On 23 October 2023, the Australian Accounting Standards Board (AASB) issued three for-consultation draft climate-related financial disclosure standards (collectively, the Draft Australian Climate Standards). The Draft Australian Climate Standards largely mirror the International Sustainability Standards Board (ISSB) Standards, with a few Australian-specific modifications to address legal and practical nuances and to reflect the Government’s proposal for mandatory climate reporting.

    What are the Draft Australian Climate Standards?

    The Government is proposing to mandate climate reporting, based on the International Sustainability Standards Board (ISSB) standards, for certain Australian organisations, likely commencing from 1 July 2024.

    The ISSB standards are currently comprised of the ISSB General Sustainability Standard (IFRS S1) and the ISSB Climate Standard (IFRS S2), and are intended to set the global baseline for sustainability reporting, commencing with climate. IFRS S1 and IFRS S2 were issued in June 2023 following an extensive global consultation process.

    The Australian Accounting Standards Board (AASB) has been tasked with the adaptation of the ISSB standards, as they apply to climate, into the Australian context.  On 23 October 2023, the AASB issued the for-consultation Draft Australian Climate Standards.

    The Government has proposed that certain companies will be required to report under the Draft Australian Climate Standards, with the first cohort of companies, comprised of the largest listed and private companies, financial institutions and emitters, required to report from 1 July 2024.  For more details on who is covered by Treasury’s mandatory climate reporting proposal, see this article.

    A failure to comply with these standards is proposed to be a civil penalty. Critically, in recognition of the liability concerns of directors and organisations (including those expressed by the AICD – see a summary of the AICD position on Treasury’s First Climate Reporting Consultation and Second Climate Reporting Consultation), the Government has proposed a three-year period of regulator-only enforcement to give organisations time to transition to the ambitious new regime without undue private litigation risk.  

    How are the Draft Australian Climate Standards different to the ISSB standards?

    As expected, the Draft Australian Climate Standards largely mirror the ISSB Standards, with a few Australian-specific modifications to address legal and practical nuances, and to reflect what has been proposed by Treasury.

    A summary of the key differences between the Draft Australian Climate Standards and the ISSB standards are set out below:

    • Materiality: The Draft Australian Climate Standards require those entities that conclude that climate-related risks and opportunities are not material to explain the basis of this conclusion. This disclosure is not required under the ISSB Standards.
    • Scope 3 emissions: The Draft Australian Climate Standards introduce a number of relief mechanisms which seek to reduce the burden of scope 3 emissions reporting. This includes allowing, in certain circumstances, the use of data for the immediately preceding reporting period; removing the requirement to disclose against all 15 categories of scope 3 emissions required under ISSB Climate Standard; and removing the mandatory requirement for those in the asset management, commercial banking and insurance activities to make financed emissions disclosures (entities in these industries are only required to consider the applicability of these additional disclosures).
    • Climate resilience/scenario analysis: The Draft Australian Climate Standards require entities to make climate resilience assessments against at least two climate scenarios, one of which must be consistent with the most ambitious global temperature goal set out in the Climate Change Act 2022 (i.e. keeping temperature increase to 1.5 degrees above pre-industrial levels). In contrast, the ISSB Climate Standard (IFRS S2) does not specify the number or type of climate scenarios to be used, although it does require an assessment of whether the entity has used a climate scenario aligned with the latest international agreement on climate change.
    • Industry-specific disclosures: The Draft Australian Climate Standards remove the requirement for entities to refer to, and consider, industry-based metrics, including Sustainability Accounting Standards Board (SASB) metrics.  Rather, the Draft Australian Climate Standard states that entities may elect to refer to, consider and apply well-established and understood metrics associated with particular business models, activities or other common features that characterise participation in an industry, as classified in the Australian and NZ Standard Industrial Classification (ANZSIC).
    • Greenhouse gas (GHG) emissions disclosures: The Draft Australian Climate Standards make various changes to the methodologies required to be used for the measurement and reporting of GHG emissions to avoid regulatory burden and to align with existing National Greenhouse and Energy Reporting Scheme (NGERS) requirements.
    • Scope:  The Draft Australian Climate Standards extend to cover not-for-profit entities, whilst the ISSB standards are directed at for-profit entities only. It remains unclear whether Not-for-Profits will ultimately be covered by the mandatory regime. The Standards may have been drafted to cover NFPs to allow for their voluntary adoption in that sector. In addition, the ISSB General -sustainability Standard (IFRS S1) has been adopted into Australia only to the extent it applies to climate-related disclosures.

    Implications for directors

    With mandatory climate disclosures likely to commence from 1 July 2024, directors have a key role to play in overseeing the transition to mandatory climate reporting, which ASIC Chair Joe Longo has called “the biggest change to corporate reporting in a generation.”

    To assist directors prepare, the AICD, in partnership with its Climate Governance Initiative (CGI) Australia partners Deloitte and MinterEllison, has produced A Director’s Guide to Mandatory Climate Reporting.

    The Guide outlines the proposed Australian mandatory reporting framework, sets out the key legal obligations for directors, and provides practical steps directors can take to ready their organisations for the commencement of the mandatory climate reporting regime.

    The resource has been informed by consultation with policymakers, regulators, industry experts and the director community, and features a foreword from ASIC Chair, Joe Longo, commending the Guide to all directors.

    We have also produced a concise snapshot of the Guide and supporting fact sheets on key topics such as scope 3 emissions and the potential application of US and EU reporting requirements which can be accessed here.

    These resources have already been downloaded over 13,500 times, indicating the scale of the reform ahead.

    What’s next?

    Submissions on the Draft Australian Climate Standards close on 1 March 2024. In the meantime, we are expecting Treasury to release its final position on Climate Reporting before the end of the year. We understand that notwithstanding the tight timelines, the Government is proposing to maintain a 1 July 2024 commencement date for the regime (for the largest public and private companies, financial institutions and emitters).

    In other relevant developments, on 2 November 2023, the Government issued its long-awaited Sustainable Finance Strategy (Strategy) for consultation.  The Strategy sets out 12 key priorities underpinned by three ‘pillars,’ being: (1) improve transparency on climate and sustainability; (2) financial system capabilities; and (3) Government leadership and engagement. The Strategy seeks to drive and support private sector decarbonisation in Australia, with mandatory climate reporting serving as the foundational bedrock underpinning the Strategy. Other key priorities set out in the Strategy include the development of a sustainable finance taxonomy, supporting transition plans, developing a labelling system for ‘sustainable’ investment products, and addressing data challenges.  

    We will be publishing a separate article on the Sustainable Finance Strategy in the coming weeks, with consultation on the Strategy closing on 1 December 2023 (the AICD intends to make a submission).

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