the statements and the notes;

•

'sustainability records' means records that contain and explain the methods, assumptions and evidence from which the substantive provisions of sustainability reports are made up; and

•

'sustainability report' refers to an annual sustainability report prepared under Chapter 2M (see section 296A regarding contents of this report).

[Schedule 4, item 3, section 9]

Overview of obligations to prepare sustainability reports

4.26 The amendments update the overview provisions setting out the obligations under Chapter 2M (the financial reporting regime) to reflect the new obligation to prepare a sustainability report and other related obligations. Companies, registered schemes, registrable superannuation entities and disclosing entities that prepare annual financial reports under Chapter 2M must also prepare annual sustainability reports, and keep records, if they meet certain size thresholds.

4.27 The overview of reporting obligations is updated to include the requirement to prepare a sustainability report and references sections 296A 296B which contain details of the contents of sustainability reports. The contents of the sustainability report include the climate statement, any notes to the climate statement, any additional statements or notes that are determined by the Minister, and the directors' declaration about the statements and notes.

[Schedule 4, items 6 to 13, heading to Chapter 2M, subsections 285(1), heading to table under subsection 285(1), table items 1A, 4, 5, and 6 of the table under subsection 285(1), section 285A]

4.28 The amendments also update the table summarising reporting obligations for companies limited by guarantee. The amendment under the item concerns companies limited by guarantee with annual revenue, or if part of a consolidated entity, annual consolidated revenue, of $1 million or more and which meet the sustainability reporting thresholds. The item stipulates that such a company must prepare a financial report and sustainability report, which must be audited. They must also provide a directors' report, which can be less detailed than typically required of other companies. All three reports must be provided to members who choose to receive them. References to the relevant sections are included.

[Schedule 4, item 14, table item 4 of the table under section 285A]

4.29 The amendments intend to improve the quality and comparability of disclosures of material climate-related financial risks and opportunities within the financial reporting framework. This will ensure investors are provided with greater transparency of an entity's climate-related plans and strategies. Improved climate-related financial disclosures will also support regulators to assess and manage systemic climate-related risks to the financial system.

Sustainability reports at AGMs

4.30 The amendments ensure that sustainability reports are considered as part of an AGM. Therefore, the note to subsection 250N(3) which explains the requirement for an AGM to be held in addition to other meetings is updated to reflect the introduction of the sustainability report. Similarly, the business of an AGM may include the consideration of a sustainability report as well as the annual financial report in light of the amendments.

[Schedule 4, items 4 and 5, note 1 to subsection 250N(3) and paragraph 250R(1)(a)]

Sustainability records

4.31 An entity required to prepare a sustainability report is also required to keep records that correctly explain and record its preparation of the substantive provisions of the report for 7 years. These sustainability records include documents and working papers that explain the methods, assumptions and evidence from which the substantive provisions are prepared. A failure to maintain records for 7 years is an offence of both fault-based and strict liability, mirroring the offences relating to the obligation to keep financial records. Breach of the fault-based offence has a maximum penalty of two years imprisonment, while breach of the strict liability offence has a maximum penalty of 60 penalty units.

[Schedule 4, items 15 and 16, heading to Part 2M.2 and section 286A)]

4.32 Provisions relating to language requirements and the physical format of financial records are updated to include a reference to the sustainability records. The provisions distinguish financial records and sustainability records to emphasise these are two different documents.

[Schedule 4, item 17, subsections 287(1), 287(2) and 288(1)]

4.33 A new section is inserted setting out that an entity may decide where to keep the sustainability records. This section mirrors existing section 289 for financial records. Where records are kept outside Australia, sufficient written information to support the substantive provisions of the sustainability report must be kept within Australia.

[Schedule 4, items 18 and 19, heading to section 289 and section 289A]

4.34 An entity may decide where to keep its sustainability records in accordance with the Corporations Act. If an entity keeps its records outside Australia, the entity must keep sufficient information in Australia that enables the substantive provisions of the sustainability report to be prepared. If the entity begins to keep records in Australia, the entity must give ASIC written notice, in the prescribed for m, of the place in Australia where the information to support the preparation of the substantive provisions of the report is kept. Notification is only required for the year in which the entity begins to keep information at the place for the first time. Further notification is not required in each year as more information is kept there: it is only required if the same or new information is kept in another place for the first time. The notification must be made no later than:

•

if the entity is required to lodge a sustainability report, the date when the lodgement of the report is required for the financial year in which the entity begins to keep information at that place; or

•

if the entity is not required to lodge a sustainability report, the date where lodgement of the report would be required if the entity were required to prepare a sustainability report for that year.

[Schedule 4, item 19, subsections 289A(1), (2), (3) and (4)]

4.35 ASIC may direct the entity to produce specified sustainability records kept outside Australia. The direction must be in writing, specify a place in the jurisdiction where the records must be produced, and specify a day by which the records are to be produced. The place in which the records are to be kept must be reasonable and ASIC must provide a buffer of 14 days following the direction by which the records are to be produced. The entity must comply with the direction.

[Schedule 4, item 19, subsection 289A(5), (6) and (7)]

4.36 A director's right to access financial records at all reasonable times is updated to extend to sustainability records.

[Schedule 4, items 20 and 21, subsections 290(1) and (2)]

4.37 Failure to comply with the requirements to keep records within the jurisdiction, notify ASIC of the location of records, or provide directors with a right of access is an offence of strict liability.

[Schedule 4, item 19, subsection 289A(8)]

4.38 Strict liability reduces noncompliance, which enhances the integrity of the regulatory regime enforced by ASIC. Strict liability is appropriate where there is a need to ensure offences are dealt with expeditiously to maintain public confidence in the regulatory regime. As these obligations align with the general record keeping obligations applicable to a reporting entity for financial records in annual financial reporting, the offence provisions are also aligned.

4.39 The strict liability provisions in this Schedule meet all the conditions listed in the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate.

[Schedule 4, item 75, Schedule 3]

4.40 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact.

4.41 The amendments also update the signposting provisions to include a reference to sections 28 to 39C of the ASIC Act which also relate to ASIC's powers to inspect records and give related information to other entities.

[Schedule 4, item 22, table item 4 of the table under section 291]

4.42 In support of these amendments, consequential amendments are made to the ASIC Act and the Corporations Act to extend the meaning of 'books' to cover sustainability reports and records.

[Schedule 4, items 1 and 2, section 5 of the ASIC Act and section 9]

Who must prepare sustainability reports

4.43 In general, the existing thresholds that determine who must prepare annual financial reports are used to determine who must prepare sustainability reports. All entities that are exempt from preparing annual financial reports are similarly exempt from preparing sustainability reports.

4.44 An entity that is an asset owner that meets the corporate size thresholds in subsection 292A(3) must prepare a sustainability report, even if it does not meet the requirements of subsection 292A(5) (regarding NGERs registered corporations) or 292A(6) (regarding asset thresholds).

4.45 The requirement to prepare a sustainability report is progressively phased-in for different cohorts, generally based on the size of the entity. An explanation of this phased-in approach is in Part 4 of this Chapter of the explanatory memorandum, regarding application provisions.

4.46 Generally, an entity must prepare a sustainability report for a financial year if that entity prepares an annual financial report for that financial year under Chapter 2M, and if it meets any one of the following for that financial year:

•

if the entity meets at least two of the following three criteria (unless another threshold is provided for in the regulations):

o

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $50 million;

o

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $25 million;

o

the entity (and the entities it controls) have at the end of the financial year, 100 or more employees;

•

if the entity is a registered corporation under the NGER Act or required to make an application to be registered under subsection 12(1) of the NGER Act; or

•

if the entity is a registered scheme, registrable superannuation entity or retail CCIV where the value of assets at the end of the financial year (including the entities it controls) is equal to or greater than $5 billion (or the amount determined by regulations).

4.47 In addition, smaller entities and asset owners are not required to prepare sustainability reports unless they are significant greenhouse gas emitters or consume large amounts of energy (indicators of relatively high exposure to climate risk). That is, entities and asset owners below the corporate size thresholds are not required to prepare reports unless they are NGER reporters.

[Schedule 4, item 25, subsections 292A(1), (3), (5), (6), and (7)]

4.48 To avoid doubt, where an entity is not covered by the above criteria (e.g. not generally required to report under Chapter 2M, or does not meet the above tests), they are not required to prepare a sustainability report for a financial year.

[Schedule 4, item 25, subsection 292A(1)]

4.49 Specifically:

•

entities that for a financial year, are already exempt from lodging financial reports under Chapter 2M of the Corporations Act, are exempt from preparing annual sustainability reports for that financial year. This includes where:

o

an entity has been provided with relief or is exempt from financial reporting by way of an ASIC class order or individual entity relief and

o

an entity is registered with the Australian Charities and Not-for-profits Commission.

•

small and medium size businesses, below the relevant size thresholds are exempt.

4.50 Part 4 of this Chapter explains the application of the law with respect to the phased-in approach for financial reporting years commencing between 1 January 2025 and 30 June 2027 (inclusive).

ASIC relief powers

4.51 ASIC has existing powers under sections 340 to 342 to relieve entities (or a specified class of entities) from complying with all or specified requirements of Parts 2M.2, 2M.3 and 2M.4 (other than Division 4) of the Corporations Act. These powers extend to the new sustainability reporting requirements including, but not limited to, the requirement to prepare a sustainability report (section 292A), the requirement to lodge reports within a certain timeframe (section 315), and the requirement to include certain information in a report (section 296A).

4.52 An entity wishing to seek relief from one or more of the new sustainability reporting requirements may apply to ASIC. ASIC's relief powers are confined by the jurisdictional threshold set out in subsection 342(1). In accordance with that threshold, ASIC may only grant relief if it is satisfied that complying with the relevant reporting requirements would make the financial report or other reports misleading, be inappropriate in the circumstances, or impose unreasonable burdens. A decision to grant relief by ASIC is discretionary and will take into account all of the relevant circumstances of an application. An application for relief must be made in writing and authorised by a resolution of the directors.

4.53 ASIC has issued regulatory guidance clearly setting out how it uses these powers in the context of financial reporting obligations, and it is expected that ASIC will over time develop similar guidance for the new sustainability reporting obligations.

Consolidated sustainability reporting

4.54 Whether an entity may choose to prepare a sustainability report on a consolidated basis is generally dependent on whether the entity prepares a financial statement on a consolidated basis.

4.55 If the entity is required to prepare financial statements on a consolidated basis, it may choose to prepare a sustainability report for the group on a consolidated basis (as the parent entity). This provision is intended to streamline general reporting requirements and treat the two reporting requirements (sustainability and financial) in a consistent manner. Where this occurs, each individual entity that is otherwise required to prepare a sustainability report would not need to, if the parent's sustainability report covers those individual entities in the consolidated sustainability report.

[Schedule 4, item 25, subsection 292A(2)]

4.56 Determining if one entity controls another must be in accordance with the accounting standards for financial statements in relation to consolidated entities. This reduces unnecessary duplication and inefficiency in reporting and reflects the fact that other entities within the same corporate group may be better placed to consolidate information.

4.57 Where an entity does not prepare consolidated sustainability reporting, but considers there are appropriate grounds to prepare a consolidated sustainability report on behalf of related entities, an entity may apply to ASIC to do so, as discussed above.

4.58 Specific provisions about consolidated financial statements are updated to incorporate climate statements. Directors and officers of controlled entities must give the controlled entity all information requested that is necessary to prepare the consolidated financial statements or to prepare consolidated sustainability reports.

4.59 Controlled entities must allow the auditor for the controlling company, scheme or entity access to its books and give the auditor any information, explanation or assistance necessary if it must prepare an annual report including consolidated financial statements or sustainability reports.

4.60 The requirement of directors and officers of controlled entities to give information, the auditor's power to obtain information from the controlled entity and the controlled entity's obligation to assist the auditor applies to the preparation of sustainability reports if the entity's reports are being prepared, reviewed or audited.

[Schedule 4, items 47 to 52, heading to Division 6 of Part 2M.3, subsections 323(1) and 323B(1) and section 323C]

Large entities

4.61 Large entities that are required to prepare and lodge annual financial reports under Chapter 2M of the Corporations Act will be required to disclose information about climate-related risks and opportunities. Large entities are defined using size thresholds equivalent to the existing large proprietary company definition (this threshold applies to both listed and unlisted companies).

[Schedule 4, item 25, subsection 292A(3)]

4.62 The amendments provide flexibility for the regulations to determine different applicable thresholds that consider whether an entity is significant enough to warrant reporting (such as to the entity's consolidated revenue amount or to the number of employees they have). This flexibility mirrors the general operation of section 45A regarding large proprietary companies which also delegates such a power regarding entity size thresholds to the regulations. This delegation is necessary to ensure that the law does not become out of date and can be flexibly updated, depending on the trends and changing sizes of entities. The delegation allows the legislation to keep pace with economic growth over time when thresholds in the primary law are no longer appropriate. It is appropriate that the delegation is made to the Governor-General who makes the regulations rather than a Minister or the regulator like ASIC.

[Schedule 4, item 25, subsection 292A(3)]

4.63 When counting employees, part-time employees should be taken into account as an appropriate fraction of a full-time equivalent.

[Schedule 4, item 25, subsection 292A(4)]

4.64 To determine whether an entity controls another entity in relation to sustainability reports, reference is made to the accounting standards made for financial statements, even if these standards do not otherwise apply to the entity.

[Schedule 4, item 25, paragraph 292A(7)(a)]

4.65 Calculating consolidated revenue and the value of consolidated gross assets for the purpose of determining if an entity must provide an annual sustainability report must be done in accordance with the accounting standard in force at the relevant time. This applies even if the standard does not otherwise apply to the financial year or to some or all of the entities concerned.

[Schedule 4, item 25, paragraph 292A(7)(b)]

Large emitters

4.66 Where entities are subject to both the annual financial reporting requirements under the Corporations Act and emissions reporting obligations under the NGER Act, they will be required to disclose climate-related financial risks and opportunities in accordance with the standards regardless of size.

[Schedule 4, item 25, subsection 292A(5)]

4.67 Reporting by NGER-covered entities is appropriate, given these are Australia's largest emitters of Scope 1 and Scope 2 greenhouse gas and therefore likely face high climate-related transition risk. Such risks include policy, legal, technological, market and reputational risks. These risks could carry financial implications for an entity, such as increased operating costs or asset impairment due to new or amended climate-related regulations. The entity's financial performance could also be affected by shifting consumer demands and the development and deployment of new technology.

Asset owners

4.68 Asset owners (registrable superannuation entities, registered schemes and retail CCIVs) are considered large if total assets under management are more than $5 billion. For retail CCIVs, the threshold applies to the whole CCIV (that is, the sum of all assets under management in all sub-funds). This threshold is designed to capture large asset owners that do not otherwise have employees or traditional sources of revenue. This will support consistent reporting of climate-related risks and opportunities across the financial sector, noting the significance of these entities in Australia's financial system. The threshold serves as a net to ensure all relevant entities are caught. Timing for reporting by asset owners is explained at [Schedule 4, item 145, section 1707B].

[Schedule 4, item 25, subsection 292A(6)]

4.69 Similarly, the amendments provide flexibility for the regulations to determine different applicable thresholds that consider whether an asset owner is significant enough to warrant reporting (specifically, to the asset value threshold). This flexibility mirrors the general operation of section 45A regarding large proprietary companies which also delegates such a power regarding entity size thresholds to the regulations. This delegation is necessary to ensure that the law does not become out of date and can be flexibly updated. The delegation allows the legislation to keep pace with economic growth over time when thresholds in the primary law are no longer appropriate. It is appropriate that the delegation is made to the Governor-General who makes the regulations rather than a Minister or the regulator like ASIC.

[Schedule 4, item 25, subsection 292A(6)]

Contents of sustainability reports

4.70 An annual sustainability report for a financial year consists of:

•

the climate statement;

•

notes to the climate statement (if any);

•

any statements required in a legislative instrument by the Minister relating to matters concerning environmental sustainability;

•

any notes on statements required in a legislative instrument by the Minister; and

•

the director's declaration about the statements and notes.

[Schedule 4, item 26, subsections 296A(1),(3)(4) and (5)]

4.71 To avoid doubt, nothing in these amendments prevents an entity voluntarily including information that is not legally required by section 296A but that the entity nonetheless considers relevant to sustainability. If voluntary information is included in the sustainability report, this information must be clearly distinguished as a separate voluntary statement (or statements) and state that it is not included in the statements or notes because of a requirement of the legislation. For example, information about an entity's nature, first nations or diversity strategy and performance may be included in a separate voluntary statement or statements in the sustainability report.

4.72 References to the sustainability report here relate only to those disclosures required by legislation.

Climate statements and notes

Climate statements – general contents

4.73 The definition of 'climate statements' references their required contents under the sustainability standards. As the climate statements are to be prepared in alignment with relevant sustainability standards, the specific contents are not prescribed in the Act. The AASB standards are the most appropriate source of information for more granular guidance on climate statements.

[Schedule 4, items 3 and 26, sections 9, 296A and 296B]

4.74 The climate statement of a sustainability report must be prepared in a manner consistent with the relevant sustainability standards made for the purposes of the Act.

[Schedule 4, item 26, subsection 296A(2)]

4.75 Relevant sustainability standards issued by the AASB are expected to align as closely as possible with the relevant standards issued by the ISSB. It is expected that while there will be modifications that are necessary and appropriate to ensure the standards are fit-for-purpose for Australia, the standards would overall align. The ISSB's climate-related disclosure standard sets out four pillars: Governance, Strategy, Risk Management and Metrics and Targets.

4.76 The climate statements for a financial year, along with the notes to the climate statements, must be prepared in a way that together, they disclose all of the following:

•

material financial risks and financial opportunities relating to climate;

•

any metrics and targets for the financial year relating to climate that are required to be disclosed by the sustainability standards made for the purposes of the Act, including scope 1, 2 and 3 emissions of greenhouse gas; and

•

any information about governance of, strategy of, or risk management by the entity in relation to these risks, opportunities, metrics and targets.

4.77 Based on the exposure draft standards issued by the AASB, when preparing sustainability reports, an entity will be required to use all reasonable and supportable information that is available to it at the reporting date without undue cost and effort.

4.78 For Scope 3 emissions reporting, this will mean that entities will not be required to disclose exact data or detailed information that their customers or suppliers cannot provide easily. Entities will also only be required to disclose scope 3 emissions from their second reporting year, and this may comprise information from a reporting year up to 12 months prior to the current period, allowing entities to use information gathered from public disclosures made by other entities in the previous year.

4.79 Draft standards require entities to conduct scenario analysis. The information disclosed in such analysis should enable users of the sustainability report to understand the span of the entity's material risks and opportunities associated with climate change. This includes consideration of both the risks and opportunities associated with responding to the threat of climate change (transition) and those associated with the potential impacts of climate change (physical). Scenario analysis would be expected to inform this understanding.

4.80 The draft standards also indicate entities will not be required to disclose information that is commercially sensitive as defined in the standard.

[Schedule 4, item 26, section 296D]

4.81 Whether something is a material financial risk or financial opportunity relating to climate is determined in accordance with the sustainability standards.

[Schedule 4, item 26, subsection 296D(2)]

Exemption for smaller entities – statement about having no material climate-related risks or opportunities

4.82 It is intended that complete standardised climate disclosures would not be required for smaller in-scope entities that do not have material climate-related financial risks or opportunities.

4.83 In these instances, the entity's climate statement will only include a statement to that effect, as well as an explanation of how it reached this conclusion.

[Schedule 4, item 26, section 296B]

4.84 To understand whether a climate-related financial risk or opportunity is material or not, these entities should consider the sustainability standards that relate to climate. Broadly, material risks and opportunities are those that could reasonably be expected to affect the entity's prospects. The concept of materiality in this instance is expected to be consistent with financial reporting.

4.85 This exemption applies only at the climate statement level, to replace a full climate statement with a shorter statement according to the exemptions. Therefore, the provisions do not exempt the entity from having to complete the sustainability report as a whole, and according to section 296A, including any other statements required by legislative instrument, notes to the statements and the directors' declaration.

4.86 This legislative exemption applies only to the smallest in-scope entities. An entity may rely on this exemption if the following do not apply to the entity:

•

where the entity meets at least two of the following three criteria:

o

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $200 million;

o

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $500 million;

o

the entity (and the entities it controls) have at the end of the financial year, 250 or more employees; or

•

if the entity is a registered corporation under the NGER Act or required to make an application to be registered under subsection 12(1) of the NGER Act; or

•

if the entity is a registered scheme, registrable superannuation entity or retail CCIV, where the value of assets at the end of the financial year (including the entities it controls) is equal to or greater than $5 billion.

[Schedule 4, item 26, subsections 296B(1), (2), (4) and (5)]

General rules for applying thresholds

4.87 When counting employees, part-time employees should be taken into account as an appropriate fraction of a full-time equivalent.

[Schedule 4, item 26, subsection 292B(3)]

4.88 Whether something is a material financial risk or financial opportunity relating to climate is determined in accordance with the sustainability standards.

[Schedule 4, item 26, subsection 296B(6)]

4.89 To determine whether an entity controls another entity in relation to sustainability reports, reference is made to the accounting standards made for financial statements, even if these standards do not apply to the entity.

[Schedule 4, item 26, paragraph 292A(7)(a)]

4.90 Calculating consolidated revenue and the value of consolidated gross assets for the purpose of determining if an entity must provide an annual sustainability report must be done in accordance with the accounting standard in force at the relevant time. This is even if the standard does not otherwise apply to the financial year or to some of the entities concerned.

[Schedule 4, item 26, paragraph 292A(7)(b)]

General application of materiality

4.91 For clarity, even if an entity does not meet the thresholds that qualify it to rely on new subsection 296B(1), principles of financial materiality as determined by the relevant sustainability standards still apply. These entities are required to follow the requirements set out in the relevant sustainability standards, made for the purposes of preparing climate statements.

Notes to climate statements

4.92 The notes to a climate statement must include all of the following:

•

any disclosures required by the regulations regarding the preparation of, and contents of the climate statement;

•

any notes required by the sustainability standards made for the purposes of the Act in relation to the preparation of, and contents of the climate statement; and

•

any notes containing other information necessary to ensure that the statement and notes together meet the requirements under new section 296D.

[Schedule 4, item 26, subsections 296A(3), (4) and (5)]

Other statements required by legislative instrument – environmental sustainability-related financial disclosures

4.93 The Minister may make a legislative instrument to require additional statements and notes relating to environmental sustainability-related financial matters to be included as part of the annual sustainability report.

[Schedule 4, item 26, subsection 296A(5)]

4.94 This is necessary to ensure that Australia's sustainability reporting framework can flexibly respond to new and emerging risks and opportunities and to developments in international environmental sustainability-related disclosure standards and frameworks. It is appropriate to use delegated legislation to ensure mandatory disclosure requirements can be expanded quickly in response to the severity of the risks facing the financial market regarding sustainability disclosures. This is consistent with the Government's 'climate first, but not only' policy.

4.95 The legislative instrument would be subject to disallowance and sunset after 10 years and will therefore be subject to appropriate Parliamentary scrutiny.

Compliance with sustainability standards

4.96 The climate statements in the sustainability report must comply with the sustainability standards made for the purposes of the Act, and any further requirements that have been determined in a legislative instrument.

[Schedule 4, item 26, section 296C]

Directors' declaration

4.97 The directors' declaration is a declaration by the directors of their opinion on whether the substantive provisions of the sustainability report are in accordance with the Corporations Act, including in compliance with the relevant sustainability standards (i.e. whether the climate statement is in compliance with the sustainability standards that relate to climate). These declarations must be made with a resolution of the directors, dated, and signed. A transitional provision allowing directors to declare simply that the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Act for the first 3 years of the scheme is included in Part 4.

[Schedule 4, items 26 and 145, subsections 296A(6) and (7), and section 1707C]

4.98 To avoid doubt, a directors' declaration must still be made if the climate statement disclosure is a statement about there being no financial risks or opportunities relating to climate in accordance with section 296B.

Providing the sustainability report to members and the public

4.99 Alongside the requirements to provide the financial report, directors' report and auditor's report for a financial year to members, the reporting entity must also provide the sustainability report to members. Where a concise report is provided to members, concise report must contain the full sustainability report.

[Schedule 4, items 27 to 33, headings to Division 4 of Part 2.3M and section 314, subparagraph 314(1)(a)(ia), paragraphs 314(2)(aa) and 314AA(1)(aa), and subsections 316(1) and (3)]

Timing of reporting

4.100 The amendments update the annual reporting requirements to members of a company limited by guarantee by specifying when a sustainability report must be shared with each voting member in the specified timeframes. These are consistent with the existing timing obligations for the sharing of financial reports, directors' reports, and auditor's reports (earlier of 21 days after the AGM or 4 months after the end of the financial year). Minor amendments are made to the numbering of these obligations in the Act accordingly.

[Schedule 4, items 34 to 37, heading of section 316A, paragraph 316A(1)(a), subsections 316A(3) and 316A(5)]

4.101 An entity must make its sustainability report publicly available on its website the day the report is lodged with ASIC, and ensure the report remains available after that day, if it is required to prepare such a report and not required to disclose this report to its members. This obligation aligns with similar obligations to publish annual financial reports on an entity's website (see section 314AA). Failure to comply with this obligation is a strict liability offence.

[Schedule 4, item 38, section 316B]

4.102 Strict liability reduces noncompliance, which enhances the integrity of the regulatory regime enforced by ASIC. Strict liability is appropriate where there is a need to ensure offences are dealt with expeditiously to maintain public confidence in the regulatory regime. As these obligations align with the general record keeping obligations applicable to a reporting entity for providing timely disclosures, the offence provisions are also aligned.

4.103 The strict liability provisions in this Schedule meet all the conditions listed in the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate.

[Schedule 4, item 65B, Schedule 3]

4.104 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact.

4.105 Similar to financial reports, directors' reports and auditor's reports, the directors of a public company that is required to hold an AGM must also lay the sustainability report before the AGM.

[Schedule 4, item 39, paragraph 317(1)(aa)]

4.106 Similar to financial reports, directors' reports and auditor's reports, a company or disclosing entity that was a borrower in relation to debentures at the end of a financial year must give a copy of the sustainability report to the trustee for debenture holders. A debenture holder may ask the company or disclosing entity that issued debentures for copies of a sustainability report if one was required to be prepared.

[Schedule 4, items 40 and 41, subsection 318(1) and paragraph 318(2)(b)]

4.107 Consequential amendments are also made regarding re-lodgement if sustainability reports are amended after lodgement, in a manner consistent with the re-lodgement of financial reports and director's reports.

[Schedule 4, items 42 to 46, headings to section 322 and subsections 322(1) and 322(2A), subsection 322(1), and paragraph 322(2A)(a)]

ASIC directions

4.108 If ASIC considers that a statement an entity makes in a sustainability report is incorrect, incomplete or misleading in any way, ASIC may direct the entity, in writing, to do any of the following:

•

confirm to ASIC that the statement is correct or complete;

•

explain the statement to ASIC;

•

give to ASIC information or documents that could substantiate or support the statement;

•

correct, complete or amend the statement in accordance with the direction;

•

if directed to correct, complete or amend the statement, publish the corrected, completed, or amended statement in accordance with the direction; and

•

if directed to correct, complete or amend the statement, give the corrected, completed, or amended statement to specified persons in accordance with the direction.

[Schedule 4, item 26, subsection 296E(1)]

4.109 To avoid doubt, ASIC may make a single direction in relation to one or more statements in a sustainability report. A single direction may also include directions to an entity to do one or more of the things listed in subparagraphs (d) to (h).

4.110 The entity must comply with a direction within the time specified in the direction (which must be a reasonable time), or within a reasonable time if none is specified. ASIC may extend the time within which the entity must comply by written notice given to the entity. The penalty for a failure to comply with such direction is 60 penalty units, and this offence is one of strict liability.

[Schedule 4, items 26 and 76, subsections 296E(2), (3) and (8), and Schedule 3]

4.111 Strict liability reduces noncompliance, which enhances the integrity of the regulatory regime enforced by ASIC. Strict liability is appropriate where there is a need to ensure offences are dealt with expeditiously to maintain public confidence in the regulatory regime. As these obligations align with the general obligations applicable to a reporting entity to follow the directions of the regulator, the offence provisions are also aligned.

4.112 The strict liability provisions in this Schedule meet all the conditions listed in the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate.

[Schedule 4, item 76, Schedule 3]

4.113 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact.

4.114 Before giving the entity a notice to correct, complete, or amend the statement, ASIC must give the entity an opportunity to appear or be represented at a hearing before ASIC that takes place in private, or to make submissions to ASIC on the matter. To provide a framework with procedural fairness to the entity, the amendments require ASIC to provide opportunity for the entity to be heard or make submissions on the matter.

[Schedule 4, item 26, subsection 296E(4)]

4.115 ASIC may vary or revoke these directions by giving written notice to the entity. The varied direction may be subject to similar conditions as the original direction.

[Schedule 4, item 26, subsections 296E(5) and (6)]

4.116 ASIC must give notice of the giving, varying, or revoking of a direction to correct, complete or amend a statement by publishing on its website. This is intended to provide clarity to the public about ASIC's enforcement approach, including what statements within a sustainability report are not considered appropriate.

[Schedule 4, item 26, subsection 296E(7)]

Product disclosure

4.117 The prospectus for continuously quoted securities or a Product Disclosure Statement relating to a managed investment scheme that is an ED security must inform people of their right to obtain a copy of the most recently lodged sustainability report if the body has lodged a sustainability report with ASIC. The contents of an offer information statement for the issue of a body's securities must include a copy of the most recent sustainability report prepared. That sustainability report must comply with the sustainability standards, and be audited. [Schedule 4, items 53, 54, 55 and 57, subparagraphs 713(4)(a)(ia) and 1013I(3)(a)(ia) , paragraph 715(1)(ia), and subsection 715(2A) ]

4.118 However, for continuously quoted securities that are not securities of a notified foreign fund passport, the information is not required to be included in the Product Disclosure Statement if the issuer of the product has lodged a sustainability report with ASIC that contains the information.

[Schedule 4, item 56, subparagraph 1013FA(2)(a)(ia)]

4.119 Issuers for superannuation products relating to a registrable superannuation entity must give a concerned person a copy of the sustainability report the entity has prepared for the financial year if the concerned person made the request in writing. The term 'concerned person' is defined in subsection 1017C(9). This requirement already applies to the financial report, directors' report, and auditor's report on the financial report, of the entity for a specified financial year.

[Schedule 4, item 58, paragraph 1017C(3AA)(aa)]

Sustainability reporting by CCIVs

4.120 Consequential amendments relating to corporate finance and financial reporting for CCIVs are made to support the new sustainability reporting requirements.

[Schedule 4, items 61, 63 and 64, headings to Part 8.4B, Division 4 of Part 8B.4, Subdivision C of Division 4 of Part 8B.4, and section 1232C]

4.121 Financial reporting provisions in Part 2M.3 that apply to CCIVs are also updated to include sustainability reports. This means if a CCIV meets the thresholds for sustainability reports (see above), the remaining provisions relating to financial reporting requirements of Division 1 of Part 2M.3 also apply to CCIVs in relation to sustainability reports and the documents of which a sustainability report consists in the Act.

[Schedule 4, items 62, 65, 66 and 67, subsection 1232(1) and paragraphs 1232C(1)(aa), 1232C(2)(a), 1232C(2)(b) and 1232C(2)(c), and item 59, table item 15 of section 1222M]

4.122 A sustainability report for a sub-fund must comply with further requirements prescribed by regulations made for the purposes of annual financial reports and directors reports for sub-funds in CCIVs. The heading to the section is changed to reflect this.

[Schedule 4, items 68 and 69, heading to section 1232D and subsection 1232D(4)]

4.123 Annual financial reporting requirements for companies, registered schemes and disclosing entities apply to a retail CCIV in relation to each of its sub-funds as if the requirement were a requirement to report to members of the sub-fund for the year. The requirement to report includes a sustainability report as well as a financial report and director's report and the auditor's report on the financial report. The amendment reflects the fact the auditor reports on the financial report itself.

[Schedule 4, items 70 and 71, heading to section 1232H, and subparagraph 1232H(1)(a)(i)]

4.124 Requirements to relodge if a financial statement or directors' report relating to a sub-fund is amended after lodgement also applies to sustainability reports.

[Schedule 4, items 72 and 73, heading to section 1232M and section 1232M]

Penalty provisions

4.125 Consequential amendments are made to Schedule 3 which list the penalty provisions under the amendments in Part 1, specifically in relation to the new obligations to keep sustainability records (subsections 286A(1) and (2)), including the place where sustainability records are kept (subsections 289A(2), 289A(4) and 289A(7)), and the obligation to make sustainability reports publicly available (subsection 316B(1)). The amendments also insert a penalty for contravention of obligations relating to complying with a member's request for a full financial report and auditor's report from a company, registered scheme or disclosing entity (subsection 316A(3A). Finally, a penalty is introduced for non-compliance with an ASIC direction to correct, amend or otherwise substantiate a statement (subsection 296E(2)).

[Schedule 4, items 74 to 78, table items in Schedule 3 and table item under Schedule 3 dealing with subsections 316A(3) and (4), column headed "Provision"]

Part 2 – Audit and assurance

4.126 Similar to the annual financial reporting obligations in the Corporations Act, the sustainability report will be subject to mandatory audit requirements, in accordance with auditing standards. The auditor of a sustainability report has the same obligations as the auditor of a financial report, and should be supported by technical climate and sustainability experts where appropriate.

4.127 The definitions of 'auditor's report' in section 9 of the Act is amended to include references to an audit of a sustainability report in addition to a financial report. Audit refers to an either an audit or review conducted for the purposes of this Act.

[Schedule 4, item 79, section 9]

4.128 Part 2 sets out the enduring audit requirements for the sustainability report, which much be audited in accordance with the provisions for the contents of the sustainability report. Initially, the sustainability report will only be required to be reviewed or audited to the extent required by the audit standards made by the AUASB. Over time these standards are expected to evolve in terms of both the extent and level to which disclosures in the sustainability report will need to be assured, reverting to the enduring provisions from 1 July 2030 (transitional provisions are set out in Part 4).

Audit of a sustainability report

4.129 The overview of annual financial reporting obligations for companies, registered schemes, registrable superannuation entities and disclosing entities now include the requirements to have a sustainability report audited and to obtain an auditor's report. The overview references the relevant provisions for ease of navigation.

[Schedule 4, item 90, table item 1B of the table under subsection 285(1)]

4.130 An entity required to prepare a sustainability report for a financial year must have the sustainability report audited and obtain an auditor's report in accordance with the Act. A Note to the section points to the transitional provisions for auditing set out in Part 4, for financial years commencing before 1 July 2030.

[Schedule 4, item 94, section 301A]

4.131 To avoid doubt, where an entity's climate statement for the year is only a statement that the entity has no material climate risks or opportunities, this statement must also be audited.

4.132 Consequential amendments update various references to reflect the additional sustainability reporting requirements, including updates from the singular 'auditor's report' to 'any auditor's reports'. The amendments also include the business of an AGM to consider relevant reports so an 'auditor's reports' are included instead of a single auditor's report. A similar update is made in the table providing the overview of financial reporting obligations for companies, registered schemes, registrable superannuation entities and disclosing entities.

[Schedule 4, items 80 to 89, , 91, 92, 93, 95 and 99, note 1 to subsection 250N(3), paragraphs 250PA(1)(a) and 250PA(1)(b), paragraphs 250R(1)(a), 250RA(1)(a) and 250RA(3)(c), subparagraphs 250T(1)(a)(i), (ii), (iiia), and (iv), table items 4, 5 and 6 of the table under subsection 285(1), and headings to Division 3 of Part 2M.3 and section 307B]

4.133 Further amendments change the wording of two headings to distinguish the sections relating to audits of financial reports.

[Schedule 4, items 96 and 97, headings to sections 307 and 307A]

Auditor's opinion

4.134 An auditor who conducts an audit of the sustainability report for a financial year must form an opinion on whether the sustainability report complies with the Corporations Act, including whether it complies with the sustainability standards (section 296C) and the climate statement disclosures (section 296D) requirements. If not, the auditor must specify why. The auditor must also form an opinion about whether the auditor has been given all information, explanation and assistance necessary for the conduct of the audit and whether the entity has kept sufficient sustainability records to support the preparation and audit of the sustainability report. A Note to this section points to the modification of the operation of this section to retail CCIVs in section 1232G.

[Schedule 4, item 98, section 307AA]

4.135 If an individual auditor or company conducts an audit of the sustainability report, the individual or company must conduct the audit in accordance with auditing standards. The lead auditor of the firm or audit company conducting a review must ensure the audit or review is conducted in accordance with the standards. Contravention of this requirement is both a fault-based offence (with a penalty of 2 years imprisonment) and one of strict liability (with a penalty of 50 penalty units).

[Schedule 4, item 98, section 307AB]

Working papers for the audit of a sustainability report

4.136 In line with the requirements for financial reports, an auditor contravenes the retention requirements for audits of sustainability reports if they do not retain all audit working papers prepared by or for, or considered or used by, the auditor in accordance with the requirement of the working standards at the end of 7 years after the report or an earlier date ASIC would determine. Contravention is an offence of strict liability. If audit working papers are in electronic form they are taken to be retained if they are convertible into a hard copy.

[Schedule 4, items 99, 100 and 101, heading to section 307B, subparagraphs 307B(1)(b)(ii) and (iii)]

4.137 A person contravenes this retention requirement if they were a member of the audit firm at the time it contravened its obligations in relation to the document retention period. Contravention is an offence of strict liability. However, under existing section 307B(5), a member of an audit firm does not commit an offence if the member did not know at the time of the circumstances there was a contravention or knew of the circumstances at the time, but took all reasonable steps to correct the contravention as soon as the member became aware of the circumstances.

[Schedule 4, items 102 and 103, subparagraphs 307B(3)(a)(ii) and (iii)]

Auditor's independence

4.138 An individual auditor conducting an audit or a review of the sustainability report must give directors of the entity a written declaration that to the best of the individual auditor's knowledge, there have been no contraventions of auditor independence requirements of this Act in relation to the audit or review, and no contraventions of any applicable code of professional conduct in relation to the audit. Otherwise, the auditor must provide a written declaration that to the best of their knowledge and belief, the only contraventions are contraventions which are set out in the declaration. Not providing a declaration is an offence of strict liability. The same requirements apply to the lead auditor of an audit firm or company conducting an audit of a sustainability report.

[Schedule 4, items 104 to 107, paragraphs 307C(1)(ba) and 307C(3)(ba), subsection 307C(5A) and paragraph 307C(5A)(c)]

Auditor's report

4.139 The auditor's report must include statements or disclosure required by the auditing standard and a report must specify the date on which it is made. If the sustainability report includes any additional information under paragraph 296A(3)(c), which concerns the inclusion of notes, the auditor's report must also include a statement of the auditor's opinion on whether the inclusion of that additional information was necessary to make the disclosures required by sections 296D.

4.140 The auditor's report must also describe any defect or irregularity and deficiencies, failures or shortcomings that may have arisen if they were not given the information, explanation and assistance necessary to complete the audit.

4.141 Contravention of subsections 309A(1) (relating to reporting to members as to whether the audit is in compliance with the sustainability standards and the climate statement disclosures) and 309A(3) (relating to reporting to members on whether the sustainability report is otherwise noncompliant) are offences of strict liability.

[Schedule 4, item 108, section 309A]

Providing auditor's report to members and the public

4.142 An entity must report to members for a financial year by providing an auditor's report on the sustainability report for the year (in addition to the financial report, director's report and auditor's report on the financial report). Under section 314AA, a company may instead provide a concise report to satisfy this requirement. An amendment is made to ensure the concise report includes the auditor's report on the sustainability report.

[Schedule 4, items 109 and 110, subparagraph 314(1)(a)(iv) and paragraph 314(2)(da)]

4.143 Similarly, a registrable superannuation entity must report to members by providing an auditor's report on the sustainability report for the year (in addition to the financial report, director's report and auditor's report on the financial report).

[Schedule 4, item 111, paragraph 314AA(1)(d)]]

4.144 Issuers of financial products that are superannuation products relating to registrable superannuation entities must, on written request from a concerned person, give the person a copy of the auditor's report for the financial year and a copy of the auditor's report on the sustainability report.

[Schedule 4, item 121, paragraphs 1017C(3AA)(c) and (d)]

4.145 If a company limited by guarantee obtains an auditor's report on the sustainability report, the company must send a copy of the report to each member who has made an election for that year. The report must be sent the earlier of 21 days before the next AGM after the end of the financial year, or 4 months after the end of the financial year. The copy of the report must be free of charge for members. Contravention is an offence of strict liability. The penalty amount for this offence is set at 30 penalty units through an amendment to Schedule 3 which sets out penalties.

[Schedule 4, items 113 and 114, subsections 316A(3B) and 316A(5), and item 127, Schedule 3]

4.146 The amendments update consideration of reports at AGMs and additional reporting by debenture issuers by changing the singular term 'report' into a plural, reflecting the addition of the auditing of sustainability reports.

[Schedule 4, items 115 and 116, paragraphs 317(1)(c) and 318(2)(b)]

4.147 Members of listed companies entitled to cast votes may also submit written questions to auditors that are relevant to the conduct of the audit of annual sustainability reports as well as financial reports.

[Schedule 4, item 82, paragraph 250PA(1)(b)]

Auditor's power to obtain information

4.148 The auditor's power to obtain information from a controlled entity is updated to include the power to obtain sustainability reports including consolidated climate statements. Auditing standards are also updated to apply to sustainability reports.

[Schedule 4, item 117, subsections 323A(1)]

Relevant audit standard

4.149 The AUASB may, by legislative instrument, make auditing standards for the purpose of this Act. This applies to the auditing of financial reports and extends to sustainability reports.

4.150 If the AUASB makes an auditing standard and the standard applies to sustainability reports in relation to particular periods and an auditor is conducting an audit of a sustainability report in relation to a period occurring before the start of the earliest of those periods, the auditor may elect to apply the auditing standard to that audit unless the standard says otherwise. The election must be recorded in the auditor's report.

[Schedule 4, items 118 and 119, subsections 336(3) and 336(5)]

4.151 To avoid doubt, the auditing standard may refer to either an audit, or review, or both.

4.152 It is necessary and appropriate for the AUASB to develop auditing standards for sustainability reports as they have the experience and understanding to effectively develop these. It would not be appropriate for the inflexibility of primary legislation to provide for auditing standards as these standards are updated from time to time to ensure they respond to new industry conditions and frameworks.

CCIVs

4.153 The requirement to audit a financial report applies to CCIVs in relation to sustainability reports for each sub-fund. Subject to modifications relevant to CCIVs, Division 3 of Part 2M.3 applies to sub-funds of retail CCIVs and in relation to sustainability reports for CCIVs.

[Schedule 4, items 122, 123 and 124, subsection 1232D(2A), paragraph 1232(1)(aa) and subparagraph 1232H(1)(a)(ii)]

Offences

4.154 Several new strict liability offences are added to support the new auditing and assurance requirements, as outlined above. Strict liability is appropriate in these circumstances, as it is necessary to strongly deter misconduct that can cause serious detriment to investors and regulators relying on auditors' compliance with core obligations in the Act. Further, the specialised role of auditors means that it is appropriate for a person to be penalised if they contravene these requirements by not complying with the strict requirements to conduct an audit in line with relevant standards, not retaining audit records as required or not providing the necessary declarations in relation to auditor independence requirements or adherence to codes of professional conduct. Additionally, the strict liability offences mirror similar offences relating to the framework for financial reporting.

4.155 The strict liability offences in this Schedule meet all the conditions listed in the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate.

4.156 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact.

4.157 Schedule 3 sets out penalties for offences in the Act. Schedule 3 of the Act is updated to reflect the addition of the new offences relating to the new requirements for auditing and assuring sustainability reports.

[Schedule 4, items 125, 126 and 127, table items in Schedule 3 and table item under Schedule 3 dealing with subsections 316A(3) and (4), column headed "Provision"]

Part 3 – Sustainability and auditing standards

Standard setting powers

AASB's functions

4.158 Schedule 4 to the Bill amends the ASIC Act to empower the AASB to make sustainability standards under section 336A. These sustainability standards are given legal effect by amendments to the Corporations Act.

[Schedule 4, items128 to 131, paragraphs 227(1)(ba) and 227(1)(ca) of the ASIC Act, notes 2 and 3 to subsection 227(1) of the ASIC Act, and note 1 to subsection 227B(1) of the ASIC Act]

4.159 The relevant sustainability standards under section 336A of the Corporations Act, similar to accounting standards, are legislative instruments. These sustainability standards are limited in scope as they must not be inconsistent with the Corporations Act or the regulations.

[Schedule 4, item 140, subsection 336A(1)]

4.160 To avoid doubt, until such time as additional statements are required by the Minister to be included in the sustainability report, the relevant sustainability standards are those that are made for the purposes of the climate statement (i.e. containing climate-related financial disclosure only), in line with subsection 296D. Consistent with the policy outcomes of the amendments under Schedule 2 to the Treasury Laws Amendment (2023 Measures No. 1) Act 2023, the AASB maintains the function to formulate sustainability standards, (subsection 227(b) of the ASIC Act refers).

4.161 Sustainability standards made by the AASB for other purposes will be voluntary standards until such time as any additional statements are required to be made in the sustainability report in the Corporations Act. These standards could be used where entities elect to disclose additional information in the sustainability report. The amendments leverage the AASB's experience to facilitate the development of sustainability-related and climate-related financial disclosure standards and to, as much as is practicable, align with the global baseline standards released by ISSB (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures) in June 2023.

AUASB's functions

4.162 To avoid doubt, no amendments to the AUASB's functions in the ASIC Act are necessary to provide the AUASB with the powers to make legally binding audit and assurance standards for the purposes of sustainability. Paragraph 227B(1)(a) already provides the AUASB with the powers to make auditing standards under section 336 of the Corporations Act. This includes for the purposes of the sustainability report under these amendments (see paragraph 336(1)).

4.163 Consistent with the policy outcomes of the amendments under Schedule 2 to the Treasury Laws Amendment (2023 Measures No. 1) Act 2023, the AUASB maintains the function to formulate auditing and assurance standards for sustainability and other purposes (see subsection 227B(b) of the ASIC Act).

Mandatory auditing and assurance standards

4.164 For the AUASB and AASB to make legally applicable standards there must also be provisions in the Corporations Act to that effect.

4.165 To provide AASB with the power to make sustainability standards for the purposes of this Act, the amendments add new section 336A, which sets out similar powers to the existing provisions for accounting standards. The term 'sustainability' is added to the heading for the existing provisions that relate to the AASB's powers to make accounting standards in recognition of this addition.

[Schedule 4, items 134 and 140, heading to Part 2M.5 and subsection 336A)]

4.166 To support the amendments, a new definition for the term 'sustainability standard' has been added to mean a standard in force under section 336A of the Act or a provision of such a standard as it so has effect.

[Schedule 4, item 133, section 9, definition of 'sustainability standard']

4.167 Similarly, to clarify that the AUASB has power to make auditing standards and that this power applies to sustainability reports, 'sustainability' is added after 'financial' in section 336, which refers to auditing standards.

[Schedule 4, item 139, section 336)]

4.168 To avoid doubt, the auditing standard may refer to either an audit, or review, or both. Deeming provisions in the application provisions ensure that where appropriate, for the transitional period, as sustainability reports are required to be reviewed and not audited, the references to audit include the reference to 'review'.

[Schedule 4, item 145, section 1707E]

4.169 In support of the amendments, the definition of 'commencement' in relation to an accounting standard or sustainability standard is replaced in light of the amendments and is defined as either of the following:

•

In the case of an accounting standard or sustainability standard as originally in effect – the time when the accounting standard or sustainability standard took effect;

•

In the case of an accounting standard or sustainability standard as varied by a particular provision of an instrument – the time when the provision took place.

[Schedule 4, item 132, section 9]

4.170 These standards apply to periods that end after the standard commences or at a later period or date as specified in the standard. Companies, registered schemes, registrable superannuation entities or disclosing entities can also elect to apply sustainability standards earlier in writing by directors, unless restricted by the relevant standard.

[Schedule 4, item 140, subsections 336A(2) and (3)]

4.171 Consequential amendments are made to insert references to the ASIC Act in provisions concerning accounting standards and auditing standards to ensure compliance with both Acts.

[Schedule 4, items 135 to 138, subsections 334(1) and 336(1)]

4.172 Provisions relating to the text and interpretation of accounting standards and auditing standards are extended to also apply to sustainability standards.

[Schedule 4, items 141 to 144, heading to section 337, section 337, heading to section 338, paragraph 338(1)(a)]

Part 4 – Application and transitional provisions

4.173 The amendments modify existing liabilities and offences that apply generally to corporate reporting for a transitional period. This provides entities time to adjust and build capability in relation to the new reporting requirements to disclose information relating to climate-related financial risks and opportunities in line with the relevant sustainability standards.

4.174 Definitions are included for the following terms:

•

'start date' is defined in relation to the passage of the Bill through Parliament as this section commences the day after the Bill receives Royal Assent (see commencement section). This is to allow sufficient lead time for entities to prepare for the first reporting period.

•

'first transitional period' is the period that starts on the start date, and ends on 30 June 2026 (but if the start date is after 1 July 2025, then there is no first transitional period);

•

'second transitional period' is the period that starts on 1 July 2026, and ends on 30 June 2027.

[Schedule 4, item 145, section 1707]

Sustainability records

4.175 If an entity keeps its sustainability records outside this jurisdiction the entity must notify ASIC of the place where those records are kept (see section 289A above). If the entity would be required to give notice on a date that is less than 12 months after the commencement of section 1707A, the date on which notice is required is instead the date 12 months after the commencement of that section.

[Schedule 4, item 145, subsection 1707A(1)]

4.176 On the commencement of section 1707A, if an entity already keeps information in this jurisdiction for the purposes of subsection 289(2), that entity is taken to not keep information at that place for that purpose immediately prior to the commencement, and is treated as beginning to keep information at that place for that purpose on commencement.

[Schedule 4, item 145, subsection 1707A(2)]

4.177 These provisions together have the effect that entities keeping sustainability records outside this jurisdiction (whether before or after commencement of the section) are required to give ASIC notice of the place inside the jurisdiction that they keep the necessary written information no earlier than 12 months after that commencement.

Phasing in in-scope entities

4.178 Under the transitional rules, entities required to prepare sustainability reports are separated into three groups and their obligations are generally phased-in across a number of financial years, generally dependent on size:

•

Entities that are in Group 1 must prepare an annual sustainability report for the financial year that commences during the first transitional period (reflective of paragraph 1707B(1)(a));

•

Entities that are in Group 2 must prepare annual sustainability reports for the financial year that commences during the second transitional period (reflective of paragraph 1707B(1)(b) which references thresholds set out in subsections 296B(2), (4) and (5));

•

All entities to which the new requirements apply (Group 3) (see Part 1 of this Chapter of the explanatory memorandum, under 'Who has to prepare annual sustainability reports') must prepare an annual sustainability report for each financial year that commences on or after 1 July 2027 (reflective of paragraph 1707B(1)(c)).

[Schedule 4, item 145, section 1707B]

4.179 The thresholds for each group of entities (Group 1, Group 2 and all relevant entities) that is required to report are progressive. Therefore the entities in Group 2 are a subset of those generally required to report; and the entities in Group 1 are a subset of the entities in Group 2.

Group 1 – Largest entities and NGER reporters (above the publication threshold)

4.180 A Group 1 entity is any of the following:

•

an entity which meets at least two of the following three criteria:

o

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $500 million;

o

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $1 billion;

o

the entity (and the entities it controls) have at the end of the financial year, 500 or more employees; or

•

an entity that is a registered corporation under the NGER Act or required to make an application to be registered under subsection 12(1) of the NGER Act and that meets a publication threshold in subsection 13(1) of the NGER Act.

[Schedule 4, item 145, subsections 1707B(1)(a), (2) and (4)]

4.181 However, even if it meets the criteria, an entity which is a registered scheme, registrable superannuation entity, or retail CCIV is not a Group 1 entity.

[Schedule 4, item 145, paragraphs 1707B(2)(b) and 1705(4)(c)]

Group 2 – Second largest entities, asset owners and all other NGER reporters

4.182 A Group 2 entity is any of the following:

•

an entity that meets at least two of the following three criteria:

o

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $200 million;

o

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $500 million;

o

the entity (and the entities it controls) have at the end of the financial year, 250 or more employees; or

•

an entity that is a registered corporation under the NGER Act or required to make an application to be registered under subsection 12(1) of the NGER Act; or

•

an entity that is an asset owner (registered scheme, registrable superannuation entity, or retail CCIV) where the value of assets at the end of the financial year (including the entities it controls) is equal to or greater than $5 billion.

[Schedule 4, item 145, subparagraph 1707B(1)(b)]

Group 3 – all other in-scope entities

4.183 A Group 3 entity is an entity that meets at least two of the following three criteria:

•

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $50 million;

•

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $25 million;

•

the entity (and the entities it controls) have at the end of the financial year, 100 or more employees.

4.184 This is consistent with and intended to catch all other entities to which the new requirements apply (see Part 1 of this Chapter of the explanatory memorandum, under 'Who has to prepare annual sustainability reports') and who must prepare an annual sustainability report for each financial year.

[Schedule 4, item 145, subparagraph 1707B(1)(c)]

General rules for applying thresholds

4.185 When counting employees, part-time employees should be taken into account as an appropriate fraction of a full-time equivalent.

[Schedule 4, item 145, subsection 1707B(3)]

4.186 To determine whether an entity controls another entity in relation to sustainability reports, reference is made to the accounting standards made for financial statements, even if these standards do not apply to the entity. (see also Part 1 of this explanatory memorandum, under 'Who has to prepare annual sustainability reports').

[Schedule 4, item 145, subsection 1707B(5)(a)]

4.187 Calculating consolidated revenue and the value of consolidated gross assets for the purpose of determining if an entity must provide an annual sustainability report must be done in accordance with the accounting standard in force at the relevant time. This is even if the standard does not otherwise apply to the financial year or some of the entities concerned. (see also Part 1 of this explanatory memorandum, under 'Who has to prepare annual sustainability reports').

[Schedule 4, item 145, subsection 1707B(5)(b))]

Directors' declaration

4.188 With respect to financial years which commence during the three years starting on the start date, the requirement for the director to declare in their opinion that the sustainability report complies with the standards and is made in accordance with requirements for climate statement disclosures applies as if the reference to that opinion includes the director's opinion on whether the entity had taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Act.

[Schedule 4, item 145, section 1707C of the Act]

Modified liability – three years

4.189 Transitional provisions provide that liability for misleading and deceptive, and other, conduct in relation to the most uncertain parts of a climate statement (defined as 'protected statements') is temporarily protected.

4.190 This limited immunity applies to protected statements in relation to sustainability reports prepared for financial years commencing during the three years starting on the start date (see definition in section 1707). During this time, only ASIC will be able to take action for misleading and deceptive conduct in relation to these types of disclosures.

[Schedule 4, item 145, section 1707D]

4.191 No action, suit or proceeding (collectively 'legal actio n') is able to be brought against a person or entity in relation to protected statements or statements required under a Commonwealth law that are substantively protected statements (for example, a reproduction of a protected statement in a Product Disclosure Statement). However, this does not prevent criminal proceedings or proceedings brought by ASIC.

[Schedule 4, item 145, subsections 1707D(1) and (2)]

4.192 This modified liability applies in relation to protected statements. For the purpose of modified liability, a protected statement is:

•

a statement within a sustainability report prepared for a financial year commencing during the three years starting on the start date, or an auditor's report of audits or reviews of such sustainability reports that is also about any of the following:

o

scope 3 greenhouse gas emissions (including financed emissions)

o

scenario analysis made in those sustainability reports; or

o

a transition plan (within the meaning the sustainability standards).

[Schedule 4, item 145, subsection 1707D(3)]

4.193 To avoid doubt, the modified liability protections described in section 1707D extend to all sustainability reports, whether or not required to be prepared, if the statement was made in compliance with the sustainability standards, the Act, or the auditing standards. Entities seeking to rely on this protection should ensure they make this explicit in their sustainability report.

4.194 The most common legal actions likely to be affected are civil proceedings for misleading or deceptive conduct. For example, proceedings under sections 1041E or 1041H. Alleged breaches of directors' duties are protected (for example, actions under section 344).

4.195 The protection applies generally and extends to other forms of alleged misconduct in making climate-related disclosures related to scenario analysis, transition plans or scope 3 emissions including actions such as negligent misstatement, breach of statutory duty and breach of fiduciary duties.

4.196 The policy intention is to ensure that during the transitional period, ASIC can undertake a role that promotes education about compliance with the new reporting regime and deter poor behaviours and reporting practices that are contrary to the objectives of the new reporting regime.

Modified liability – one year for forward-looking statements

4.197 Modified liability is also extended to cover all forward-looking statements, related to climate and made for the purpose of complying with sustainability standards, if they are made in sustainability reports for financial years commencing within the first 12 months starting on the start date.

[Schedule 4, item 145, subsection 1707D(4)]

4.198 This extends to statements made in an auditors' report of an audit or review of a sustainability report for financial years commencing during the 12 months starting on the start date, which relates to climate and was made for the purpose of complying with a sustainability standard.

[Schedule 4, item 145, paragraph 1707D(4)(ii)]

4.199 The liability is modified in the same way as for the other protected statements, described above.

[Schedule 4, item 145, subsection 1707D(4)]

Phasing in auditing and review requirements

4.200 The AUASB must make auditing standards in accordance with the Act that specify the extent to which sustainability reports for financial years commencing on or before 30 June 2030 must be audited and/or reviewed, and provide standards for such audits and reviews.

[Schedule 4, item 145, subsection 1707E(2)]

4.201 The requirement to 'audit' annual sustainability reports and to obtain an auditor's report includes the requirement to have those reports reviewed and audited to the extent the auditing standards require.

[Schedule 4, item 145, subsection 1707E(3)]

4.202 If the AUASB makes auditing standards that require a sustainability report to be reviewed to any extent:

•

The reference to 'audit' in this Act will generally include a reference to a review of a sustainability report; and

•

a reference to 'an auditor's report' will include a reference to an auditor's report in accordance with the requirement to review sustainability reports before 1 July 2030

4.203 The exceptions to this interpretative aid are in the specific provision requiring the audit of a sustainability report and the provision specifically dealing with the auditor's report on the sustainability report.

[Schedule 4, item 145, subsection 1707E(4) ]

4.204 The amendment also provides guidance on how the provisions concerning the audit of a sustainability report interact with provisions concerning the audit or review of sustainability reports before 1 July 2030. The application of these provisions is amended to account for the fact auditors will need an adjustment period to get used to complying with the new reporting standards.

•

An auditor forming an opinion on whether the sustainability report is in accordance with existing sustainability standards and requirements for climate statement disclosures is only required to form such an opinion to the extent required by the auditing standards.

•

When forming an opinion whether the entity that prepared the sustainability report has kept sustainability records sufficiently to enable the sustainability report to be prepared and audited, the reference to audited only references auditing to the extent the auditing standards require.

[Schedule 4, items 98 and 145, section 307AA and subsection 1707E(5) ]

4.205 The requirements around an auditor's report on a sustainability report apply as if references to the auditor's opinion that the sustainability report in in accordance with the Act references whether the auditor is of the opinion the sustainability report, to the extent it is required to be audited, is in accordance with the Act.

[Schedule 4, items 108 and 145, subsection 309A(1) and 1707E(6) ]

4.206 An auditor who reviews sustainability reports before 1 July 2030 must report to members on whether the auditor becomes aware of any matter in the course of the review that makes the auditor believe the sustainability report, to the extent it is required to be reviewed by the auditing standards, does not comply with the Act. Any such report must be in compliance with the standards. Such a report must be dated, and non-compliance with any of the requirements in drafting this report will be an offence of strict liability. The penalty amount for this offence is set at 50 penalty units through an amendment to Schedule 3 which sets out penalties.

[Schedule 4, items 145 and 146, section 1707F and table item in Schedule 3]

4.207 A finding of non-compliance in the course of reviewing the sustainability report must describe the non-compliance and specify why the matter would make the auditor believe the sustainability report does not comply with the Act to the extent it is required to be reviewed by auditing standards.

[Schedule 4, item 145, subsection 1707F(3)]

4.208 The auditor's report must include any statements or disclosures the auditing standards require for the purposes of this section.

[Schedule 4, item 145, subsection 1707F(4)]

Review of laws

4.209 To ensure sufficient Ministerial and Parliamentary oversight of this legislation which implements new obligations and reports for a significant cohort of entities, Schedule 4 must undergo a review.

4.210 As soon as practicable after 1 July 2028, a review of the legislation and written report of the outcomes must be prepared. After the report is provided to the Minister, it must be tabled in each House of the Parliament within 15 sitting days of that House.

[Schedule 4, item 145, section 1707G]

4.211 This review forms an integral piece in ensuring that new legislation and frameworks are operating effectively and in accordance with the intended outcomes. It provides an opportunity for further refinement of legislation where recommendations are provided, and Parliamentary oversight of the process.

Commencement, application, and transitional provisions

4.212 Schedule 4 to the Bill commences the day after Royal Assent.

4.213 Under the amendments, the requirement to prepare a sustainability report will be progressively phased in for different cohorts, generally based on the size of the entity. An explanation of this phased-in approach is explained in Part 4 of this Chapter, regarding application provisions.