A New Climate For Financial Reporting: Mandatory Sustainability Disclosure Obligations

From 1 July 2026, the second group of companies required to lodge financial reports under Chapter 2M of the Corporations Act will be subject to the mandatory sustainability disclosure obligations introduced by the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024.

Australia has officially transitioned to a mandatory climate-related disclosure regime, amending Chapter 2M of the Corporations Act 2001 to require in-scope Australian entities to prepare and lodge a sustainability report alongside their traditional financial report with ASIC.

For many larger Australian companies, the first reporting cycle began last year from 1 January 2025. With the commencement of the second reporting period in July this year, this article will outline which businesses are bound by the new sustainability reporting obligations and when. It will also outline what information must be included in the mandated sustainability report and valuable tips for how businesses can prepare for the upcoming reporting period.

Who Must Report?

Sustainability reporting applies to entities which are required to lodge financial reports under Chapter 2M of the Corporations Act. The commencement of the reporting obligations is a three-phased approach, based on size and revenue, or if the entity is a registered corporation (or is required to register) with the National Greenhouse and Energy Reporting (NGER) Act 2007.

Note: Group 3 entities are only required to disclose if they identify material climate-related risks or opportunities. If they do not, they must provide a statement explaining why.

Other entity considerations:

• Australian subsidiaries of international groups are required to lodge sustainability reports if they meet the above requirements.
• Consolidated Groups – Individual entities within consolidated groups are not required to prepare a separate sustainability report where they are controlled by a parent entity.
• Not-for-profits – Reporting obligations only apply to not-for-profits which are companies limited by guarantee and meet the size threshold, plus have at least $1 million in revenue.

Core Disclosure Requirements

An entity’s sustainability report must follow Australian Sustainability Reporting Standards (ASRS), specifically:

• AASB S1: General Requirements for Disclosure of Sustainability-Related Financial Information
• AASB S2: Climate-Related Disclosure

The actual disclosure framework follows a four-pillar structure:

1. Governance: How an entity’s board and management intend to oversee climate risks including governance processes, controls and procedures.
2. Strategy: How climate change impacts (and is expected to impact) an entity’s business model and financial planning and how the entity intends to manage climate-related risks and opportunities. This includes the implementation of a climate scenario analysis. AASB S2 requires strategy analysis against at least two mandatory climate scenarios (warming scenarios of 1.5°C and >2°C above pre-industrial levels).
3. Risk Management: How climate-related risks and opportunities are identified, assessed, prioritised and monitored. This includes an overall assessment of the entity’s risk profile and risk management process.
4. Metrics and Targets: Qualitative and quantitative climate-related metrics and targets including scope 1, 2, and 3 greenhouse gas emissions.

Note: Due to its notable difficulty in calculation, scope 3 emissions data have a one-year grace period for reporting (i.e. group 2 entities do not have to disclose in time for their first 2027 report)

Assurance

Under the new amendments, climate-related financial disclosure will need to be independently assured by the same auditor who audits the entity’s financial report.

Sustainability reports will require “reasonable assurance” (high certainty) of the entire sustainability report from 1 July 2030 onwards. Prior to this, the degree of assurance will follow a phased implementation schedule of “limited assurance” in accordance with minimum standards provided by the auditing and assurance standards board. The same pathway applies to entities in all three groups.

Consequences

Contraventions of the reporting obligations are enforced through the existing penalty framework in the Corporations Act 2001. A company that fails to prepare, lodge or retain required sustainability disclosures, or that makes misleading climate-related disclosures, may be subject to civil penalty proceedings under s 1317G of the Corporations Act. The maximum civil penalty for an individual is the greater of 5,000 penalty units (currently AUD $1.65 million) or three times the benefit obtained or detriment avoided. For a company, the maximum civil penalty is the higher of 50,000 penalty units (currently AUD $16.5 million), three times the benefit obtained or detriment avoided, or 10% of annual turnover (capped at 2.5 million penalty units, currently AUD $825 million). Certain contraventions, including failures to retain sustainability records for seven years and some audit-related obligations, are strict liability offences, with some provisions expressly attracting penalties of 50 penalty units (currently AUD $16,500). In addition, including knowingly false or misleading statements in sustainability reports may also attract criminal liability under ss 1308 and 1311 of the Corporations Act, including imprisonment and criminal fines. Finally, ASIC may also seek infringement notices, injunctions, compensation orders and director disqualification orders.

Tips for Preparation

With the commencement date for group 2 soon approaching, several factors should be considered to ensure applicable entities are ready to comply with reporting obligations. Early board engagement and data readiness is critical to ensure effective compliance, and as such, group 3 entities should also consider the following recommendations (if they have not already done so).

• Establish Cross-Functional Teams: Sustainability reporting is no longer the role of just one team. It now requires integration and representation across all key business functions – from legal and finance to procurement and operations. Identify which teams may require more resources and/or capacity to facilitate short to longer-term implementation of new strategy and governance procedures.

• Upskill the Board: Ensure board members have received a formal education on the new reporting requirements with a specific emphasis on directors’ duties and liabilities.

• Gap Analysis: Assess your current voluntary reporting framework against the new AASB reporting requirements. Determine what additional data disclosure and governance structures are needed and recalibrate your action plan accordingly.

• Get Assurance Ready: Strive to undertake a baseline assurance exercise at least 12 months before disclosures must be officially assured to identify gaps in your paper trail and implement necessary changes.

• Internal Controls: Treat sustainability data like financial data. Implement internal controls over the collection process, including secondary reviews of data entry and validation of emission factors used.

Conclusion

The implementation of mandatory sustainability reporting poses a considerable challenge and is a key area of uncertainty for many entities.

Fortunately, to incentivise complete and meaningful disclosure in this new area of reporting, the law provides a limited three-year modified liability regime for sustainability reports prepared between 1 January 2025 and 31 December 2027. In the context of scope 3 emissions and forward-looking statements (i.e. scenario analysis and transition plans), this will limit company liability regarding private litigation for misleading or deceptive conduct. However, ASIC can still take enforcement action if disclosures are fraudulent or dishonest.

This period is a vital opportunity for entities to navigate the complexities of these new standards and refine their sustainability reporting frameworks.