Extract from ABC News
Company directors could face legal action if they fail to produce credible emissions forecasts, under draft laws proposed by the federal government.
Key points:
- The federal government wants to require large companies to produce an annual sustainability report
- The report would need to include emissions projections, targets, and assessment of climate-related risks
- Companies will be liable to ensure the accuracy of the figures they produce, but will have a few years as a buffer before this includes highly-uncertain Scope 3 emissions
The laws would require large companies to publish an annual sustainability report including emissions and other climate-related details.
The new reporting regime would be phased in over the next three financial years. Once fully phased in, directors will be liable for the accuracy of the figures in the same way they are currently liable for the accuracy of other financial reporting.
Treasurer Jim Chalmers said the changes would give investors "the transparency, clarity and certainty they need to invest in new opportunities as part of the net zero transformation".
Many Australian companies already report their emissions, but the quality of this reporting is patchy and there is broad agreement that "greenwashing" is common.
The proposed laws would algin Australia with the latest international reporting standards and follows similar moves by the UK, US and EU.
But while there is broad support for better guidelines, some business groups consulted by the Treasury warned Australian companies lack the skill set to produce accurate projections, especially for Scope 3 emissions (e.g. those generated by customers).
The case for better information
Private capital is expected to play a major role in meeting global climate targets. The International Energy Agency estimates private investors will need to provide 70 per cent of the funding required to transition the world to net zero emissions by 2050.
For this to occur, investors need good information about the companies they invest in. How exposed is a company to the effects of climate change, or to the consequences of the net zero transition? What plans does it have in place?
There is growing appetite for this information, and many companies have started to report it. In Australia, 103 of the 200 largest ASX-listed companies voluntarily comply with global standards developed in 2017 by the Task Force on Climate-Related Financial Disclosures.
But those standards are vague and leave room for interpretation. Research from PwC in 2022 found that just over half of large Australian companies with published climate targets had provided a reasonable amount of detail about how they planned to achieve those targets.
The International Sustainability Standards Board (ISSB) was established following the 2021 Glasgow climate summit to develop more specific standards. Several advanced countries have since moved to adopt ISSB-consistent domestic reporting regimes, and the federal government is now moving to do the same.
The proposal
The draft bill would require large companies and large public entities to publish sustainability reports as part of their annual report suites.
Reporting requirements would be gradually introduced for companies of different sizes. The first group, which includes 723 of Australia's largest companies, would need to report in 2024-25. A second group, comprising another 755 companies, would begin reporting in 2026-27.
A third group of smaller companies would start reporting from 2027-28 if they self-assess as having "material" climate-related risks or opportunities worth reporting on.
Reports would need to outline financial exposure to climate-related risks (e.g. extreme weather events), and to risks related to the net zero transition (e.g. fossil fuel dependence). They would also need to detail any targets for emissions reduction, including estimates of the company's own emissions (Scope 1 emissions) and those generated as a by-product of its activities (Scope 2 and Scope 3 emissions).
The ASX warned these reporting requirements would not be achievable for some business in the specified time-frame. "For companies not already voluntarily complying with a climate disclosure regime, such a time frame is likely to be very difficult to meet."
Emissions categories for companies | |
|---|---|
Scope 1 | Emissions resulting directly from the company's activities (e.g. from a manufacturing process) |
Scope 2 | Emissions resulting from the company's purchase of electricity |
Scope 3 | Emissions occurring indirectly as a result of a company's activities (e.g. transport of employees to work, customer use and disposal of products sold by the company) |
A question of scope
Scope 3 emissions are especially difficult to calculate, because they require a company to make assumptions about external conditions. In light of this, several business groups told Treasury the law should include a "safe harbour" to protect directors from liability if Scope 3 calculations were inaccurate.
"It would be disproportionate to heavily penalise businesses for disclosures on potential future outcomes and uncertainties that end up inaccurate as a result of factors beyond their control," the Australian Chamber of Commerce and Industry said in its submission.
The Business Council of Australia also supported a "safe harbour", though it added protections should be used "judiciously" to encourage companies to make "fulsome disclosures on a best endeavours basis, without removing appropriate accountability".
The draft bill would give companies a one-year buffer before they are required to include Scope 3, and would exempt directors from full legal liability until 2027-28.
After that, directors would be legally liable for incorrect statements released about Scope 3 emissions, or anything else-climate related, without "reasonable" grounds.
This liability already exists for other financial information and tends to discourage companies from making uncertain forward-looking statements, which they would be required to do here.
But the New South Wales Bar Association said the reasonable grounds provision would protect directors from incorrect Scope 3 projections made in good faith.
"Investors and court do not expect entities to predict the unpredictable, but instead to make sensible disclosures on a reasonable basis," the association said in its submission.
"If a concern about legal liability sometimes means that a desired forward-looking statement cannot be made because it lacks reasonable assumptions and therefore reasonable grounds, we do not perceive that to be a bad thing.
"Scope 3 emissions disclosures are critical for investors and other stakeholders to be able to assess the risks in [a company's] value chain, for example, [its] financed emissions."
The association also called for the standards to require companies to disclose any carbon credits or offsets used to improve their emissions figures, a recommendation echoed by Industry Super and the Centre for Policy Development. The draft bill does not specify whether offsets need to be included.
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