Senator David Pocock's Additional Comments

Introduction

1.1The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (the Bill) is transformative legislation poised to redefine financial disclosures in Australia. It is largely successful in aligning national practices with global standards, enhancing transparency, supporting sustainable investment, and fostering a proactive approach to climate-related risks and opportunities.

1.2Australia is a late adopter of mandatory climate-related financial disclosures. Jurisdictions such as the European Union, the United States, UK, Canada, New Zealand, Singapore, and Hong Kong already have in place or are implementing a mandatory climate-related financial disclosures regime.[1] The delay presents an opportunity to learn from international best practice, but it also means that we should move swiftly to catch up and make up for lost time.

1.3The considerable positive changes in the bill are undermined by the modified liability regime in Schedule 4.

Broad support for climate-related financial disclosures and the model contained in the Bill

1.4Submissions provide substantial support for the introduction of a climate-related financial disclosure regime, and for the model adopted in the Bill. The financial services sector, represented by the Financial Services Council (FSC) expects the disclosure regime to enhance investor confidence and assist in efficient capital allocation.[2] Herbert Smith Freehills (HSF) agrees and emphasised the importance of proposed alignment with the International Sustainability Standards Board (ISSB) standards on climate-related disclosure.[3] This alignment not only fosters transparency but also ensures that Australian corporations remain attractive to global investors.

1.5The Australian Financial Markets Association (AFMA) and the Governance Institute of Australia (GIA) were also supportive, highlighting the Bill's potential to reduce compliance costs and simplify cross-border comparability through substituted compliance for local subsidiaries.[4]

1.6The Investor Group on Climate Change (IGCC) highlighted the critical role of disclosures in managing climate-related risks and opportunities affecting investments, thus aiding in the prudent management of assets totalling more than $35 trillion.[5] This view is supported by the Insurance Council of Australia (ICA), which saw the Bill as enabling consistent climate-related financial disclosures, thereby leveraging capital to meet Australia’s emissions reduction targets effectively.[6]

Risk of greenwashing

1.7Broad support for the Bill is undermined by serious concerns about the proposed modified liability regime. In short, the regime enables corporate greenwashing. Proposed section 1707D of the Bill provides legal protections that could shield companies from accountability by restricting third parties from initiating civil actions against entities for misleading statements concerning Scope 3 emissions, scenario analysis, and transition plans.

1.8Under the regime, only ASIC, rather than affected individuals or investor groups, can pursue civil actions against entities for false or misleading sustainability disclosures during a three-year period following the enactment of the Bill. This limitation is particularly troubling as it allows a crucial window in which companies might misrepresent their environmental impact without facing immediate legal repercussions from the public or investors.

1.9Concerns about the modified liability regime are briefly outlined at 2.36 to 2.39 of the Chair’s Report. Regrettably, the details and depth of the concerns are not adequately discussed.

1.10The Australian Conservation Foundation (ACF) was critical of the regime, saying:

The modified liability for false and misleading statements should not extend further than statements regarding Scope 3 emissions and scenario analysis, and for no longer than three years.[7]

1.11They argue that this could lead to a "concealment of greenwashing activity and therefore risks undermining Australia’s emission reduction goals and misallocation of capital".[8]

1.12Climate Integrity expressed concern that expanding the modified liability regime:

…to include immunity from legal action by third parties, including investors, in relation to an entity’s transition plan undermines accountability and the enforcement of best-practice, science-based emissions reductions.[9]

1.13They argue that this provision "provides cover for widespread greenwashing to continue during the first three years of the new disclosures regime."[10]

1.14The Environmental Defenders Office (EDO) highlighted a significant contradiction:

Including transition plans in the proposed modified liability regime will carry the unintended consequence of facilitating greenwashing at a time when urgent action is critical.[11]

1.15They emphasise that this protection could mislead investors and regulatory bodies about the actual environmental impacts and risks associated with corporate actions.

1.16Equity Generation Lawyers called for the removal of the proposed section 1707D altogether, arguing it "does not support the policy goals of the reporting regime and could weaken investor confidence."[12] They emphasise that the provision could delay essential auditing requirements, undermining the transparency and clarity necessary for informed investment decisions.

Support for the modified liability regime

1.17Some submitters and witnesses gave evidence that the modified liability regime is necessary. The Chair’s Report refers to this support at 2.40 to 2.43.

1.18In referencing support for the regime, the Chair’s Report fails to distinguish between the circumstances of the largest and smallest companies intended to be subject to the new climate reporting regime. By its silence on the topic, it falsely treats the capacity of all companies as equal.

1.19Nothing could be further from the truth. The Bill itself separates companies into three cohorts for the purposes of the start date of the new regime, by reference to size of revenue, assets and number of employees.[13]

1.20Many of Australia’s largest companies are already sophisticated in their climate reporting. Some of Australia’s largest fossil fuel producers and emitters have been reporting annually on climate-related issues for around a decade, first under the National Greenhouse and Energy Reporting Act 2007 and later pursuant to the framework of the Task Force on Climate-Related Financial Disclosure (TCFD). Most if not all these corporations already enjoy the resources, the expertise, the advice and the experience to report competently on their climate performance.

1.21Additionally, since 2021 in response to investor demand, many carbon-intensive ASX-listed companies have been publishing transition plans to the market. The high level of investor interest in these plans, and the non-binding votes of shareholders that ensue suggest that investors’ legal rights to hold companies to account for their representations should not be diluted without a very good reason.

1.22It may be justifiable to afford some smaller corporations the benefit of a transitional opportunity to “gear up” for the new reporting regime: But why should large corporations that are already well familiar with climate reporting, and that also happen to be among the largest fossil fuel producers and emitters in this country, enjoy the same liability holiday?

1.23As set out at 1.76 of the Chair’s Report, only the largest ‘Group 1’ corporations will be required to prepare a sustainability report before 1 July 2026. Smaller ‘Group 3’ corporations which meet two of the following criteria will not have to prepare sustainability reports before 1 July 2027:

Consolidated revenue equal to or greater than $50 million;

Consolidated gross assets equal to or greater than $25 million; and

100 or more employees.

1.24The staged requirement for preparation of sustainability reports is sufficient to allow corporations that are not currently engaged in climate reporting to develop that capacity. That is in fact the purpose of the transitional period structure set out in the Bill. This approach fundamentally undermines the argument for a modified liability regime.

1.25The need for better corporate climate reporting is the very aim of these provisions of the Bill. How is that aim achieved by a proposal that denies investors their existing right to test the largest carbon producing and emitting companies’ representations?

1.26Given the decades of lost opportunity to address the impacts of climate change in this country, we simply don’t have the luxury of time any more to dispense liability holidays to large fossil fuel producers and emitters, especially absent any good articulated reason to do so.

ASIC and enforcement of breaches covered by the modified liability regime

1.27At the hearing, representatives of the Treasury claimed that the risk of greenwashing is addressed by the fact that ASIC will ensure that “reporting is appropriate.”[14] This claim lacks credibility in light of the well documented under-resourcing and overburdening of the regulator. Indeed, James Shipton, the former ASIC chairman is reported to have said that the body has been asked to do too much with too little, leaving it chronically underfunded.[15]

1.28There can be no confidence that ASIC will act to prevent greenwashing in the context of sustainability reports in the absence of additional resources.

1.29Remove the liability modification provisions in section 1707D so as to restore shareholders’ rights in relation to companies’ climate representations under the new regime.

1.30If the proposed liability regime is to remain, the definition of ‘protected statement’ in subsection 1707D(3) should be amended to remove subparagraph (iii), ‘a transition plan’.

1.31If the proposed liability modification regime is to proceed in any form, corporations currently listed under the corporate group threshold of the National Greenhouse and Energy Reporting Act 2007 should be excluded entirely from the liability modification regime.

Disclosures and physical risk

1.32Climate change presents profound physical risks to assets. The National Climate Risk Assessment identifies 56 significant risks, including systemic risks to the economy from climate-related financial shocks.[16]

1.33Assessments of a company’s exposure and resilience to physical risks must include a scenario analysis that considers the climate trajectory on the basis of current policies rather than aspirational targets. Estimates from 127 central banks and financial supervisors indicate that under current policies, economic costs of climate change are more than 10 times the cost of achieving a 1.5°C emissions pathway.[17]

1.34The Institutional Investor Group on Climate Change (IGCC) argues convincingly that climate related financial disclosures can play a key role in mitigating against this risk.[18] Companies need to “have a good understanding of what physical risks they are exposed to and how best to prepare against them depending on various future states of warming.”[19] Climate-related financial disclosures can help investors assess and address physical risks, improving resilience.

1.35If the Bill passes, the Government should mandate scenario analyses to assess physical risk that includes a “current policies” scenario, anticipating a 3°C or higher temperature increase.

Senator David Pocock

Independent Senator for the Australian Capital Territory

Footnotes

[1]Financial Services Council, Submission 10, p.2.

[2]Financial Services Council, Submission 10, p.2.

[3]Herbert Smith Freehills, Submission 17, p. 1.

[4]Australian Financial Markets Association, Submission 9, p. 2; Governance Institute of Australia, Submission 18, p. 1.

[5]Investor Group on Climate Change, Submission 5, p. 1.

[6]Insurance Council of Australia, Submission 14, p. 1.

[7]Australian Conservation Foundation, Submission 13, p. 2.

[8]Australian Conservation Foundation, Submission 13, p. 2.

[9]Climate Integrity, Submission 12, pp. 1-2.

[10]Climate Integrity, Submission 12, pp. 1-2.

[11]Environmental Defenders Office, Submission 3, p. 4.

[12]Equity Generation Lawyers, Submission 22, p. 4.

[13]Proposed section 1707B.

[14]Ms Rebecca McCallum, Director, Climate Change Reporting Unit, Treasury, Committee Hansard, 23April 2024, p. 37.

[15]Mr Ronald Mizen, Senior Reporter, It’s time to break ASIC in two: James Shipton, 20 February 2023.

[16]National Climate Risk Assessment: First pass assessment report, Department of Climate Change, Energy, the Environment and Water, www.dcceew.gov.au/climate-change/publications/ncra-first-pass-risk-assessment.

[17]Explore the NGFS scenarios here: www.ngfs.net/ngfs-scenarios-portal/explore/.

[18]Institutional Investor Group on Climate Change, Submission 5, p. 2.

[19]Institutional Investor Group on Climate Change, Submission 5, p. 2.