The Commonwealth Climate Disclosure Policy coming July 1

Climate Change is prevalent

With 2023 being the hottest year on record as a direct result of climate change, it is now more important than ever the government intervene to ensure corporate activities align with the Australia’s commitments to the Paris Agreement and our 2050 net zero emissions target.[1]

Introducing the Commonwealth Climate Disclosure

The commonwealth government is currently developing a policy requiring commonwealth companies and private entities to disclose material climate-related financial risks and opportunities.

The Commonwealth Climate Disclosure will create transparency between corporations, investors and ordinary Australians, while allowing government regulators to assess and manage climate risks and mitigate climate impact. The policy will bring Australia in line with other jurisdictions, such as the UK, New Zealand and Japan.[1] The policy will be rolled out in three phases, with phase 1 scheduled to commence on 1 July 2024.

Who does this apply to?

In reference to non-government companies, the draft policy currently only applies to entities required to prepare annual financial reports and directors reports under Chapter 2M of the Corporations Act 2001.[1] These are public companies, large proprietary companies, financial institutions, superannuation entities and registered investment schemes. However, if a company is a Chapter 2M company and is required to report emissions under the National Greenhouse and Energy Reporting Act 2007,[2] that company must make disclosure – regardless of size. Small and medium sized companies are currently exempt from disclosure under the policy.

So what are climate risks and opportunities?

Some broad examples include:

• Transition Risks – market and reputational risks that disrupt company relationships.
• Physical Risks – acute and chronic risks of climate change which effect a company’s ability to operate successfully
• Transition Risks – policy, legal and technology risks exposing companies to regulatory action or climate-related litigation.
• Strategic opportunities – useful in countering the above risks by seeking out opportunities for improved resource efficiency, energy sources, products and services, markets and resilience.

Disclosing Risks

A risk must be disclosed if it is a “material” risk. While section 299A of the Corporations Act sets out what should be included in a director’s report, it does not define materiality. As a guideline, materiality should be determined in the lens of what information a shareholder would reasonably require in reference to the specific circumstances of the company. Information may also be considered material if it effects the economic decisions of investors, lenders and creditors.

Be aware

While the majority of Australian companies will remain unaffected by the policy, directors should consider the policy an important reminder to evaluate how their company adds to climate risk and prompt you to seek out opportunities to mitigate climate risks.