The little known policy that could be a climate game-changer
Australian companies will soon be subject to a new mandatory climate reporting regime. It could help heap pressure on big emitters to implement credible climate change plans.
It was easy to miss, but last week the federal Senate passed legislation that will establish a mandatory corporate climate reporting regime in Australia - a regime that could prove to be a game-changer for corporate engagement on climate change.
Under the climate reporting regime, a large and growing number of Australian companies will be required to produce dedicated climate change reports that detail how climate change could financially impact their business over the short, medium and long term.
In these climate reports - which will need to be published alongside a company’s annual reports and financial statements - each company will need to include an assessment of their material climate change-related risks and opportunities, and their plan for how they propose to monitor and mitigate identified risks. Companies will need to outline and disclose their governance and accountability measures for appointing responsibility for climate change matters across their boards and senior management.
Relevant climate change-related risks will include both future physical risks (the impacts that drought, bushfire, sea-level rise etc, could have on a business’s financial performance) and climate change-related transitional risks (those relating to new government policies like carbon pricing, technological innovation and changing societal attitudes that arise through efforts to prevent the cooking of the planet).
For example, a fossil fuel company will need to disclose the fact its business model faces an existential risk under any scenario that limits global warming to just 1.5 degrees. Insurance companies will need to disclose the degree to which the products are exposed to increased bushfire and flooding, hailstorm risk etc. An agricultural venture will need to assess the future impacts of drought and flooding.
Companies will also need to publish details of the climate change-related metrics and targets. This will include their emissions reduction targets, a statement of their Scope 1, 2 and 3 greenhouse gas emissions, and any other industry-based metrics that might be an appropriate measure of the company’s climate impacts.
Companies will be expected to present these reports to shareholders at their annual general meetings, including by listing them as a specific item of business open for review and scrutiny.
Crucially, the information contained within the climate change reports will be covered by corporate laws that prohibit misleading or deceptive statements, after an initial three-year protection against private litigation expires in 2028.
Companies will need to have a reasonable basis for the information they include in these reports, and any effort to diminish or obscure future climate threats - such as a fossil fuel company pretending that they don’t face existential risks under a scenario where we successfully limit global warming to 1.5 degrees - will leave companies open to potential litigation action.
It is this pressure that should allow the regime to serve as a hugely positive development for corporate engagement on climate issues - companies captured by the regime will be compelled to be transparent about the risks that their companies face. Additionally, the Australian Securities and Investments Commission (ASIC) has been granted new powers to demand companies correct or complete climate change reports that are found to have omitted key details or contain incorrect information.
The reporting regime - and the information required to be published by companies under it - have been modelled off the international IFRS S2 Climate-related Disclosures standards - which itself is modelled off the well-known TCFD Recommendations. A set of Australian climate reporting standards is expected to be finalised imminently.
Similar mandatory climate reporting regimes have already been implemented in the European Union, the UK and New Zealand - with more to come in countries like Canada and the United States.
While these mandatory regimes are becoming increasingly common, in recent years, there has been a lot of pressure on many of Australia’s largest companies to voluntarily produce climate change reports - including the major banks and some of the largest resource companies.
The voluntary climate reports that many major companies have produced have already emerged as a key point of engagement for shareholders - including through climate advocacy groups like Market Forces or the Australasian Centre for Corporate Responsibility (ACCR), as well as major institutional investors like superannuation funds.
Oil and gas giant Woodside attracted the wrath of shareholders earlier this year when it presented a voluntary climate change report that many felt presented a misleading picture of the future prospects of the oil and gas industry. Woodside’s 2024 climate report was rejected by its shareholders when it was put to a vote in April this year, with a massive 58 per cent voting against its endorsement.
At the time, Market Forces said the report presented an unrealistic forecast of the company’s future prospects and was out of step with Australia’s climate policies.
“The only way that Woodside’s forecast can be true is if currently enacted government policies are repealed,” Market Forces said in a statement in April.
“Woodside is therefore gambling shareholder capital on the notion that governments around the world will scrap policies that have already been implemented, an absurd pipe dream as climate action around the world only gets more ambitious.”
It is easy to see how a mandatory climate reporting regime will provide a massive boost to those seeking to push companies to take meaningful action on climate change. Mandatory climate reports will provide a huge amount of new information for shareholders and stakeholders to engage with, and provide a much more informed basis for direct corporate engagement.
According to the Federal Treasury’s estimates, when the regime starts on 1 January 2025, around 750 of Australia’s largest companies and biggest emitters will need to start producing reports. That number is expected to grow to as many as 2,000 of Australia’s largest companies as its coverage expands in subsequent years.
It will include big mining companies, energy companies, property investors, airlines, the big banks, superannuation funds and investment firms.
It will expose those companies that are not taking the issue of climate change seriously, including those who are actively trying to obscure the issue from the public and shareholders, adopting ineffective climate transition plans or adopting weak emissions reduction targets - including to the threat of future climate litigation.
For those interested, the provisions establishing the new mandatory climate change reporting regime were included within the obscurely titled Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 - an omnibus bill of reforms to various pieces of corporate governance legislation.
The legislation passed the Senate with the support of Labor, the Greens and cross-bench senators David Pocock, Jacqui Lambie and Tammy Tyrrell. Unsurprisingly, it was opposed by the Coalition, who bemoaned the perceived regulatory burden on covered companies (they still don’t seem to accept the potential burdens climate change will pose to those same businesses).