Announcement date
12 January 2024
Link to announcement
New climate reporting reforms for a stronger financial system
Problem being addressed
Climate change is having an impact on the financial prospects of companies, for better and for worse. It is increasingly recognised that companies need to manage and disclose those risks. This is becoming a mainstream part of corporate governance and strategy. To do this effectively, the financial impacts of climate change need to be identified and disclosed to the market.
While existing guidance from regulators in Australia has led to an increase in the number of companies disclosing climate-related risks, investors note that existing climate risk disclosures are often inconsistent or contain insufficient information to support decision-making. To appropriately price climate-related risks and opportunities, value assets and allocate capital efficiently, investors need information on climate risks and opportunities and the actions being taken by individual companies to meet their climate change targets. Investors also note the lack of standardisation makes disclosures difficult to compare, which impacts their decisions.
Proposal
As part of the ‘Powering Australia’ policy, the Government has committed to introducing a standardised, internationally aligned requirements for mandatory disclosure of climate-related financial risks and opportunities in Australia for large businesses. Improving climate 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. This is necessary to sustain Australia’s reputation as a destination for the international capital that will be inevitably needed in the transition to net zero.
Climate-related financial disclosures will be mandated through amendments to the Corporations Act 2001 (Cth) and related legislation. Detailed sustainability and assurance standards will be made and maintained by the Australian Accounting Standards Board (AASB) and the Australian Auditing and Assurance Standards Board (AUASB). The new requirements build on the existing financial reporting framework through inclusion of a new ‘sustainability report’ that is required to be prepared for certain entities. As a part of this report, entities will be required to report on their climate strategy and governance processes as well as scope 1 and 2 emissions from commencement, with scope 3 reporting being required as the reforms mature. Entities will also be required to conduct scenario analysis from commencement. Assurance requirements will be phased in and a modified liability regime will operate for the first three reporting years.
Assessed Impact Analysis outcome
Good practice
Assessment comments
The analysis in the IA is good quality overall. The IA addresses the seven IA questions and follows an appropriate policy development process commensurate with the significance of the problem and magnitude of the proposed intervention.
Regulatory burden
The Department of the Treasury estimates an increase in regulatory costs of $1.0 to 1.3 million per year per entity, averaged over ten years.