Sustainability and climate disclosures will be challenging – what you need to know now and 9 ways to prepare

Some experts say the sustainable finance framework underway will be as big a change in the reporting landscape as the introduction of the GST was in 2000. There are questions around the feasibility of the accuracy of Scope 3 emissions accounting and concerns about protection for company officers who’s acted in good faith with greenwash for instance. These are just some of the angles on the new sustainability and climate disclosure reporting regimes on the way.

It has been an intense start to the new financial year for boards and executives focused on impending updates to sustainability and climate disclosure reporting, with the Treasury’s consultation paper on mandatory disclosure of climate-related financial disclosures finally released.

This coincided with the International Sustainability Standards Board (ISSB)’s release of two standards for sustainability and climate-related disclosures, IFRS S1 and S2 respectively.

Simultaneously, the Australian Sustainable Finance Institute (ASFI) is working on Australia’s version of a sustainability taxonomy, setting up a technical working group to determine what activities are deemed sustainable as part of a concerted effort to tackle greenwashing and integrity concerns.

This is the first key steppingstone for Australia on its way towards establishing the sustainable finance framework, announced by Treasury and due to be released towards the end of 2023. This is regarded by some experts to be as big a change in the reporting landscape as the introduction of the GST was in 2000.

ISSB’s international non-financial disclosure standards are due to come into effect in January 2024. As recently as the start of July, the process of transferring responsibilities from the Taskforce on Climate-related Financial Disclosures (TCFD) to ISSB has commenced with the final handover of all roles and responsibilities set to be completed following the delivery of TCFD’s 2023 annual status report.

It can therefore be expected that entities already reporting in line with the TCFD framework are well advanced in their journey. However, it’s those impacted as part of groups 2 and 3 (earnings $50-$200 million) who are at risk of not being compliant.

With a likely 85 per cent not having begun what is generally a three-to-four-year process, these businesses must act now to meet their FY27 and FY28 deadlines respectively. 

It is important to note here that the ISSB standards are of a voluntary nature with many legislative regions implementing their own standards, such as the European Sustainability Reporting Standards (ESRS) from the European Union.

It is expected that any Australian mandatory reporting regime will incorporate most, if not all, requirements set out in the ISSB standards, and it is therefore critical for reporting entities to familiarise themselves with all aspects of these standards and conduct gap analyses of any current reporting.

Treasury consultation paper on mandatory climate-related financial disclosures

The current and second consultation paper put forward by the Australian Treasury seeks responses to questions around coverage, content, framework and enforcement of a mandatory climate-related financial disclosure regime.

The consultation proposes some key elements, including a generic description of an entity required to report, a phased approach to introducing mandatory disclosure, Treasury’s indicative position on the generic content of reports, the reporting framework and assurance, and details on liability and enforcement structures.

The Treasury does not propose a detailed disclosure standard; rather, this is the focus of the Australian Accounting Standards Board (AASB), which has its own roadmap and is expected to release an exposure draft in the second half of 2023.

The graphic shows key milestones in the development of mandatory climate-related financial disclosure requirements in Australia.

How the key elements of the proposed legislation will affect reporting entities depends on several factors:

• In the final stage of implementation, all ASX-listed entities of a certain size would be required to report their climate-related risks and opportunities. See table 1 for details.
• Depending on the size of the reporting entity, a phased approach is proposed by Treasury, beginning in Financial Year 2025 (1 July 2024 to 30 June 2025). See table 1 for details.
• Treasury indicates that AASB will heavily lean on the IFRS S2 Standard for climate-related financial disclosures. IFRS S2 provides detailed disclosure requirements on the governance and management of climate-related risks and opportunities, as well as strategies to mitigate risks and capitalise on opportunities. It requires detailed scenario analysis and forward-looking statements, underpinned by an ever-increasing list of metrics and targets that are to be third party-assured.
• Questions have been raised around the feasibility of the accuracy of Scope 3 emissions accounting, one critical element of the IFRS S2 standard, and forward-looking statements beyond a medium time horizon. The response from Treasury has been to propose a phased approach and limited liability for the first three reporting years – essentially, until reporting entities can be expected to include sufficient data.
• The proposal also includes details on third party assurance and the enforcement of the legislation as civil penalty provisions, providing protection for company officers and entities in civil proceedings where they have acted honestly and fairly. In May 2023, Treasury announced an additional $4.3 million for the Australian Securities & Investments Commission (ASIC) to continue its focus on greenwashing; work which is considered a significant precedent for what’s to come once this proposed legislation is enforced.

Best practice tips for keeping up with and taking action on sustainability and climate disclosure reporting requirements

The Treasury consultation paper suggests that the phased approach of implementing mandatory reporting should mitigate the risk of resource shortages. However, with labour shortages already presenting a big problem for many industries, this new reporting mandate has the potential to put further stress on the labour market.

Organisations are strongly advised to identify resource requirements as soon as possible.

Nine important actions to take now:

1. Identify any resource requirements and start closing any gaps as soon as possible.
2. If you have not started your climate-related disclosure journey yet, familiarise yourself with the current TCFD standard and look towards implementing a voluntary climate-related disclosure regime.
3. If you are already reporting in alignment with the TCFD standard, conduct a gap analysis between your organisation’s current disclosures and ISSB S1 and S2 standards.
4. Keep up to date with any changes in the industry with regards to new or upcoming regulations and keep an eye on what your leading peers are doing.
5. Expand your greenhouse gas (GHG) inventory accounting and include Scope 3 emissions for a complete value chain. Develop and carry out a data quality improvement plan to comply with the final stage of the proposed disclosure requirements.
6. Undertake regular reviews of your sustainability-focused statements, targets and outcomes to ensure they remain accurate.
7. Get your ESG data independently verified by industry experts and ensure you are accurately complying with any regulation.
8. Be open and transparent in your reporting and any assumptions used.
9. When setting long and short-term goals be ambitious but realistic. We highly recommend getting any targets independently verified.

Businesses need to act now to ensure they’re not caught out by these reporting requirements when the time comes. Conduct a best practice sustainability and climate disclosure reporting hygiene check soon, to ensure you are complying with regulations and do not risk being called out for greenwashing.

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