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: Lack of Consistency: Different countries and organisations use various sustainability reporting frameworks, leading to a lack of comparability and transparency, especially for investors. 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: Streamlined Reporting for Companies: Simplifies the reporting process. 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: Transition Risks from shifting to a lower-carbon economy include policy/legal changes, technological advancements, market dynamics, and reputational issues. 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
