Mandatory Climate Reporting is Looming: Are You Ready?

In the rapidly evolving landscape of corporate responsibility and environmental stewardship, one certainty is changing boardrooms and C-Suites forever: Mandatory Climate Reporting. 

In a keynote speech to Deakin University earlier this year, ASIC Chair Joe Longo spoke about how important it is, “the growing interest in environmental, social, and governance (ESG) issues is driving the biggest changes to financial reporting and disclosure standards in a generation. This is a transformational issue for global markets, and we need to be ready to meet that change at every step of its development.”

Governments and regulatory bodies worldwide are stepping up their efforts to ensure businesses are transparent about their environmental impact, particularly their greenhouse gas (GHG) emissions. This transparency aims to provide stakeholders—investors, customers, regulators, and the community—with a clear picture of a company’s contributions to climate change and the measures taken to mitigate these effects.

These regulations are not just a trend; they are becoming a fundamental aspect of doing business. Countries like New Zealand and members of the European Union have already implemented stringent climate reporting standards. Japan, Singapore, and the United States are also moving in this direction, with some countries adopting stricter measures than others.

With the clock ticking towards the regulations’ implementation in our backyard, every Australian business leader should ask, “Are we ready?”

Understanding the ISSB’s role

Multiple stakeholders, including accounting boards, investors, multinationals, and regulators, have expressed frustration over the need for interoperability between various sustainability standards. Their two primary concerns are:

  1. Lack of Consistency: Different countries and organisations use various sustainability reporting frameworks, leading to a lack of comparability and transparency, especially for investors.
  2. Limited Focus on Materiality: Sustainability reports do not always emphasise the most financially material climate-related risks and opportunities for companies.

A harmonised global approach offers significant benefits:

  1. Streamlined Reporting for Companies: Simplifies the reporting process.
  2. Consistent and Improved Data for Investors: Enables more informed investment decisions across multiple jurisdictions.

The International Sustainability Standards Board (ISSB) develops and approves sustainability reporting standards for financial markets. It led to the development of the new International Finance Reporting Standards (IFRS), designed to create a common language for financial reporting. 

The first two standards issued, IFRS S1 and S2, outline the general and climate-related disclosure requirements for companies:

IFRS S1: Sets out overall disclosure requirements for sustainability-related financial information.

Companies must disclose sustainability risks and opportunities over short, medium, and long-term periods. These disclosures should provide insights into aspects such as cash flows, access to finance, and cost of capital. A key feature of IFRS S1 is its integration with general-purpose financial reports, ensuring that sustainability information is part of overall financial statements.

IFRS S2: Complements S1 by detailing specific requirements for Climate-related disclosures.

Companies must disclose climate-related risks and opportunities that could influence their prospects, including industry-specific metrics derived from the  Sustainability Accounting Standards Board (SASB) standards. 

Both standards build on and go further than the four pillars (governance, strategy, risk management, and metrics and targets) and 11 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). 

The risks to be disclosed include:  

  1. Transition Risks from shifting to a lower-carbon economy include policy/legal changes, technological advancements, market dynamics, and reputational issues.
  2. Physical Risks include acute risks like extreme weather events and chronic risks like rising sea levels.

Companies should also highlight opportunities such as resource efficiency, alternative energy sources, innovative products and services, market expansion, and resilience.

Aligning Australian standards with ISSB standards 

Following the ISSB’s announcement in June 2023, the Australian government initiated a consultation on implementing ISSB-aligned requirements in Australia. 

A proposed roadmap and timeline were released. They initially targeted the largest companies from 1 July 2024 and planned to expand to smaller companies over the next three years. This timeline has been adjusted, and Group 1 reporting is expected to commence on 1 January 2025. 

On 27 March 2024, Treasury incorporated the recommendations into an Omnibus Bill to adopt Australia’s version of ISSB S1 and S2. This Bill, named the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, integrates the reporting changes into the Corporations Act (2001) under the financial reporting obligations section (Chapter 2M). The Bill proposes that reporting begins on 1 January 2025 for the first tranche of organisations subject to the new obligations.

2025: Group 1  – Large Entities 

Entities meeting 2 of the following criteria:

  • $500m+ consolidated revenue
  • $1b+ consolidated gross assets
  • 500+ employees  

2026: Group 2 – Medium Entities

Entities meeting 2 of the following criteria:

  • $200m+ consolidated revenue
  • $500m+ consolidated gross assets
  • 250+ employees 

2027: Group 3 – Small Entities

Entities meeting 2 of the following criteria:

  • $50m+ consolidated revenue
  • $25m+ consolidated gross assets
  • 100+ employees 

The Bill passed the Lower House on 6 June and now sits with the Senate. Then Parliament has until 2 December 2024 to enact these changes into law. If the Bill passes after this date, the start will be deferred to 1 July 2025. 

It is also important to note that the Bill does not specify the precise reporting requirements. Instead, it outlines the key components required of organisations. The Australian Accounting Standards Board (AASB) defines the specific obligations and are currently in draft form. 

Organisations that must comply with regulations in other countries must rely on something other than Australian reporting standards to meet their international compliance. They will need to adhere to the regulations in each jurisdiction. While some countries follow the ISSB model, others do not. Currently, over 20 global jurisdictions have committed to adopting the standards, reflecting significant progress.

As a rule of thumb, US regulation is lighter, and EU regulation is more stringent. NZ already follows its own climate change reporting and may not opt into ISSB. 

Taking advantage of the 1 January 2025 extension

Although 1 January 2025 has yet to be confirmed as the official start date, the extension offers businesses a valuable opportunity. Many businesses still need to start, and for those that have, the additional six months provide valuable time to align their processes, systems, and governance structures with the new standards.

One key reason for this extension is the widespread recognition that many organisations needed more time to prepare adequately for the reporting requirements. 

This extension also allows businesses to view compliance as an investment rather than a cost, planning their efforts to create strategic advantages.

New Zealand, which implemented its comprehensive ESG reporting regime in 2023, provides valuable lessons. Even though it is not ISSB-aligned, it demonstrates the benefits of starting early in preparation.

Lessons from New Zealand

New Zealand’s mandatory climate-reporting regime began on 1 July 2023, starting with around 170 financial market participants, including registered banks, credit unions, and building societies with over $1 billion in assets. The requirements will extend to large listed entities, with expansion dates yet to be announced.

The regime is based on the TCFD’s four pillars (governance, strategy, risk management, and metrics/targets), which align closely with the ISSB standards and the draft Australian standards. A key takeaway is that preparation and early engagement are crucial for businesses to meet deadlines.

Board Engagement (Governance)

Early and regular engagement with the board was essential for several reasons:

  • Boards determine which disclosures can be made public.
  • Boards sign off on the reporting, requiring their satisfaction and approval.
  • Board support and education were necessary, especially for the hybrid qualitative and quantitative nature of climate reports.

A climate-aware board and business are seen as a competitive advantage and are viewed favourably by investors. Consequently, many organisations appointed a Climate Reporting and ESG Board sub-committee to oversee the process, a valuable consideration for Australian businesses.

Deep Engagement with Business Units and Suppliers (Governance and Process)

Deep engagement with business units and suppliers was also critical because of complexities in the process, including:

  • Reporting entities typically needed a project lead (0.5 to 1 FTE) for the preparation period, which was 18 months for NZ and will be shorter for Australia.
  • Major business units provided necessary data, requiring regular briefings. Again, education and support were needed to ensure engagement.
  • Intensive periods of data checking were common, with large organisations having up to 5-6 people working full-time during peak times.
  • Supplier data needed to be verified for integrity, emphasising the reporting entity’s responsibility for accuracy.
  • Additional time was needed to bring smaller suppliers on board to provide Scope 3 data.

Planning and Data Management

Adopting a bottom-up approach to planning was vital to ensuring a comprehensive and effective process. This approach helped identify governance, processes, systems, and data gaps. Scope 3 reporting is notably resource-intensive, requiring a mindset focused on progress rather than perfection. Conducting pre-assurance data testing was crucial to avoid receiving a Qualified Opinion from auditors.

Building a Data Integrity Culture

Focusing on data integrity over perfection is essential. Organisations must recognise that it will take time for high data quality and management to become standard practice.

Collaborative Approach

New Zealand’s External Reporting Board developed standardised scenarios and sector analyses and promoted a collaborative approach between regulators and reporting entities.

Critical Takeaways for Australian Businesses

These steps are essential for successfully navigating the upcoming reporting requirements:

  • Early preparation is critical.
  • Engage boards and stakeholders early and regularly.
  • Adopt a bottom-up planning approach.
  • Focus on data integrity.

Lessons from other jurisdictions

Japan

Japan is about to approve mandatory climate reporting, which will affect approximately 4,000 listed companies. Reporting will start in April 2025.A key takeaway is that Japan’s standards will align with international frameworks, namely the ISSB. This approach balances global alignment with regional considerations.

Singapore

Starting in 2025, all listed and large non-listed companies in Singapore will begin mandatory climate-related disclosures aligned with ISSB standards. Listed entities must report Scope 1 and 2 emissions from FY25 and Scope 3 from FY26, while large non-listed companies have a longer runway. 

The Singaporean government also offers Sustainability Reporting Grant Schemes to support large businesses and SMEs. For large companies with annual revenue of S$100 million or more, the Sustainability Reporting Grant covers up to 30% of qualifying costs, capped at S$150,000 per company.

Launching in late 2024, the SME Sustainability Reporting Support Programme will provide financial assistance over three years to help small and medium enterprises prepare their first sustainability reports.

Regional developments

In the coming years, we can expect more regional neighbours to introduce their own disclosure requirements, which will provide valuable lessons from their successes and challenges.

Critical preparation

We’ve identified and recommended seven essential steps for climate disclosure preparation:

Determine reporting status:

First, determine if your organisation falls under the mandatory reporting criteria, such as asset size or specific industry involvement. Even if not mandatory, consider the benefits of voluntary reporting. Early adopters often gain a competitive edge through enhanced transparency and stakeholder trust. The competitive advantage is that voluntarily reporting can distinguish your organisation as a leader in sustainability, potentially attracting more investors and positive public attention.

Review current disclosures:

Review current ESG disclosures to determine which parts align with the new climate-related requirements. Identify gaps where additional data collection or processes are needed. Separating new climate disclosures from other ESG reports is crucial because they require a specific Directors’ Declaration, ensuring higher scrutiny and accountability.

Establish robust governance:

Implement a clear governance model for climate disclosures, creating dedicated committees or subcommittees to oversee the process. Establish detailed processes for data verification to ensure the accuracy and reliability of disclosures. This may involve internal audits and cross-departmental coordination.

Review risk management frameworks:

Assess your current risk management frameworks to ensure they effectively address climate-related risks. Update these frameworks to integrate climate risk assessments comprehensively. Ensure that climate risk management is seamlessly integrated into the overall risk management strategy, providing a holistic approach to risk assessment.

Plan for Scope 3 emissions reporting:

Given its complexity and resource-intensive nature, begin sourcing Scope 3 emissions data as soon as possible. For Supply Chain Engagement, map out your supply chain and engage with suppliers early. This process involves briefing them about data requirements and working collaboratively to gather accurate information. Another efficient way is to implement a phased approach for data collection, which will avoid overwhelming suppliers. Make reasonable requests and provide support and education to ensure compliance.

Engage auditors for assurance:

Start by obtaining limited assurance from auditors on your climate disclosures. This will help identify any initial gaps or issues. As reporting matures, plan to move towards reasonable assurance, which will likely require hiring specialist climate risk auditors. This step is crucial for ensuring the credibility and accuracy of your reports.

Prepare for additional workload:

Climate reporting will add significant workload to existing financial reporting processes, impacting departments like Finance, Internal Audit, and Investor Relations. Conduct training sessions and regular updates for the Board, C-Suite, and other key stakeholders to ensure they are informed and understand the importance and implications of the new reporting requirements. This alignment is critical for successful implementation and compliance.

Board responsibilities for climate risk reporting

The board plays a crucial role in overseeing climate risk reporting. The Australian Institute of Company Directors (AICD) checklist outlines the necessary steps to ensure compliance and strategic alignment.

Step 1: Preparation and groundwork

  1. Review board mandate: Ensure the board’s mandate includes oversight of climate risk reporting.
  2. Assign governance structures: Establish clear structures and processes for climate governance.
  3. Board skills audit: Conduct a skills audit to identify gaps related to climate risk.
  4. Board education: Provide board members with education on climate risks and reporting requirements. Implement comprehensive ESG education across all business units to highlight ESG’s financial benefits and relevance. Regular stakeholder engagement and strong communication plans are crucial for effective ISSB reporting. The AICD offers excellent Climate Governance training courses for directors.
  5. Confirm reporting frequency and type: Decide on the frequency and type of climate reporting required.
  6. Identify resourcing needs: Determine the necessary resources for compliance based on management’s recommendations.
  7. Prioritise reporting requirements: Make climate risk reporting a priority within the organisation. Boards and executives must clearly communicate its significance.
  8. Review governance structures: Ensure that the established structures support the new reporting obligations and make them more robust if needed.
  9. Data storage: Support management in implementing systems to capture and store data for seven years.

Step 2: Strategy and risk requirements

  1. Strategy and risk assessment: Conduct thorough assessments of the organisation’s strategy and risks related to climate change.
  2. Identify risks and opportunities: Identify risks and opportunities across short, medium, and long-term horizons.
  3. Financial and strategic impact: Assess how these risks and opportunities affect the organisation financially and strategically.
  4. Scenario analysis: Ensure the organisation performs scenario analyses, including a 1.5°C temperature increase and a higher temperature scenario.
  5. Climate change management strategy: Develop or refine the organisation’s plan for managing climate change.
  6. Transition plan leadership: Appoint a leader for the transition plan to ensure smooth implementation.
  7. Stakeholder engagement: Engage with stakeholders to communicate and report on climate risks and opportunities.
  8. Monitor and review: Continuously monitor targets, progress, reporting quality, and compliance. Regularly review and reassess the organisation’s climate change transition strategy.

The board can effectively govern and strategically manage climate risk reporting by implementing these steps. While many of these steps will be performed by management, ultimate accountability rests with the board. The buck stops there.

C-suite responsibilities for climate change strategy

C-suite leaders responsible for their organisations’ daily operations must now extend their remit to include climate change considerations. This involves integrating climate strategy, risk and opportunity management, valuation, and data management into their responsibilities.

Leadership responsibilities

  1. Develop and implement climate strategy: Leaders must actively participate in developing and implementing the organisation’s climate change strategy, identifying and managing both physical and transitional risks and opportunities.
  2. Incorporate climate considerations into valuation: This includes understanding the financial impacts of climate-related risks and opportunities on future projections and prospects.
  3. Prepare climate reports and manage data: Leaders are responsible for preparing comprehensive climate reports and effectively managing the associated data.

Key actions for leaders

Double Materiality Assessment: start with a double materiality assessment, especially if this isn’t how they’ve conducted materiality assessments in the past. They must conduct assessments that reveal both the qualitative and financial impacts of climate change on the organisation. Double materiality involves understanding significant issues qualitatively and calculating their economic impact on the organisation’s forward projections.        

Data Mapping and Gap Analysis:

  1. Identify sources of Scopes 1, 2, and 3 emissions data and where data is missing or needs improvement.
  2. To accurately calculate Scope 3 emissions, map the entire supply chain, understanding its extent and complexity.
  3. Engage with suppliers to obtain necessary data, ensuring requests are reasonable and not prohibitively costly. Initial assessments may use spend/financial ledger data, but more detailed data will be required over time.
  4. Compile, analyse, and securely store all relevant data, ensuring it is stored for seven years per legal requirements. Notify ASIC about where and how the data is stored in the first year.

Stakeholder Engagement: Actively engage both internal and external stakeholders to gather data, input into strategy, and manage risks and opportunities.

Internal Audits and Third-Party Assurance: Conduct internal audits to verify the accuracy and completeness of data and calculations. Commission third-party independent assurance to ensure data integrity and compliance with standards.

Creating distributed ownership across the organisation and embedding these processes is essential for fully operationalising climate strategy and ensuring long-term success.

Key actions and timeline

Now that we understand the necessary preparations let’s consider what a typical timeline might look like for businesses that are starting immediately. Every organisation’s timeline will vary based on its stage of preparedness. Some may be mature in certain areas, with much of the work already done, while others may be starting from scratch. Another critical factor is the availability of internal resources to undertake the work across various functional areas. Fewer internal resources mean a longer timeline unless supplemented with external support.

This is why the initial assessment phase and gap analysis are critical. In this phase, with the help of external consultants, business leaders can assess their organisation’s readiness and create a comprehensive implementation roadmap that is realistic and tailored to their specific needs. Another consideration is the company’s financial reporting period. Whether it’s the classic July to June financial year or another variation, the reporting periods must align since mandatory climate reporting must integrate with financial reporting.

Generally, the actions fall into three key stages:

Stage 1: Audit & Plan

  1. Readiness assessment and gap identification: Start with a comprehensive evaluation to identify gaps.
  2. Early stakeholder engagement: Engage stakeholders early and provide education across relevant levels of your business and with key external stakeholders like suppliers.
  3. Double materiality assessment: Understand the expectations of your stakeholders, identify non-financial risks, and prioritise them.
  4. Governance and planning: Shore up governance and plan the necessary resources, systems, and processes for the next phase.

Stage 2: Implement & Embed

  1. Data collection and systems: Cement your data collection processes and systems.
  2. Scopes 1, 2, and 3 inventory and verification: Complete your inventory and verification for Scopes 1, 2, and 3 emissions.
  3. Scenario analysis and resilience assessment: Conduct scenario analyses and resilience assessments.

Stage 3: Optimise Impact

  1. Reporting and assurance: Bring your reporting together and ensure internal and external review and assurance.
  2. Stakeholder engagement: Re-engage all stakeholders to close the loop on the conversations started in Stage 1 and demonstrate the value created through your efforts.

By following these stages, organisations can effectively manage their climate reporting journey, ensuring compliance and strategic alignment while maximising the value of their investments.

Reframe: From compliance to competitive advantage 

By reframing mandatory reporting costs and efforts as a strategic investment, businesses can drive not only long-term value and resilience—a fundamental expectation of climate transition—but also achieve shorter-term high-value outcomes. There is a genuine competitive advantage to be leveraged.

Access to capital at lower costs:

The most apparent advantage is enhanced access to capital at reduced costs, as compliance satisfies lender demands and opens access to products like sustainability-linked loans.

Early adoption of best practices drives enhanced reputation:

Adopting or achieving best practices will enhance business reputation and brand value. When communicated effectively, this positively influences investors, customers, employees, and other key stakeholders.

Attraction, engagement & retention of talent:

Climate transition leaders attract and retain top talent, particularly younger workers who prioritise sustainability and seek purpose in their work.

Accelerated innovation for new market opportunities:

Sustainability drives innovation by encouraging and sometimes forcing the development of more sustainable products and services opening new markets and customer segments.

Operational efficiency:

Sustainability transformation often leads to increased operational efficiency, reduced waste, and lower costs. This is especially true for organisations that engage deeply with their supply chains, discovering unexpected efficiencies through conversations with suppliers at lower tiers. Thoughtful and well-planned integration of new ESG practices can lead to improved operational efficiencies, reduced costs in the long run, and better resource management.

Benchmarking to close performance gaps:

Benchmarking ESG data against peers, which mandatory reporting inherently delivers, helps identify performance gaps and sets more ambitious goals, strengthening overall business value.

Final key takeaways

Start early:

  • Prioritise board and team education, resource allocation, governance structure, data strategy and tools, Scope 3, and stakeholder engagement in the earliest phase.
  • Socialise implementation plans early internally to find economies of scale across other business activities.
  • Consider the potential consequences of delays, including increased costs from a late rush to meet deadlines.

Adopt an integration mindset:

  • Drive early cross-functional ownership of different aspects of climate transition practice and reporting to accelerate operationalisation. Early efforts won’t be perfect, but starting early is crucial.
  • Promote interconnected thinking around the social and governance aspects of climate transition, considering everything is interlinked.
  • Ensure climate risk management and strategy are integrated into overall risk management and business strategy.

Unlock strategic advantages: 

  • Recognise that this is a once-in-a-generation change that will forever alter how businesses operate and what is considered strategically critical.
  • Don’t view this as a compliance or box-ticking exercise. Elevate it to an incredible opportunity to transform your business into a force for good and long-term resilience.

Comply with confidence

Don’t let deadlines catch you off guard. Contact our team to discover how our experts can help you and your board seamlessly navigate these disclosure requirements and regulatory changes. We’ll ensure your organisation is not only compliant but also positioned for sustainable success. By starting now, your business will unlock the strategic advantages of proactive and comprehensive climate risk management.