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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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Australia | Publication | July 2023
This article was co-authored with Jayne Kelly.
In June 2023, the International Sustainability Standards Board (ISSB) launched the inaugural standards, International Financial Reporting Standards S1 and S2. As we have previously reported here, these standards require entities to disclose information about their sustainability-related financial information (IFRS S1) and climate-related risks and opportunities (IFRS S2).
The Iaunch of the IFRS S1 and S2 is expected to have a significant impact on the reporting obligations of an entity, and its board of directors and senior management that will be responsible for such reporting. Entities that are already reporting voluntarily under the Taskforce for Climate-related Financial Disclosures (TCFD) framework will now be able to rely on clear guidance in order to properly prepare and meet their disclosure obligations.
The new IFRS S1 and S2 standards complement the international trend of mandating TCFD reporting as we have previously explained here. More significantly, the IFRS standards support the ongoing consultation by the Australian Government on the proposal to mandate climate-risk disclosures in Australia.
The IFRS S1 is a general standard that requires an entity to disclose information about all material sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s future operations and compliance with future regulations. This information includes an entity’s strategy and objectives in relation to sustainability. IFRS S1 also requires an entity to disclose information about its greenhouse gas emissions. An entity’s disclosure under IFRS S1 could include matters that arise out of its relationship with its stakeholders, new regulations, the economy, emerging technology and the natural environment throughout the entity’s value chain.
The standard provides four pillars for disclosure and the information expected to be disclosed for each:
In addition to the sustainability-related risks and opportunities that must be disclosed, IFRS S1 also provides general rules that disclosures must meet to be relevant and useful. Disclosures must:
IFRS S2 is a more detailed standard that focusses on an entity’s climate-related physical and transition risks and opportunities. This standard requires an entity to disclose information about its Scope 1, 2 and 3 greenhouse gas emissions, its adaptation plans and mitigation strategies, its physical and transition risks and opportunities, governance and management of such risks and opportunities, and the metrics and targets it used to measure and monitor its risks and opportunities.
Disclosures under IFRS S2 must provide:
The IFRS S1 and S2 are designed to provide investors with the information they need to make informed decisions about an entity’s sustainability performance and how prepared they are to adapt to the material impacts of climate change. The standards are also designed to help an entity better manage its risks and opportunities such that this will lead to a more consistent and comparable approach in reporting on progress.
Overall, the trend towards more consistent and comparable reporting via the use of the IFRS S1 and S2 is a positive development towards climate resilience. By requiring entities to disclose information about their sustainability and climate-related risks and opportunities, entities are encouraged to take steps to mitigate risks and improve accountability. It also allows investors to make informed decisions that unlock the potential for accelerating climate solutions by investing in entities that genuinely progress their activities towards meeting their climate targets.
Amid the growing pressure from investors to understand the material risks that climate change presents to the global financial system, the Australian Treasury (Treasury) released a consultation paper to seek initial views on mandatory climate-related financial risk disclosure in December 2022.
In response to this consultation paper, Treasury received 194 submissions from peak bodies, businesses, individuals, academics, research institutes and public sector entities. These submissions were almost universally supportive of the Government mandating climate-related risk disclosures. However, feedback in relation to the governance and oversight arrangements in the financial reporting system was mixed and is still ongoing.
In June 2023, Treasury released its second consultation paper on the proposal to make the TCFD framework mandatory for Australian entities (Second Consultation). Under the proposed phased approach, all entities will be required to lodge climate-related risk disclosures by 2027-2028.
The phasing is intended to work as follows:
Phases | Timing | Reporting Entities |
1 | 2024-25 onwards |
Entities that meet two of the three thresholds:
Entities that are required under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold. |
2 | 2026-27 onwards |
Entities that meet two of the three thresholds:
Entities that are required under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold. |
3 | 2027-28 onwards |
Entities that meet two of the three thresholds:
Entities that are required under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act. |
Source: Climate-related financial disclosure – Consultation paper
The biggest priority is for standards to be developed quickly in order to ensure that investors are able to make informed decisions and that entities are disclosing consistent and comparable information. The Treasury Laws Amendment (Measures for Consultation) Bill 2022 which seeks to amend the Australian Securities and Investment Commission Act 2001 is currently before Parliament to give the Australian Accounting Standards Board (AASB) the ability to develop climate-related standards, with reference to the IFRS S1 and S2.
The Second Consultation seeks feedback on the following proposals which would apply to reporting requirements:
Of note, a modified liability approach is proposed given concerns raised in relation to the requirement to report on scope 3 emissions and the fact that there may not be sufficient data available to allow confident and accurate reporting. The proposal is that climate-related financial disclosure requirements would be drafted as civil penalty provisions in the Corporations Act. However, the application of misleading and deceptive conduct provisions to Scope 3 emissions and forward-looking statements would be limited to regulator-only actions for a fixed period of three years after the reporting regime commences.
The launch of the IFRS S1 and S2 provide entities with more clarity, consistency and comparability in relation to how entities identify, assess and plan for sustainability and climate-related risks and opportunities. Other countries such as the UK, Canada, EU Member States, New Zealand and Singapore have either already made TCFD reporting mandatory or have announced that they plan to mandate such reporting.
In line with international support for mandating TCFD reporting and the growing societal expectation for corporate climate action, Australian entities would be wise to start preparing for mandatory TCFD disclosures, particularly having regard to the forthcoming mandatory reporting requirements.
To find out more about how sustainability and climate reporting will impact your organisation, and the resulting duties and responsibilities placed on directors and senior management, please contact a member of our climate and sustainability team.
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