4 April 2023 • 20 minute read

A new regime?

This article was originally published in Law Institute Journal and is reproduced with permission from the publisher.

There is currently no overarching legal requirements for business to disclose their performance on climate-related issues, but change is in the air.

Introduction

In Australia there are limited legal requirements for climate-related disclosure but this looks likely to change as the federal government has been consulting on a proposed climate-related disclosure regime (Consultation). Further, the federal government’s strategy looks likely to include initiatives that aim to strengthen environmental, social and governance (ESG) labelling and encourage more participation in international forums to support climate and sustainable finance.

Additionally, there is no universally accepted framework for making climate-related disclosure. Internationally and locally there have been many recent developments and, increasingly, Australian regulators are recommending using the work of the Task Force on Climate-Related Financial Disclosures (TCFD framework) and the International Sustainability Standards Board (ISSB). Also, as part of the Consultation, there is a proposal to amend parts of the Australian Securities and Investments Commission Act 2001 to empower the Australian Accounting Standards Board (AASB) to deliver sustainability standards for use in ESG and climate-related disclosures.

This article looks at disclosure for climate-related issues – both mandatory requirements (including effectively quasi-mandatory requirements) and voluntary disclosures.¹

Why is this discussion so important?

Investors, consumers and governments are demanding businesses make disclosure on their climate-related risks and activities. Increasingly, Australian businesses are making voluntary climate-related financial disclosures (often adopting the TCFD framework).² However, Morningstar reported that internationally one in five funds are not living up to their stated ESG goals.³ Over the past 12 months regulators such as the Australian Securities and Investment Commission (ASIC), Australian Stock Exchange (ASX), Australian Prudential Regulation Authority (APRA) and Australian Competition and Consumer Commission (ACCC) have consistently indicated that such climate-related and other ESG disclosures are going to be more closely scrutinised. The ASX is also concerned about inadequate climate-related disclosures from listed companies and funds and their potential impact on the market.

In particular, ASIC and the ACCC have flagged that they will target businesses engaged in “greenwashing”. Generally speaking, greenwashing is when an entity claims that its activities or products are ethically based or environmentally friendly or sustainable, but where the claim is misleading or deceptive.⁴ In June 2022, ASIC released Info Sheet 271 outlining its concerns about greenwashing.⁵ Recently, ASIC fined Vanguard Investments and Tlou Energy for misleading and deceptive ESG-related statements.⁶ Misinformation or misleading information damages confidence. Both consumers and markets need to be appropriately informed and trust not only in the disclosing entity but in markets and the corporate system generally.⁷ Businesses must understand their legal and regulatory requirements regarding climate change and have processes that produce accurate climate disclosure. Another reason for ensuring appropriate disclosure is to protect businesses seeking to make climate-related improvements from unfair competition from other businesses that have greenwashed their climate-related performance.

What is the Consultation about?

Given the increasing importance of disclosure of climate-related risks and activities, the Consultation sought input on a range of design issues for a disclosure regime via 19 questions. Some key issues can be summarised as:

Who should report? Should a phased approach apply to who should report? What are implications of a phased approach?
Should Australia align with international practice on climate-related financial risk disclosure such as those from the ISSB, and are there any particular Australian considerations to be taken into account?
What key considerations should inform design of a disclosure framework including the level of materiality, metrics, standards, reporting on transition plans and assurance that should apply?
How would existing reporting obligations interact with new climate reporting requirements? How should these interactions be addressed?

The current state of play: Mandatory disclosure

In Australia there is currently no overarching legal requirement for businesses to disclose their performance on climate-related issues. Other jurisdictions such as the US, UK, Europe and New Zealand are increasing mandatory climate-related disclosures especially for listed entities or products marketed as green or sustainable. In Australia there are only limited specific statutory requirements – for greenhouse gas emissions, net energy consumption and climate-related disclosures related to product disclosure. However, the Consultation indicates that this could change as early as the financial year 2024-2025 and may take a phased approach starting with larger listed entities and financial institutions.

National greenhouse gas and energy reporting

In climate-related reporting, the metrics that are measured and reported on are important. The National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) requires companies and facilities that meet the relevant thresholds to report on greenhouse gas emissions and energy consumption formation to the Clean Energy Regulator (CER).

The facility thresholds are:

25 kt or more of greenhouse gases (CO2-e) (scope 1 and scope 2 emissions)
production of 100 TJ or more of energy
consumption of 100 TJ or more of energy.

The corporate group thresholds are:

50 kt or more of greenhouse gases (CO2-e) (scope 1 and scope 2 emissions)
production of 200 TJ or more of energy
consumption of 200 TJ or more of energy.

Disclosures to the CER are published including:

greenhouse gas emissions and net energy consumption for all registered corporations
greenhouse gas emissions, energy production, primary fuel source, emissions intensity and grid connection information for facilities where the principal activity is electricity generation.

The US and Europe are likely to also require Scope 3 (indirect) greenhouse gas emissions to be reported by larger businesses and financial institutions. Accordingly, the Consultation proposes that some requirements to disclose Scope 3 emissions will apply.

Product disclosure statements

Many financial products⁸ are now marketed as “sustainability related” products – so called “green products”. Section 1013D(1)(l) of the Corporations Act requires Product Disclosure Statements (PDS)⁹ for investment products to include the extent to which labour standards or environmental, social or ethical considerations are taken into account when selecting, retaining or realising an investment. These products include superannuation, managed investments and investment life insurance. The Corporation’s Regulations provide more detail on what disclosures are needed. If such ESG considerations are not taken into account the PDS must clearly say so (Corporations Regulations 2001, reg 7.9.14C), and s1013D will not apply.

ASIC’s views on such disclosure are expounded in Regulatory Guide 65 “Section 1031DA disclosure guidelines”. These guidelines set the tone for PDS disclosures and a breach of the guidelines may render a PDS ineffective. Reg Guide 65 indicates the PDS needs to detail:

how the climate-related/ESG criteria are taken into account
what weight is given to them
what monitoring/review of investments is undertaken
time frames involved in monitoring/reviews.

If the business has no set views about these matters this needs to be disclosed. While disclosure must contain what a “person would reasonably require” to make a decision to invest, the more the product is marketed as ESG-based the more detailed disclosure is required. How businesses measure ESG compliance is clearly relevant and Reg Guide 65 requires the criteria by which this is assessed to be outlined or that of external providers or rating systems to be generally explained.¹⁰

Quasi-mandatory disclosures

Strictly speaking, the ASX and APRA do not mandate particular climate-related disclosure. However, in practice their requirements are like quasi-mandatory disclosure because of their roles as regulators.

ASX

The ASX Corporate Governance Principles and their recommendations are considered “best practice” for corporate governance, not just for listed entities to which they are directed. Various ASX Corporate Governance Principles have either a climate-related or an ESG aspect to them, either expressly or indirectly. They are not mandatory but if a listed entity does not adopt a recommendation it must explain why – the so called “if not, why not” disclosure. Each ASX listed entity must include in its annual report or website a corporate governance statement detailing the extent to which a recommendation was followed.

Since 2014 Recommendation 7.4 has required disclosure about material exposure to environmental or social risks and how it manages, or intends to manage, those risks. In 2015, the Financial Services Council (FSC) and Australian Council of Superannuation Investors (ACSI) published a joint report, “ESG Reporting Guide for Australian Companies” to create a reporting guide for listed companies. Note that Recommendation 7.4 focuses on material risks and opportunities ie, what a reasonable person would consider to have an impact on the company’s valuation or the sustainability of its operations. With the development of the TCFD framework (discussed below), more recent ASX Principles recommend use of the TCFD as the basis of disclosure.¹¹

APRA regulated entities

APRA has an existing suite of practice guides and other guidance on risk management and governance. To supplement these, and after extensive consultation, APRA published its Prudential Practice Guide CPG 229 Climate Change Financial Risks in November 2021. Rather than creating new regulatory requirements, CPG 229 outlines a framework for assessing and considering how to manage climate change risks based on the TCFD framework and APRA’s own views. CPG 229 focuses on three areas of climate risk:

physical risk – direct damage to assets or property, and consequently lower asset values, increased insurance claims and supply chain disruption
transition risk – economic adjustments, with impacts such as changed pricing and demand for goods and services, stranded assets and loan defaults
liability risk – with consequences such as stakeholder litigation and regulatory enforcement action.

APRA’s expectation is that a prudent institution will establish procedures to provide relevant information on its material climate risk exposures to its board and senior management.¹²Further, APRA emphasised that it considers it to be better practice for any disclosures to be produced in line with the TCFD framework and that “a prudent institution would consider whether additional, voluntary disclosures could be beneficial in enhancing transparency and giving confidence to the wider market institutions approach to measuring and managing climate risks”.¹³ In August 2022, APRA released the results of its climate risk self-assessment survey conducted across banking, insurance and superannuation industries, which showed good alignment with CPG 229’s requirements especially in the areas of governance and disclosure.¹⁴

The current state of play: Voluntary disclosure

Voluntary disclosure on climate-related impacts and activities is being driven by the finance sector,¹⁵ activist shareholders and consumers. At present, there is no uniform set of definitions or approaches to the elements of ESG. Particularly problematic is the difficulty in measuring and evaluating a business’s climate-related and ESG activities or its claimed achievements. International and local bodies, including the Australian Sustainable Finance Initiative (ASFI),¹⁶ are working to produce guidelines and frameworks that will assist in standardisation of reporting, especially for the financial sector.

The TCFD framework

Voluntary disclosures on climate-related matters can be made in many different forms. However, the approach of the TCFD is rapidly gaining overwhelming support. Already a significant proportion of the ASX-200 voluntarily report using aspects of the TCFD framework. The TCFD set outs seven high level principles for effective disclosures, which I consider can be adopted by any business as the basis for climate-related disclosure:

Disclosures should represent relevant information
Disclosures should be specific and complete
Disclosures should be clear, balanced, and understandable
Disclosures should be consistent over time
Disclosures should be comparable among companies within a sector, industry or portfolio
Disclosures should be reliable, verifiable and objective
Disclosures should be provided on a timely basis.¹⁷

ASIC, APRA and the CER recommend use of the TCFD framework for climate-related disclosure. It is little wonder that the Consultation proposes use of this framework. Also, the Consultation indicates alignment with the TCFD and ISSB approaches is the way forward.

For those reporting under the NGER Act, the CER has created a voluntary initiative – Corporate Emissions Reduction Transparency (CERT) report¹⁸ – where eligible businesses can present their climate related commitments, progress and net emission positions. The CERT uses a standardised framework and adopts principles from the TCFD framework.

Disclosure standards

As noted above, there has been a lack of consistency in climate change and ESG reporting. The International Financial Reporting Standards Foundation (IFRS Foundation) undertook consultation which showed that despite “differences in scope and motivation, all stakeholders share a common message: there is an urgent need to improve the consistency and compatibility in sustainability reporting. A set of compatible consistent standards will allow businesses to build public trust through greater transparency of their sustainability initiatives, which would be helpful to investors and an even broader audience in a context in which society is demanding initiatives to combat climate change”.¹⁹ The IFRS Foundation established the ISSB in 2021 to create a baseline of sustainability-related disclosures standards so that companies would report sustainability-related risks and opportunities on a consistent and comparable basis.²⁰ The ISSB is building on the earlier work of the TCFD, Climate Disclosure Standards Board (CDSB), the Sustainability Accounting Standards Board (SASB) and others.

In March 2022, the ISSB published two consultation papers which build on the TCFD recommendations and work of the SASB:

General Requirements for Disclosure of Sustainability-related Financial Information²¹
Climate-related Disclosure Report.

The Climate-Related Disclosure Report focuses on climate-related risks and opportunities. It incorporates the recommendations of the TCFD and includes metrics from the SASB standards. These consultation papers also incorporate industry-based disclosure requirements. A company would be required to identify physical risks and transition risk of climate change, to disclose whether it has sufficient finance to deal with issues/opportunities and to disclose its Scope 1, Scope 2 and Scope 3 emissions and the intensity of those emissions. It would also disclose the climate-related risks and opportunities most likely to be significant in that industry and the associated metrics relevant to an assessment of enterprise value.²²

The ASFI produced the Australian Sustainable Finance Roadmap (2020) (Roadmap) which included a key priority being the development of an Australian sustainable finance taxonomy. The Roadmap proposed exploring such a taxonomy which would be linked to consistent labelling and disclosure standards for financial services products in order to provide clarity to consumers on the quality of products and how sustainability is considered and managed within these products.²³In December 2022 the ASFI launched its own taxonomy project, which is working to establish common definitions for the Australian context (reflecting and integrating elements of international taxonomy initiatives).²⁴

The federal government proposals involve Treasury ultimately determining the most suitable finance taxonomy for Australia to promote greater consistency in reporting. The federal government’s Consultation canvasses the potential implementation of the draft ISSB standards in the Australian context and queries what modifications could be made (or what alternative standards could be adopted). A possible solution to the lack of consistency is for the AASB to develop relevant standards detailing the disclosure obligations for climate governance, strategy, risk management and targets and metrics.

Biodiversity

Climate change has a major impact on biodiversity. Increasingly society is recognising the importance of biodiversity, the impact of businesses on biodiversity, the reliance on biodiversity by certain businesses and on protecting our fauna and floral environments. In addition, the Taskforce on Natural Related Financial Disclosure (TNFD) is working to create frameworks for biodiversity reporting.²⁵

The TNFD was established in June 2021. In November 2022 it released a revised risk management and opportunity disclosure framework – the TNFD Framework. This framework provides guidance for businesses to incorporate nature-related risk and opportunity assessment into their strategies and risk management, and provides disclosure recommendations for nature-related risks and opportunities adopting the approach of the TCFD to disclosures.²⁶ The Consultation indicates that the ISSB’s draft overarching standard for disclosing sustainability risks points to future development of standards to cover the TNFD remit. Notably, in August 2022 the federal government announced the creation of a Biodiversity Certificates Scheme²⁷ to encourage investment in protecting our fauna and floral environments (which no doubt will have its own reporting requirements for those that participate).

Getting climate-related disclosure right

Not only are regulators focusing on climate-related disclosures, but activist shareholders are as well. In my recent LIJ article I looked at climate-related litigation and discussed the increase in investor/shareholder activity.²⁸ Legal action by activist shareholders alleging misleading and deceptive conduct in climate-related disclosures is not going away any time soon. Recently, the Australasian Centre for Corporate Responsibility (ACCR) expanded its case against Santos for misleading and deceptive conduct in Santos’ 2020 annual report, to include alleged greenwashing in its 2020 investors day briefing and 2021 Climate Change Report. Businesses need to take steps to ensure that their climate-related disclosures are accurate and not misleading to avoid regulatory action for civil penalties and potential shareholder or class actions.

The first step is to do a stocktake of the current climate-related disclosures that the business makes (either legally required or voluntary), and assessing how relevant data is collected, what processes exist to create the disclosures, who in the business is involved, and what oversight or sign-off is in place to ensure the disclosure is accurate. The business needs to consider whether the data collection and analysis processes are appropriate to support effective disclosure on climate-related issues. If not, what investment is needed to bring them up to scratch?

The second step is to modify or redesign the current processes to best ensure appropriate disclosure. The business needs to identify which business units and employees should be involved and who should sign off at each stage of the process – data collection and analysis, drafting disclosures and finalising disclosures. It goes without saying that the relevant people need to have appropriate skills and seniority. In larger businesses it may be necessary to create an internal committee to manage disclosure with formal lines of reporting to the committee.²⁹In larger businesses with an internal audit function, the disclosure process can be checked by internal audit. Also, the timetable for voluntary disclosures needs to be managed and consideration should be given to how it may be aligned with the corporate reporting season.

Usefully, ASIC suggests there are eight groups of questions³⁰ that businesses issuing financial products should ask to avoid misleading and deceptive disclosure. I believe these are useful questions to consider for any climate-related disclosure:

Is your product [service] true to label?
Have you used vague terminology?
Are your headline claims potentially misleading?
Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship’s activities?
Have you explained your investment screening criteria? Are any of the screening criteria subject to exceptions or qualifications?
Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described?
Have you explained how you use metrics related to sustainability?
Do you have reasonable grounds for a status sustainability target? Have you explained how this target will be measured and achieved?
Is it easy for investors to locate and access relevant information?

Clearly, there is a role to play for the company secretary, in-house counsel and external law firms in helping businesses design processes to answering these questions. Further, legal and regulatory risk can be reduced by having climate-related disclosures subject to legal review before they are made. In particularly sensitive industries, or with sensitive disclosures, there may be a case for having independent third-party review of the internal processes and proposed disclosures for assurance purposes.

Finally, and importantly, there needs to be a clear strategy about communication to, and engagement with, stakeholders about climate-related disclosures and the integrity of the processes that led to the disclosures.

¹While the current focus of many is on climate change and the environment (E-related issues), disclosures for ESG go beyond Environment (climate change, waste reduction and environmental protection) and encompass a range of other disclosures such as Social (employee/diversity/ human rights) and Governance (diversity at board level).
²Click here
³F Schwartzkoff & S Kishan, “ESG funds managing $1 trillion are stripped of sustainable tag by Morningstar”, 10 Feb 2022.
⁴I have previously written in the LIJ on the legislative sources that ASIC, APRA or the ACCC could use to litigate such claims, G Bean “Litigating for change” Jan/Feb 2022 LIJ p35.
⁵Click here
⁶22-336MR ASIC issues infringement notices against investment manager for greenwashing | ASIC.
⁷CEDA Paper R Simms, “ACCC’s enforcement and compliancy policy update 2022-23”, 3 March 2022; J Longo “ASIC’s corporate governance priorities and the year ahead”, AICD Australian Governance Summit, 3 March 2022.
⁸The Continuous Disclosure regime is not discussed here as it is not specific to climate change related disclosure but it is possible that for such disclosing entities that immediate climate related threats would need to be disclosed: see Corporations Act s667; s675(1(b): ASX Listing Rules 3.1.
⁹Shorter PDSs, eg for pension products, are subject to a similar but more summary-form regime under the Corporations Regulations.
¹⁰Table 2 p15, Reg Guide 65.
¹¹Further, the ASFI recommends ASX listed companies, beginning with the ASX 300, report according to the TCFD recommendations on an “if not, why not” basis: Australian Sustainable Finance Roadmap (2020), p13, Recommendation 12.
¹²CPG 299 paras 35-36.
¹³Note 12 above, paras 48-50.
¹⁴Click here
¹⁵Some would argue that as climate change action is now forming part of environment protection that the potential for director/management liability under environmental laws is also driving climate-related disclosures. Further, the EU is pursuing widening of mandatory climate and environmental disclosures (See the EU Taxonomy Disclosure Delegated Act) which may ultimately flow to reporting by Australian subsidiaries of EU entities.
¹⁶A coalition of banks, insurers, super funds and other stakeholders.
¹⁷TCFD Report 2017, fig 6 p18: Good guidance for implementing the TCFD framework exists in TCFD Implementation Guide and Good Practice Handbook from the SASB and CDSB.
¹⁸Click here
¹⁹IFRS Foundation Consultation Paper on Sustainability Reporting (2020), p4.
²⁰Note 19 above.
²¹The General Requirements focus on disclosure of significant ESG related risks and opportunities that affect a business’s enterprise value which is seen as a wider set of matters to report on than just financial matters. It is expected these reports would be issued with the business’s financial reports. The sustainability-related financial information disclosed would be centred on a company’s consideration of its governance, strategy and risk management and the metrics and targets it uses to measure, monitor and manage significant sustainability-related risks and opportunities: Note 19 above.
²²Note 19 above, Summary.
²³Recommendations 13 and 27. Also the Global Reporting Initiative published multiple indicators for use in reporting on ESG performance, and the International Integrated Reporting Council created the IR Framework. The SASB issued standards for various industries by sector.
²⁴Designing Australia’s sustainable finance taxonomy (2022), issued after industry consultation.
²⁵J Williams, “Nature Positive Outcomes”, 2002 Jan/Feb LIJ 40 at 42.
²⁶From summary on website; see also note 25 above. Note the ASFI is a member of the TFND.
²⁷Click here
²⁸Note 4 above; see also the other articles in Jan/Feb LIJ 2022.
²⁹In the future as disclosure requirements increase, this could even be a board committee.
³⁰ASIC Info Sheet 271.