As legislation makes its way through Federal Parliament, the middle market should know this “isn’t the end, it’s the beginning”.
At the recent Deakin Law School International Sustainability Reporting Forum, ASIC Chair Joe Longo made it clear that ASIC believes the implementation of mandatory climate disclosures “isn’t the end – it’s the beginning”.
It is important that middle market businesses consider the impact of these changes and what it may mean for them.
We’ve already pulled together for some practical tips to help keep businesses prepare reporting requirements. We’ve also unpacked what we expect those reporting requirements to look like and the changes that were announced when legislation was introduced earlier this year. While the best time to start these conversations may have been yesterday, the next best time is today.
Businesses might be (understandably) questioning why this matters for them. Especially when the Australian Government anticipates that 95% of SMEs will have ‘no material climate risks or opportunities’. Recent advocacy efforts by Chartered Accountants Australia and New Zealand (CAANZ) members on this topic have highlighted the compliance considerations and costs for SMEs.
The quantification of carbon emissions is broken into three scopes below.
| Scope 1 | Direct emissions from sources controlled by entity (such as burning of fuel from fleet vehicles/items of PPE) |
| Scope 2 | Indirect emissions from generation of electricity, steam, heating or cooling. |
| Scope 3 | Indirect emissions that occur in the value chain both upstream and down-stream |
Even where your business does not have a legislated requirement, you may be affected by Scope 3 emissions carbon accounting, as other businesses seek climate-related information from their supply chain and sales networks. In keeping with recent trends, it’s likely that we will see continued growth in the consideration of climate-related data as part of procurement and operational decisions.
By 2022 all ASX top 50 organisations were already reporting on sustainability and governance and many had built requests for such information into their standard terms of engagement. Additionally, climate, sustainability and other social measures are now increasingly being integrated into executive remuneration frameworks. All of this suggests a continued increase in the expectation that this information be readily available, as needed, and organisations should prepare their governance and reporting structures accordingly.
What are my first steps?
For businesses considering their requirements under the proposed climate-related reporting requirements, there are some practical steps you can take:
- Formally assign a governance body that will oversee climate-related risks and opportunities
- Formally appoint reporting responsibility to management
- Identify the controls and processes that management will use to monitor and oversee climate-related issues
- Determine how the business will identify, assess, prioritise and monitor climate risk, including creating a risk register capturing climate related physical risks and transition risks.
What are the types of relevant risks for a climate-related register?
| Climate-related physical risks | Driven by a short-term event (e.g. storms, heatwaves, floods)Driven by a long-term shift (e.g. droughts, biodiversity, water resource control) |
| Climate-related transition risks | Driven by the transition of the economy to lower-carbon outcomes and toolsIncludes policy, legal, technological, market and reputational risksCan have financial risks associated (e.g. reduced sales, impairment of assets, higher costs) |
How can I better prepare for the transition?
Mandatory requirements are very new and being very early-stage, they create uncertainty for businesses, directors and management. Starting your planning early and trying a “dry run” of any sustainability reporting before mandatory disclosure comes into effect can help businesses and their people understand the impact and identify any opportunities for improvement. Measuring a business’s climate impact can also enable effective monitoring and management of climate-based risks and opportunities.
Regulator guidance
ASIC has suggested that regulatory guides and resources will be available on its website to support businesses with preparing and using sustainability reports.
While ASIC has stated it intends to be cautious on its enforcement regime for climate related disclosures, they have been clear on their expectations that businesses will avoid misleading and deceptive conduct, particularly “greenwashing”. Businesses should therefore be alert to ensuring the accuracy and fidelity of any information disclosed publicly and having the systems, processes and governance structures in place to ensure the accuracy of any public disclosures.
Climate disclosures and assurance
The Australian Auditing and Assurance Standards Board (AUASB) is continuing to develop the relevant audit frameworks for climate related disclosures. The Board has planned a phased approach to the new disclosure expectations, starting with limited assurance requirements in the transition years. We will keep businesses updated on next steps and developments from ASIC as the auditing standards become clearer, and legislation is passed.
What’s next
The focus of recent ESG efforts has predominantly been on mandatory climate disclosures. But long-term trends and developing formal disclosure protocols for non-financial data suggest there is an increasing demand for biodiversity, nature and social impact disclosures too. While mandatory adoption remains a longer-term consideration, businesses can work toward a competitive advantage if they monitor and make improvements in these areas ahead of mandatory timelines.
While the standards and mandatory reporting is new, the role of directors and management in mitigating material risks and identifying opportunities is not. As regulators continue to show interest in monitoring non-financial information, the risks and opportunities for businesses will grow. Naturally, the importance of high-quality information and monitoring will grow too.
The next frontier appears to be nature-related impacts, highlighted by the Taskforce on Nature-Related Financial Disclosures (TFND)releasing its final recommendations late last year . The broad headings and format show a level of conformity with IFRS/AASB standards – which suggests mandatory and voluntary adopters of climate-related disclosures will be well-placed with future standards including the TFND.
If you or your business have any questions about what the new standards might mean for you, reach out to one of our experts today.
