Starting 1 January 2025, large Australian companies are required to make new financial disclosures relating to their climate impacts. Large and medium-sized construction companies will be affected in a rolling scheme which will be in full force by 2028.
The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 (Cth) (Act) was given Royal Assent on 17 September 2024. Schedule 4 of the Act sets out the new climate-related financial disclosure requirements.
Under the Act, publicly listed and large private companies (‘Chapter 2M’ reporting entities defined by the Corporations Act) that meet certain thresholds or have emissions reporting obligations under the existing National Greenhouse and Energy Reporting (NGER) scheme are subject to the new reporting requirements.
Policy intent
The mandatory climate reporting law aims to enhance available market information by increasing financial disclosures in relation to climate change. According to the explanatory memorandum, the reporting requirements are designed to provide investors with access to comparable information about the entity’s exposure to, and management of, climate-related financial risks, allowing for greater transparency regarding those entities’ plans and strategies.
Further, the Treasury Department’s policy statement provides that “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”.
Who will be affected?
The sustainability reporting regime will be gradually introduced over a three-year period, starting with ‘Group 1’ entities on 1 January 2025. A Chapter 2M reporting entity (i.e. a large proprietary company, public company, disclosing entity, registered scheme, and registrable superannuation entity) that also meets two of three specified criteria is required to prepare sustainability reports and keep written records detailing its climate impacts, risks and opportunities.
Source: Treasury’s Mandatory climate-related financial disclosures – Policy position statement
What must be included in the sustainability report?
The annual sustainability report must contain information including climate statements report for the year, notes on the climate statement, any other statements relating to “matters concerning environmental sustainability”, and directors’ declaration about the statement and notes in accordance with the sustainability standards. The Australian Accounting Standards Board (AASB) have drafted three Australian Sustainability Reporting Standards (ASRS) in 2023.
Required disclosures in climate statements
Under the provisions of the Act and AASB draft standards, the climate statement and accompanying notes must disclose information regarding the material financial risks and opportunities relating to climate, along with metrics and targets of the entity related to scope 1, 2 and 3 greenhouse emissions. Entities must also provide statements about risk management and governance policies and strategies in relation to the risks, opportunities, metrics and targets and amounts of scope 3 emissions prescribed by ASRS 2.
Material climate risks and opportunities are determined in accordance with the sustainability standards and are defined in ASRS 2 as potential negative and positive effects of climate change on an entity.
What are scope 1, 2 and 3 emissions?
In a construction context, greenhouse emissions can be categorised as follows:
- scope 1 emissions – direct emissions caused and controlled by a project, such as emissions from vehicles or onsite generators
- scope 2 emissions – indirect emissions generated from the production of the power used by the entity. For example, emissions resulting from the electricity used on a construction site
- scope 3 emissions – emissions that a company is indirectly responsible for up and down its value chain, which are not directly produced or controlled by the company. For example, emissions from the production and transportation of construction materials delivered to the site and used in the project.
Climate risks in the construction sector
Construction companies generate scope 1, 2 and 3 greenhouse emissions, with scope 1 and 2 emissions generally produced at a similar extent to each other. However, the greenhouse emissions produced by construction companies will largely be scope 3 emissions due to the significant external materials needed for their projects.
Construction companies subject to the new reporting requirements will need to know the emissions throughout their supply chain resulting from the production, use and transport of construction materials and energy consumption activities.
Limited immunity regimes
Limited liability will be given against individuals for making ‘protected statements’. These are statements concerning scope 3 emissions, climate scenario analysis or transition plans in sustainability reports within three years of the starting date.
Legal action during the limited immunity period will only occur in relation to those statements if the action is criminal in nature or brought by ASIC.
After the initial three-year grace period, any misleading disclosures could lead to both the company and directors facing civil legal liabilities.
Next steps
Directors and officers of large to medium-sized construction companies should now review the reporting thresholds to determine whether they are captured under the new regime.
The new reporting obligations under the Act interact with various sustainability standards and other Acts. This makes it essential for construction companies to begin identifying their climate risks and opportunities, and to consider creating processes for the imminent commencement of the reporting obligations.
For any questions about your reporting requirements, please get in touch with Holding Redlich Partner Lachlan Ingram.