Australia’s new climate disclosure regime: ‘generational shift’ gets underway

Australia’s mandatory climate disclosure regime, which came into effect on the first day of the new year, is being heralded by investors as a “generational shift”.

Preparations for the roll-out of mandatory disclosures have been nearly a year in the making. The proposal first hit the floors of the Australian parliament in March 2024. By September the amendment had been approved and stakeholders were being consulted. The date was set. From 1 January 2025 Australia would join a club of ten other jurisdictions including the UK ,New Zealand and the EU which are currently implementing mandatory climate reporting.

Ahead of the new year, Australia’s financial markets regulators convened a gathering of superannuation fund executives in late 2024. The executives made it clear that standardised climate disclosures were of vital importance to their duties as the country’s largest asset owners.

Investor expectations from the reporting regime are notably high.

Investor expectations

Reporting requirements will be phased in, with the first phase being focused on scope 1 and 2 disclosures by large companies. The second phase, which sets in a year later, will expand coverage to asset owners and will see reports step into the contested territory of scope 3 disclosures.

“The introduction of the climate disclosure legislation is a once in a generation change” says Estelle Parker, co-CEO of the Responsible Investment Association of Australasia (RIAA), which has long campaigned in favour of mandatory climate disclosures.

“This legislation ensures that before an investment decision is made, investors will be able to assess how well a company is prepared to navigate the risks posed by a changing climate, avoid potential losses, and build a portfolio for the long-term”, she adds.

One such investor is Australian Ethical, a superannuation fund with $13.36 bn in assets under management. The fund’s ethical research and climate policy lead, Persephone Fraser told Net Zero Investor :

“We expect the biggest change to be from the moderate emitting companies, whose key climate risks may well be those arising from changing climate patterns, the costs of adapting to this, and an in-orderly transition. Too often we see climate scenarios addressing transition only, while physical risks aren’t considered”.

Rebecca Mikula-Wright, CEO of the Investor Group of Climate Change (IGCC), notes that mandatory disclosures will also help reporting companies attract capital.

“For the reporting companies themselves, the standards-based process of analysing and reporting their climate risks, opportunities and plans becomes a strong foundation for demonstrating to all stakeholders, including investors that they’re running the company well. That helps operations and growth, with translates to good investments”, she says.

Alignment

When superannuation fund executives met regulators in late 2024, they flagged an important determinant of the disclosure regime’s success – alignment with global standards.

“With portfolios invested around the globe, there has been a strong investor appetite for comparability and consistency across jurisdictions”, Louise Davidson, CEO of the Australian Council of Superannuation Investors (ACSI), an investor coalition, told Net Zero Investor.

Australian Ethical shares this appetite. “Aligning Australia’s mandatory reporting closer to international standards is imperative for Australian funds, which also invest internationally and international funds that want to invest in Australia, who must be able to view the risks and benefits reported by companies in a comparable way”, said Fraser.

This was also a key demand by other institutional investors. “Standardising the reporting of climate-related financial risks in Australia ensures consistency with existing climate disclosure frameworks in the United Kingdom, the European Union, and New Zealand”, a spokesperson from the Insurance Council of Australia told Net Zero Investor.

The demand seems to have been met. The Australian reporting standards will be aligned with ISSB standards.

“The regime is internationally aligned”, notes RIAA’s Estelle Parker. “The Australian Accounting Standards Board consulted comprehensively throughout the design process, took on a lot of feedback and worked hard to ensure the disclosures are internationally aligned”, she adds.

Reports will also include scenario analysis aligned with global standards, which IGCC’s Mikula-Wright argues will be beneficial. “Really importantly, the local legislation requires reports to use at least two scenarios; a 1.5° scenario, and a scenario that well exceeds 2°. That’s entirely compatible with the global standard but is a very useful and positive addition”, she says.

Headwinds

As the first phase of reporting gets underway, two major headwinds are expected. First, Scope 3 reporting in the second phase could face data and methodology constraints.

“Scope 3 reporting will be required from year two. This is more complex, but we will have information after a year of Scopes 1 and 2 emissions data to build on. Scope 3 is vital for meaningful risk management, and waiting for perfect data is not an option”, warns Parker.

The second major headwind is political. Australia will head to polls this year and climate policy is far from immune to a change in the direction of political winds.

 Whether the reporting regime will survive any political turbulence from the upcoming federal election is a question worth asking. According to Parker, investors are expecting the incoming government to stay the course:

“Investors will be expecting that whoever is in government following the upcoming federal election will continue this regime, which is important for Australia to attract international capital. Climate change is not going away, and the energy transition is here to stay”, she says.

Australian Ethical too expects the benefits of the mandatory reporting to extend into the future:

“Mandatory climate reporting standards are essential to safeguarding Australian retirement savings. While the time horizon on retirement reaches far into the future for some, so too does Australia’s progression in combating climate change”, says Fraser.

For reporting entities and investors alike, a period of learning by doing lies ahead. It helps that several large companies have already built disclosure capabilities.

“The majority of ASX200 companies already disclose their management of climate risks”, Davidson notes, citing ACSI research.

Australia’s 'generational shift' in mandatory climate disclosures will take time to bear fruit but investor expectations are high and with an election around the corner, a new reporting regime down under has much to live up to.

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