A Rock and a Hard Place: Climate Related Financial Disclosures and their relevance to the construction industry

The construction industry may find itself caught between a rock and hard place due to legislative changes which force companies to publicly disclose the extent of their greenhouse gas (GHG) emissions – but not for the reasons you think.

Overview of the Climate Related Financial Disclosures Framework

As of 1 January 2025, directors of large companies and financial institutions which fall under Chapter 2M of the Corporations Act 2001 (Cth) are required to submit a sustainability report as part of the Climate Related Financial Disclosure (CRFD) framework. This law marks a turning point in Australia’s approach to climate change.

Reporting will be phased in in 3 stages from 2025 until 2027- based on the company’s size.
The table below sets out the start of the reporting period for each phase, and the criteria for determining which reporting group a company belongs to.

Reporting
entity		Consolidated
revenue		EOFY
consolidated
gross assets:		EOFY FTE
employees		Reporting Period
Commencing
Group 1$500 million or
more		$1 billion or more500 or more1 January 2025
Group 2$200 million or
more		$500 million or
more		250 or more1 July 2026
Group 3$50 million or more$25 million or
more		100 or more1 July 2027

Here’s the catch: while many construction companies will fall short of the reporting thresholds, their large clients are likely to be early adopters (e.g. REITs, Super funds and Sovereign Wealth Funds). Given construction is a major source of GHG emissions – approximately 40% of GHGs are generated by the industry globally, 1it is likely they will rely on builders to manage emissions across their investment pipeline.

Construction firms should therefore be on notice to expect the CRFD framework to change compliance obligations imposed by their clients moving forward.

Here’s How

In their annual sustainability report, reporting companies will be required to publish the
following information in accordance with the recently published Australian Sustainability Reporting Standards AASB S1 and S2 standards:

  • Climate statements and notes to those statements for the reporting year
  • Any statements relating to matters concerning environmental sustainability
  • Directors’ declaration about the statements and the notes that the report meets the statutory requirements of the CFRD framework.

In terms of the content of those climate statements, the AASB S2 standard is the mandatory standard which all reporting entities must comply with to satisfy the statutory requirements of the framework. These statements must disclose:

  • Material climate related financial risks and opportunities related to climate.
  • Metrics on Scope 1, Scope 2, and Scope 3 greenhouse gas emissions (including financed emissions).
  • Governance, strategy, or risk management policies employed by the company relating to the above; and
  • As a minimum, a scenario analysis for 1.5°C of warming and 2.5°C of
    warming.

Like any statutory report, Directors and officers are required to exercise reasonable care in preparing sustainability reports with civil penalties of up to $1,565,000 applicable to individuals who contravene these reporting requirements.2

While the CRFD excludes liability for statements about a company’s scope 3 GHG emissions (protected statements), that exclusion is temporary (from 1 January 2025 until 31 December 2027) and directors are on the hook for scope 1 and 2 GHG emissions. 3 Moreover, Greenwashing (i.e. misrepresenting the green credentials of a product to the marketplace) has recently been held by the Courts to be a legitimate cause of action by strategic litigants seeking to hold corporations to account in Australia. So, we anticipate company directors will be under mounting pressure to accurately measure all their emissions as shareholder expectations shift.

What are Scope 1, 2, and 3 emissions?

Scope 1 emissions are the direct GHG emissions that occur from sources that are owned or controlled by a company. In the construction context Scope 1 emissions would include the direct emissions of a project resulting from vehicles onsite or generators.

Scope 2 emissions are indirect emissions. These occur from the energy a company purchases or acquires and occur at the facility where the energy or electricity is
generated. Scope 2 emissions in the construction context would include the indirect emissions of off-site electricity generation used to power a project

Scope 3 emissions are the indirect GHG emissions that are not included in Scope 2 emissions. They occur both upstream and downstream within a company’s value chain and are set out into 15 categories by the Greenhouse Gas Protocol Corporate Value Chain
(Scope 3) Account and Reporting Standard (2011):

  • Purchased goods and services
  • Capital goods
  • Fuel and energy-related activities not included Scope 1 or Scope 2 emissions.
  • Upstream transportation and distribution
  • Waste generated in operations
  • Business travel
  • Employee commuting
  • Upstream leased assets
  • Downstream transportation and distribution
  • Processing of sold products
  • Use of sold products
  • End-of-life treatment of sold products
  • Downstream leased assets
  • Franchises
  • Investments

The biggest challenge for building and construction firms lies in accurately identifying and quantifying their Scope 3 emissions given that they make up the majority of a company’s emissions. They encompass the indirect emissions emitted up and down a company’s value  chain- like in the procurement and delivery of raw materials and manufactured goods. Scope 3 emissions also include embodied carbon, which are the emissions released throughout a building’s life cycle from the extraction and processing of materials, its construction, and the emissions released in its operational stage right up to demolition and disposal of waste.

The Significance of Financed Emissions Reporting for the Construction Sector

Emissions from the construction sector make up almost 30% of Australia’s total annual emissions. However, given its low market concentration only a handful of medium to large building and construction firms will be classed as reporting companies. Regardless, the CRFD will impact the construction industry as a whole given that the large institutional clients who finance the construction and operation of built assets will be immediately subject to the CRFD framework in reporting their Scope 3 financed emissions. We expect that these institutions will rely on builders to meet any decarbonisation goals they adopt to manage their portfolios. We anticipate that this will play out in two ways such that pressure will be applied to:

  1. documenting measures to minimise GHG emissions during a development’s construction phase; and
  2. demonstrating performance requirements aimed at minimising GHG emissions during a development’s operational phase are actually being met.

Moving forward, builders will no longer be able to just pay lip service to sustainability, new specialist resources may be needed to collect the data necessary to meet reporting standards. ASIC is intent on combating Greenwashing within the financial services industry having successfully sued a number of superannuation funds in the last year, and financiers and lenders of development projects will increasingly expect builders to fully deliver on their commitments made with respect to sustainability. 4

Next Steps?

For builders, it will be crucial to ensure that risks or liabilities associated with the CRFD framework are passed onto their subcontractors and consultants effectively. This will require renewed focus on:

  • Stated Purpose – where a Principal’s Projects Requirements call for decarbonization, precise definitions are critical;
  • Certification – design consultants must not be allowed change the wording of design certificates in an attempt to sidestep meeting the project’s Stated Purpose;
  • Warranties and indemnities – consultants must provide express warranties and indemnities against the kind of loss that ensues from:
    • failing to accurately record and report emissions data so as to cause a Principal to submit an erroneous report;
    • or providing designs which do not meet emissions requirements
  • Deeds of Warranty – Principal’s financiers are likely to increasingly insist on creating a pathway to consultants’ insurance that survives the lifespan of the contract and the builder itself.
  • PI insurance – Consultants’ insurance must cover failure to meet the Stated Purpose as an aspect of the professional duty owed.•
  • Security – In most jurisdictions, liability for significant defect ranges from 6 to 10 years, and securities in their conventional form only operate to keep claims off the balance sheet for 2 years: given the highly technical nature of this risk, novel undertakings may be needed to close the gap.

If you have any questions related to the CRFD framework and its relevance to the construction industry, our experts at Crisp Law are here to assist you in navigating these significant legislative reforms.

Contact Crisp Law for advice and information at:
Telephone: +61 2 8042 8701
Email: admin@crisplaw.com.au

  1. United Nations Environment Programme, & Yale Center for Ecosystems + Architecture Building Materials and the Climate: Constructing a New Future (Report, 2023) ↩︎
  2. Corporations Act 2001 (Cth) s 180(1). ↩︎
  3. Ibid, s 1707D ↩︎
  4. See ASIC v Vanguard Investments [2024] FCA 308; ASIC v Active Super [2024] FCA 587 ↩︎

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