Global climate and sustainability reporting standards are coming

New international global reporting standards on climate change and sustainability are set to be finalised in early 2023. AICD Senior Policy Adviser Andrew Heath GAICD outlines what directors need to know. 

Around the world, company directors are responding to rapidly growing investor and stakeholder demand for high quality, comparable disclosure of the sustainability and climate-related practices of their companies. This is inhibited, however, by a lack of consistency across the competing array of non-financial reporting frameworks which currently exist. The AICD has long held the view that there is a need to consolidate these frameworks and produce a globally consistent reporting framework. Achieving this outcome will not only respond to investor and other stakeholder demands, but also allow companies to better benchmark their own sustainability practices and see where there may be room for improvement.

• New international standards planned to be finalised in early 2023 will move companies closer to a consolidated framework for non-financial reporting.
• The International Sustainability Standards Board standards will require disclosure of climate and sustainability governance, strategy, risk management and performance, including greenhouse gas emissions.
• The AICD has supported the draft standards, while highlighting opportunities for their improvement and key domestic implementation issues to be addressed.

In March 2022, the recently created International Sustainability Standards Board (ISSB), launched a global consultation on their exposure drafts for General Requirements for Disclosure of Sustainability-related Financial Information (Sustainability Standard) and Climate-related Disclosures (Climate Standard).

Separately, the Australian Accounting Standards Board (AASB) conducted its own consultation on whether, and if so how, those standards should be implemented in the domestic market.

The consultation period for the ISSB and AASB has recently closed, with the AICD playing an active role (our submissions are available here). According to ISSB Vice Chair, Sue Lloyd, speaking recently at the AICD’s Climate Governance Forum, the ISSB standards are set to be finalised in early 2023.

Albanese government commitment to climate reporting

It is important to recognise that the ALP went to the May election with the policy intent to work with large businesses to provide greater transparency on their climate related risks and opportunities.  On 16 June 2022, Prime Minister Albanese and Climate Change and Energy Minister Bowen, reaffirmed this approach in a broader climate announcement, stating they would be introducing “new standardised and internationally-aligned reporting requirements for climate risks and opportunities for large businesses”.

With this in mind, it is likely that the ISSB standards would be used as the basis for any Australian standard on climate or broader sustainability. It is also expected that the implementation process will start with large listed companies, as well as heavy carbon emitters in the case of climate disclosure.

Mandatory climate reporting is expected to be an early focus of the Albanese government, so directors and executives of larger companies should be preparing for that eventuality. It is likely that any reporting requirements would follow closely the Climate Standard currently being consulted on by the ISSB.

What do the draft Standards propose?

The draft ISSB Standards, at their core, require the disclosure of practices across four areas:

• Governance — the governance processes, controls and procedures a company uses to monitor and manage their sustainability and climate-related risks and opportunities;
• Strategy — the approach for addressing sustainability and climate-related risks and opportunities that could affect a company’s business model and strategy over the short, medium and long term;
• Risk management — the processes a company uses to identify, assess and manage sustainability and climate-related; and
• Metrics and targets — information used to assess, manage and monitor a company’s performance in relation to sustainability and climate-related risks and opportunities over time.

While this proposed structure is sound, the AICD has noted that within the Sustainability Standard, the central definition of ‘sustainability-related financial information’ is unclear because a definition of ‘sustainability’ is not provided. The AICD believes that for the standards to provide sufficient clarity, they require the ISSB to propose a definition of ‘sustainability’, using the UN definition as a starting point for consultation.

Climate-related disclosures

The Climate Standard draws heavily on the well-known Taskforce on Climate-Related Financial Disclosures (TCFD) framework favoured by Australian and global regulators and investors.

Of particular note, the Climate Standard requires disclosure of both general metrics (referred to in the Standard as ‘cross-industry metrics’) as well as industry-based metrics. The general metrics will include disclosure of greenhouse gas emissions in terms of absolute gross emissions and emissions intensity (the latter being metric tonnes of carbon dioxide per unit of physical or economic output). The greenhouse gas emissions disclosure is further broken down into three classifications:

• Scope 1 emissions — Direct greenhouse gas emissions that occur from sources that are owned or controlled by a company;
• Scope 2 emissions — Indirect greenhouse gas emissions that occur from the generation of purchased electricity, heat or steam consumed by a company; and
• Scope 3 emissions — Indirect emissions outside of Scope 2 emissions that occur in the value chain of a company, including both upstream and downstream emissions.

In particular, for most companies, Scope 3 emissions will be difficult to confidently report on, given the lack of agreed methodologies and the challenges posed with relying on the emissions data of others in the value chain.

The planned industry specific emissions disclosures, based on the Sustainability Accounting Standards Board (SASB) standards, are also very detailed and prescriptive, and would require a major change in current practices for many Australian entities.

AICD reflections

The AICD has strongly supported the principle of harmonised international sustainability standards under the ISSB umbrella and has urged a consistent approach across jurisdictions. Our submissions (available here) were informed by extensive stakeholder engagement as well as participation in a cross-industry “Australian Voice” letter to the ISSB which demonstrated a high degree of consensus within our market.

The AICD’s key points to the ISSB and AASB were as follows:

Prioritising the Climate Standard: We have supported climate change being identified as the first area to be the subject of a specific ISSB standard. With a vast array of regulatory and disclosure initiatives on climate taking place globally, there is considerable value in pursuing a harmonised approach across jurisdictions.

Australian legal environment: There are unique aspects of the Australian legal environment that if not addressed, will hinder good faith adoption by companies. Liability settings for the kinds of forward-looking statements contemplated by the standards will need to be calibrated appropriately, or else risk unhelpful, generalised disclosures that will not meet investors’ expectations. Given the unique aspects of the Australian legal environment, we sought specific legal advice from Herbert Smith Freehills on issues regarding potential Australian implementation (the legal advice is available in Attachment D to our AASB submission).

Considerable uplift in practice, capability and data needed: We have urged a carefully designed phased-in approach that recognises the considerable uplift in practice and capability that will be required in Australia, in addition to addressing current data and workforce skills gaps. Appropriate transitional arrangements will need to be developed that recognise the extent of preparatory work required. In our view a minimum two-to-three-year phase in period may be required.

Capable of reasonable, independent assurance: We have strongly recommended that further work be done to clarify and refine the standards, so that they are capable of reasonable, independent assurance. Currently, the draft standards would be very difficult to assure. Without such assurance, the value of the standards would be considerably diminished.

Need to push harder for harmonised standards: While the ISSB standards have the potential to achieve consolidation, the drafts incorporate by reference existing ESG reporting regimes. In particular, the SASB standards play a prominent role in the ISSB’s framework and would be challenging to implement, given limited adoption in the Australian market, according to a recent KPMG report.

Next steps

The ISSB has said that it wishes to finalise the standards in early 2023, with any Australian implementation process likely to accelerate thereafter, subject to any policy decision of government.

The AICD will continue to engage with our membership, government and stakeholders about the proposed Standards as their development is progressed internationally and domestically.

In the meantime, for practical resources on effective climate governance, we encourage you to access the Climate Governance Initiative hub of our website.