The Economic Development, Science and Innovation Committee met its truncated timeline and delivered its report on the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill (the Bill) yesterday.
The Select Committee has recommended some changes, but the key provisions remain the same – climate reporting entities (generally, listed issuers and large registered banks, licensed insurers, credit unions, building societies and managers of registered schemes) will be required to:
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prepare annual climate statements that disclose information about the effects of climate change on their business, or the funds they manage, in accordance with the climate-related disclosure framework to be issued by the External Reporting Board (XRB);
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obtain independent assurance about any greenhouse gas emissions disclosure;
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make their climate statements and assurance reports publicly available; and
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collect and retain the records underpinning their climate statements.
Notably, the Select Committee has not recommended changing the start date of the regime. The new reporting and record-keeping requirements remain set to apply to climate reporting entities for accounting periods starting on or after the date on which the XRB issues the climate standards. Those climate standards are currently expected to be issued by December 2022.
Further detail on the Select Committee's report and next steps are set out below.
What's changing?
Contents and materiality
The Select Committee has recommended changes to the contents of the climate statements, particularly with respect to materiality. The changes:
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remove the exceptions for climate reporting entities that determine they are not materially affected by climate change. This is due to concerns that the provisions would result in substantially different reports and quality of reporting which would undermine the regime's goal of providing consistent and comparable climate reporting – instead, any need for differential reporting will be achieved through the application of the climate standards to be set by the XRB; and
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remove the immaterial information provisions. This is due to concerns that requiring entities to include information to explain why excluded information is immaterial would result in reports that contain disclosures that are of no value to users, and because the XRB is better placed to address the issue of materiality when it sets the climate reporting standards.
Independent assurance
The Select Committee has recommended changes to the assurance provisions (which require any greenhouse gas emissions disclosure to be verified by a third party). The changes:
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delay implementing the assurance requirements for an additional two years, to build and grow professional capacity for climate reporting and the assurance industry, and to allow sufficient time for climate reporting entities and assurance practitioners to become familiar with the assurance requirements;
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remove the assurance practitioner licensing and accreditation regime provisions altogether, due to concerns that the proposed regime would be ineffective because the FMA would have very limited oversight and also that the requirements could exclude non-accountants with the necessary skills and experience; and
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include a new offence for assurance practitioners that fail to comply with the applicable assurance standards, in lieu of the code of conduct and disciplinary process contemplated under the removed assurance practitioner licensing and accreditation regime provisions.
Climate reporting entities
The Select Committee has recommended changes to the scope of the entities that are considered climate reporting entities. The changes:
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exclude listed issuers with market capitalisation of $60 million or less, with no quoted equity or debt securities, or whose equity or debt securities are quoted only on a growth market (such as Catalist) from being climate reporting entities; and
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clarify that amalgamations do not reset the clock on the two-year period over which the financial thresholds in the definitions of "large" are tested – if one of the entities amalgamating is "large" prior to the amalgamation, the amalgamated entity will also be "large".
What's not changing?
A notable omission from this list of changes concerns timing – while the implementation of the assurance requirements has been delayed, the implementation of the reporting and record-keeping requirements has not. The reporting and record-keeping requirements will still apply to accounting periods starting on or after the date on which the XRB issues the climate standards, which is expected to occur by December 2022.
The timing of the reporting and record-keeping requirements was the subject of a number of submissions to the Select Committee, given the tight turn-around time and the potential liability under the Bill for failing to comply with the requirements.
That the Government representatives on the Select Committee have not agreed to change the timing of the reporting and record-keeping requirements fits with other messaging that it is full steam ahead for the regime, in line with the Government's ambitious climate change regulatory agenda more generally (see our earlier update here).
What next?
The Bill will continue through the usual parliamentary and royal assent processes.
Climate reporting entities should make sure they are on top of the progress of the Bill and the separate XRB process to develop the climate standards. In beginning to design processes to comply with the Bill, climate reporting entities should also keep in mind the potential for director liability and the associated statutory defences.
Get in touch with one of our experts if you wish to understand more about climate-related disclosures and putting your business, and directors, in the best position to comply with these new legal requirements.