Governments should be focused on the long term, making decisions in the best interests of citizens and setting up the rules so we're reducing our risks and pursuing our opportunities. But in this case, where we're debating the merits of a new mandatory climate reporting requirement, the government is catching up to what much of the investment community and the corporate sector has realised and acted upon for years—that is, the long-term efficient allocation of capital depends on a good understanding of climate risk.

So what does the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 actually do? Well, it's an omnibus bill that combines two completely unrelated changes into one piece of legislation. We've seen a few of these lately; often, they can be used as a wedge when something controversial is combined with something innocuous. Luckily, I don't think that's the case here.

Schedules 1, 2, 3 and 5 of the bill implement the recommendations of the Council of Financial Regulators' advice-to-government report which was delivered in July 2020. They relate to our financial market infrastructures, which are like the plumbing of the financial system. The reforms contained in the bill have been recommended by various reports to government going back to 2015. The first reform introduces a crisis management and resolution regime for Australia's financial market infrastructure, which means the RBA can resolve a crisis in a clearance-and-settlement facility if the crisis is likely to pose a threat to the Australian financial system. This seems wholly appropriate. The bill also transfers the current ministerial powers for licencing and supervision to ASIC and the RBA—again, a sensible change to have regulatory powers sit with the regulator rather than have them delegated from the minister.

The more interesting part of the bill, and the part I'll be focusing on, is schedule 4, which introduces mandatory climate reporting requirements for large businesses. At the outset, I want to state by support for this requirement. This bill is a significant amendment to the Corporations Act, and for particular companies requires a sustainability report to be added to the annual reporting package that also includes a financial report, a director's report and an auditor's report. Covered companies will need to tell their shareholders how climate change might affect their performance and operations. The sustainability report requires disclosure of material climate risks and opportunities, the governance process, a strategy and risk management plan, information about how to manage climate-related risks and opportunities, and climate metrics and targets including scope 1, 2, and 3 greenhouse gas emissions. The types of risks covered could include extreme weather events, rising sea levels, market shifts, technology advancements, insurance costs, and logistical disruptions or resource scarcity.

For large companies, the concept of sustainability reporting is not new. Australian companies are actually pretty good at recognising environmental, social and governance—or ESG—risks, with 98 per cent of Australia's top companies providing sustainability reporting, most for many years. Eighty per cent of ASX100 companies recognise climate as a financial risk, with 78 per cent reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures. This is actually a topic quite close to my heart. Ten years ago, I was the sustainability manager at one of Australia's 10 largest companies, overseeing its sustainability reporting, including climate reporting. We reported on sustainability and climate risks in our annual sustainability report, because our investors were starting to wake up to the significant risks ahead and wanted to know how we were addressing these risks. Even at that stage we had our sustainability report audited to give investors confidence that what they read was accurate. This was voluntary—both the reporting and the auditing. We did it because it was useful information for our investors. But not every company did it, and there were a range of reporting frameworks and standards. This made it hard to compare sustainability data and risks between companies.

Last month, the Investor Group on Climate Change published an open letter in support of the bill we're debating today. This group of 15 organisations, including the Australian Council of Superannuation Investors, the Australian Institute of Company Directors and the insurance and property councils of Australia, represents more than 900 companies and investors with more than $80 trillion in assets under management. This is a group of organisations that understands risk and sees the benefit in better information about the risks posed by the big shifts climate change will drive.

This bill does create an additional reporting burden, especially for entities that are not already reporting their climate risk. When fully implemented, it's estimated that this requirement will apply to 1,800 Australian businesses and financial institutions. The reporting obligation is rolled out in three tranches: firstly for large entities, with more than $500 million in revenue or 500 employees by 2026; then quite large entities, with more than $200 million in revenue or 250 employees; and then for smaller entities, with revenue over $50 million or 100 employees, but only if they have material climate risks. Those smaller entities, called group 3 entities, don't have to report if they can show that they don't have any material climate related risks or opportunities. The assessment of materiality may incur some cost, but this seems reasonable given how quickly climate risks are changing. We want Australian businesses to be regularly considering how the world is changing and what it means for them.

This change is important for two reasons: so that Australian companies can operate in an internationally competitive market for capital and to help Australia meet its climate targets. Several stakeholders, including the ASX, have made the important point that implementation of a climate reporting regime is crucial to ensuring Australia remains a competitive destination for investment capital. Standardising the approach to sustainability reporting has significant advantages for companies and for the investment community.

Under the bill, climate statements must be prepared in line with the relevant sustainability standards issued by the Australian Accounting Standards Board, which are expected to align as closely as possible with the International Accounting Standards Board. It's essential that Australian companies are operating and reporting at the same level as international counterparts. KPMG has reported that the world's top 250 companies, known as the G250, are almost all providing some form of sustainability reporting. Eighty per cent of these G250 companies are setting carbon reduction targets. There are tomes of research on why sustainability reporting is beneficial for individual companies, like increased investor confident in a company and potential to highlight opportunities arising from a transition to a low-carbon economy. Evidence shows that firms engaged in clean research and development activities increase their stock market valuation. Companies that effectively manage climate related risk and capitalise on related opportunities can gain a competitive advantage in a changing market.

The second reason is supporting climate targets. The Carbon Market Institute said in its submission that climate reporting would work alongside market based mechanisms to help guide investment decisions that would support Australia's climate targets.

As well as disclosing scope 1, 2 and 3 emissions data, a company's sustainability report will need to disclose climate metrics and targets and material risks and opportunities presented by climate. Some commentators don't think this will have a material impact on Australia meeting its climate targets, but I think it helps. Transparency about material risks and future targets will mean that, as a country, we're able to get a better estimate of whether we're on track to meet our emissions reduction targets. Companies will also learn from each other's disclosures, which should drive more of a best-practice approach. If companies are competing for investment dollars based on how they address climate risk, we're likely to see better emissions reduction outcomes.

We need all the tools we can get to achieve our climate targets, so mandatory climate related disclosure will sit alongside the safeguard mechanism and sectoral policies and programs to build a more complete picture of the challenge ahead and how we're tracking towards it. Knowing where we stand will allow us to formulate policies in response to the size of the challenge. There are two main issues that have prompted some discussion between different stakeholders: the transition period and modified liability. There's been some discussion about the phasing in of reporting obligations for group 1, 2 and 3 entities. On balance, I think the timing proposed seems reasonable. For some it will be a new type of reporting, and having a few years to prepare should increase the quality of the reporting and allow companies to plan for it. I would rather that we have a well-functioning framework that's understood and applied in an informed way than that we have a rushed framework that creates a burden that's not well understood or implemented. As ASIC continues to remind us, the growing interest in environmental, social and governance issues is driving the biggest changes to financial reporting and disclosure standards in a generation. So let's get it right and work with the private sector to build a robust and respected reporting framework. In a recent ASIC survey of AICD members, 31 per cent of respondents said that their main concern in relation to mandatory climate disclosure is the complexity of reporting requirements. I believe we need to give companies appropriate transition time to implement these changes properly. Accounting firms may also need to increase their capability and sustainability auditing, so ramping up the requirements is a pragmatic way to address a big change like this.

The second controversial part of the bill is the inclusion of a modified liability approach for the first three years of the scheme. This means that, for the first three years, civil actions by affected individuals and investor groups cannot be pursued against companies for false or misleading disclosures in their sustainability reports or in an auditor's report about scope 3 emissions, scenario analysis or transition plans. The government says this will ensure that reporting entities, auditors and directors are allowed time to develop experience and practice to report in line with the required standards.

Stakeholders have conflicting views on this. Some think the immunity should be extended, but many think either that it's too wide in scope or that it applies for too long. I can see why some are objecting to this and think that it may allow continued greenwashing for another three years. There is that risk. But, having been responsible for sustainability reporting in a diversified conglomerate, I know it can be complicated. Scope 3 emissions are likely to have a large component of estimation, and I don't think it's appropriate for companies to be civilly liable for these estimates when they're building up their methodology and skills. Scenario analysis and transition plans also contain an element of forecasting that will be challenging. Notably, ASIC may still take an action for misleading and deceptive conduct in relation to climate related disclosures during the transition period. I would support an amendment that allowed civil action in relation to serious misconduct, but it's not a deal breaker.

So I support a moderated liability period. I'm aware that some stakeholders are worried about the length of this modified liability—that three years is too long and allows more greenwashing while being protected from third-party actions. While I note this concern, on balance I think a three-year modified liability period is appropriate, particularly for those companies that are entering the reporting scheme for the first time. For auditors, it may take three years to build up the methodology and standards to appropriately assure these elements of climate reporting that depend on estimation and future predictions.

In conclusion, I think this introduction of mandatory climate risk reporting is necessary for international competitiveness. It levels the playing field so that all covered entities report, rather than there being a reporting burden only on those who choose to do it voluntarily. It will create clear reporting standards for comparison purposes, which will also allow the assurance industry to build the necessary skills. As much as I'd like to see mandatory reporting on climate risk immediately, given my understanding of the complexity of sustainability reporting and given that it is a big change in reporting requirements, I think it's appropriate that requirements are phased in and liability is modified for three years. I would like to see a change to the modified liability framework so that civil action is still available for serious misconduct to protect the intention of the bill, but this will not change my support for the bill in its current form. I commend the bill to the House.