The pressing global need for climate action demands a transformative shift. As part of that global effort, leaders and their organisations must now prepare to transition from voluntary climate related disclosures, to mandatory governance and reporting.

The International Sustainability Standards Board (ISSB) has issued the IFRS S2 climate disclosures standard. In October 2023, the Australian Accounting Standards Board (AASB) released three draft climate-related financial disclosure standards which have ‘Australianised’ the ISSB standards.

The proposed climate reporting regime will form part of Australia’s broader sustainable finance framework and net zero transition commitments.

It requires detailed and quantitative disclosures of current and projected financial impacts of climate change, over short, medium, and longer term time horizons.

It will also be necessary to disclose climate impacts throughout the supply chain.

Commencing 1^st July 2024, a limited number of large Australian companies will need to begin reporting these disclosures as part of their Annual Report. Some companies may also decide to voluntarily report climate disclosures.

The number of Australian organisations required to complete mandatory Annual Reporting will progressively expand over several years.

Organisations that are not within the scope of the initial mandatory reporting may still be part of the supply chain for companies that are required to make disclosures.

This is likely to lead to organisations being asked to provide climate related reporting to their clients and business partners, even when they themselves are not part of the mandatory reporting regime.

What needs to be updated?

The revised standards will require in-scope entities to fully disclose their greenhouse gas emissions, alongside their approach to the identification of climate related risks, and the opportunities to mitigate these risks.

These will need to be presented through a series of amendments to their strategic plan, governance and risk frameworks and future reporting protocols.

These reporting requirements will align with the four-pillared approach of the ISSB standards, which include Governance, Strategy, Risk Management, and Metrics and targets.

As a consequence, the climate disclosure reporting requirements for in-scope entities will need to reflect the following key considerations.

Governance Considerations

Processes, controls and procedures that an organisation uses to monitor sustainability related risks and opportunities.

Strategy Considerations

Sustainability related matters that could enhance the business model and strategy over the short, medium and long terms.

Risk Management Considerations

How sustainability related risks are identified, assessed and managed.

Metrics & Targets Considerations

Information to explain the company’s performance on sustainability related matters over time. For example, Scope 1, 2 and 3 emissions.

Which areas are impacted by these changes

“In scope” for climate reporting refers to the specific aspects or elements of an organisation’s operations, activities, or investments that are considered relevant and included in the reporting framework.

Climate reporting is guided by frameworks and standards such as the Task Force on Climate-related Financial Disclosures (TCFD) or Global Reporting Initiative (GRI). Areas that are “in scope” for climate reporting may include, but are not limited to:

• Greenhouse Gas Emissions: This involves reporting on the direct and indirect emissions of greenhouse gases from an organisation’s activities. It includes Scope 1 (direct emissions), Scope 2 (indirect emissions from purchased energy), and Scope 3 (indirect emissions from the value chain).
• Energy Usage: Reporting on the energy consumption and efficiency measures within an organisation.
• Climate Risks and Opportunities: Identification and assessment of climate-related risks and opportunities that may impact the organization’s financial performance.
• Adaptation and Resilience Measures: Strategies and actions taken to adapt to the impacts of climate change and enhance resilience.
• Renewable Energy Investments: Information on investments in renewable energy sources and initiatives to reduce reliance on fossil fuels.
• Supply Chain Impact: Assessing and reporting on the climate-related impacts and risks within the organisation’s supply chain.
• Policy Engagement: Reporting on the organisation’s engagement with climate-related policies, regulations, and advocacy.
• Innovation and Technology: Highlighting efforts in adopting innovative technologies and practices to mitigate and adapt to climate change.

Greenhouse Gas Emissions – What are scope 1,2, and 3 emissions?

• Scope 1 Emissions: These are direct emissions from sources owned or controlled by the organisation.
• Scope 2 Emissions: These are greenhouse emissions from the purchase of electricity consumed by the organisation.
• Scope 3 Emissions: All indirect emissions that occur in the value chain of the reporting organisation. This includes both upstream and downstream emissions. There are 15 defined categories for the sources of these emissions.

Large organisations are likely to already be well advanced in their ability to measure both their Scope 1 and Scope 2 emissions.

The Australian government currently proposes that Australian based emissions should be reported and disclosed using methods consistent with the National Greenhouse Energy Reporting Scheme (NGER).

IFRS S2 requires calculation of scope 3 emissions in accordance with their GHG Protocol Corporate Value Chain Accounting and Reporting Standard.

What do these reporting changes mean for leaders?

Environmental, social and governance (ESG) challenges are driving the biggest changes to financial reporting and disclosure standards. As a consequence, requirements and expectations from investors and the public are evolving fast.

These changes will require leaders and their Boards to consider the following priorities.

Regulatory Compliance

The Australian Government is proposing that these disclosures are mandatory from July 2024 for in-scope organisations.

This will then start to trickle down through the related value chain as suppliers and customers provide data to organisations in their supply chain, with whom they have a business relationship.

Being proactive in developing a plan ensures that leaders and their organisation is prepared to meet any regulatory requirements.

Investor and Stakeholder Expectations

Investors and stakeholders want to understand how companies are managing climate-related risks and opportunities.
Having a clear plan for disclosures demonstrates a commitment to transparency and sustainability, which can enhance organisational reputation and attract socially responsible investors.

Risk Management

Climate change poses various risks and opportunities to organisations. Incorporating this consideration into enterprise-wide risk and governance frameworks better positions organisations to mitigate them effectively.

What opportunities do these changes offer?

Strategic Advantage

Companies that proactively consider climate change within their long term strategic and annual reporting frameworks can gain a competitive advantage. ESG considerations are increasingly top of mind for consumers.

Long-Term Sustainability

Developing a plan for climate-related disclosures is part of a broader strategy for ensuring the long-term sustainability of an organisation. It forms part of other changes to landscapes such as Covid, AI and cyber security that may impact long term viability.

Access to Capital

Organisations will increasingly find that financial institutions are integrating (ESG) criteria into their lending decisions.

Brand Image and Reputation

Environmental impact is integral to understanding an organisation’s approach to corporate responsibly. A genuine focus on corporate responsibility is linked to enhanced brand image and reputation.

Future Broader Reporting

Climate related disclosures are only the start, The Taskforce on Nature-related Financial Disclosures (TNFD), launched in September 2023, with modern slavery and human capital potentially following.

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