Taking action now for new mandatory climate disclosures

Staying on top of the many forms of mandatory disclosure changes that confront boards and management is a challenging task. The changes to regulatory standards and financial and non-financial disclosure requirements are a perpetual catalyst for boards to think about risks and opportunities facing their organisation. But when John Longo, ASIC Chair, describes the shift to mandatory climate-related disclosure as presenting “…the biggest change to corporate reporting in a generation”[1], it’s time for every decision maker in a company to sit up and take notice.

A number of Australian businesses are already reporting under voluntary frameworks such as Task Force on Climate-related Financial Disclosures (TCFD), Climate Active, the National Greenhouse Gas Reporting scheme (NGERs), and science-based targets (SBTi).

Although this voluntary disclosure is beneficial, there is growing agreement on the need to transition towards a more standardised global reporting framework. Such a unified system would establish a baseline for disclosures and ensure compatibility with international financial markets.

Several jurisdictions, including New Zealand and the European Union, have progressed towards mandatory climate and sustainability reporting. They have developed and implemented their unique standards for sustainability and climate disclosures. Some, like the United Kingdom, have also mandated disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD).

Given Australia’s emission reduction targets and its net zero goal for 2050, it’s no surprise that the Australian Government, through the Australian Accounting Standards Board (AASB), is intending to follow other jurisdictions in introducing mandatory standards.

In June 2023, the International Sustainability Standards Board (ISSB) issued its first two IFRS Sustainability Disclosure Standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.

The Australian Government responded to this in October 2023, when the AASB released three draft Australian Sustainability Reporting Standards (ASRS) for consultation based on IFRS S1 and IFRS S2:

• • • • Draft ASRS 1 General Requirements for Disclosure of Climate-related Financial Information (based on IFRS S1 but limited to climate-related sustainability disclosures)
      • Draft ASRS 2 Climate-related Financial Disclosures (based on IFRS S2)
      • Draft ASRS 101 References in Australian Sustainability Reporting Standards (to cover any non-legislative documents that are referenced in the ASRS standards).

Treasury is expected to release a final ‘Position Paper’ before presenting the climate reporting legislation to Parliament in early 2024.

According to the Treasury’s proposal, companies will be required to report their present and expected climate-related risks across short, medium, and long-term horizons within their general financial reporting framework. This reporting obligation could commence as soon as July 2024 for certain companies and include the following:

• • • • their climate-risk governance arrangements
      • qualitative scenario analysis
      • climate resilience assessments against two possible future states
      • climate-related targets
      • transition plans
      • identification and management of climate-related risks and opportunities
      • greenhouse gas emissions from all sources – scope 1 (direct emissions generated by operations), scope 2 (indirect emissions from energy purchased and used) and scope 3 (indirect emissions along the wider value-chain)
      • executive remuneration details relating to climate
      • planned use of carbon credits

Entities that do not face significant climate-related risks are still obligated to disclose the process by which they arrived at this conclusion.

Treasury is proposing a staged, three-tiered approach to implementation that will be threshold based (2 out of 3 thresholds)[2] as follows:

Cohort 1 (for 2024/2025 reporting periods):

• • 1. Over 500 employees
    2. $1 billion+ in consolidated gross assets
    3. $500 million+ consolidated annual revenue

Cohort 2 (for 2026/2027 reporting periods):

• • 1. Over 250 employees
    2. $500 million+ in consolidated gross assets
    3. $200 million+ consolidated annual revenue

Cohort 3 (for 2027/2028 reporting periods):

• • 1. Over 100 employees
    2. $25 million+ in consolidated gross assets
    3. $50 million+ consolidated annual revenue

The consultation period for the draft standards remains open, until 1 March 2024 and feedback received during this phase will be taken into consideration. Once these standards are finalised, their implementation will still depend on the necessary legislation being approved. Once enacted, these finalised standards are expected to apply to specific entities for annual reporting periods beginning on or after 1 July 2024.

These new rules require more than just a compliance-based mindset or last-minute tactical response. It’s both a catalyst and an opportunity for companies to respond positively to a decarbonising economy. Boards should determine what changes are required to business strategy and how to improve their value proposition to investors while meeting broader stakeholder expectations.

The new disclosure goes beyond merely reporting greenhouse gas (GHG) emissions. It obliges companies to comprehend the financial impact of climate risk on their operations. Additionally, these disclosures furnish many of the essential components needed to develop credible transition plans towards environmental sustainability.

And it won’t be easy.

For many companies, this will be a significant challenge, owing to constraints in resources and capacity, coupled with the lack of access to high-quality data necessary for precisely measuring emissions throughout their value chain.

With the relatively brief timeframe for implementation, time is a critical factor. Companies must swiftly evaluate their reporting requirements and assess whether they possess the necessary capabilities and resources to meet these expanded disclosure obligations.

Moreover, companies must approach this task with a strategy that extends beyond mere compliance with mandatory requirements. It’s crucial for them to maintain credibility with their diverse stakeholders and to steer clear of practices that could be construed as greenwashing, especially in light of the Australian Securities and Investments Commission’s (ASIC) increasing scrutiny in this area.[3]

Businesses, whether directly affected by new reporting mandates or part of the supply chain, must prepare for evolving requirements. It’s crucial for board members and management teams to understand what’s relevant for their business in terms of reporting, recognising the effort and resources necessary to meet new standards. This involves identifying gaps in current reporting, gaps in data, and planning to achieve compliance and increasing ESG capabilities.

Even for companies not falling under one of the cohorts for mandatory reporting obligations, it’s important to assess the material impact of climate change on financial positions and disclosures. Proactive reporting on climate issues can be a strategic choice for organisations not mandated to do so, as it may attract investors who are increasingly concerned about climate risks, be a competitive advantage with customers, or reduce costs of funding or insurance.

Beyond compliance, effective climate reporting is seen as a strategic opportunity for showcasing an organisation’s value and resilience. Companies can’t rely solely on auditors for this transition; they should seek external advice and build internal capabilities. Integrating climate and sustainability into the broader business strategy is key for staying competitive and appealing to investors and customers in an increasingly decarbonising economy.

Insight authored by: Leylan Neep

Footnotes:

[1] See Climate Governance Initiative Australia  – A director’s guide to mandatory climate reporting, 2023, p2. (here)

[2] See Australian Government, The Treasury, Climate-related financial disclosure: Second consultation (here).

[3] See Australian Securities and Investments Commission (June 2023) Information Sheet 271 (INFO 271) How to avoid greenwashing when offering or promoting sustainability-related products.