How to complete your climate disclosure report

Monday, 01 May 2023


    With mandatory climate reporting soon to hit the Australian governance landscape, a panel of experts joined a recent AICD webinar to help directors grapple with the “alphabet soup” of acronyms and potential requirements. 

    For any director yet to lean into the implications of the mandatory climate-related financial disclosure regime soon to land in Australia, now is the time. That was the clear message from experts on a recent AICD panel, which coincided with the wrapping up of initial consultations for Treasury’s planned reforms to company reporting, which could come into play as early as 1 July 2024.

    While the specific design proposal is yet to be revealed, Chartered Accountants business reform leader Karen McWilliams GAICD told the session the government had committed to bring in “standardised, internationally aligned” climate- related reporting requirements, to be mandatory for large businesses first, and rolled out to smaller businesses over time. Although not entirely a new concept, as some Australian businesses volunteer climate-related disclosures, McWilliams and her fellow panellist, NAB non-executive director David Armstrong MAICD, agreed that the new obligations, which are based on the significantly more granular standards developed by the International Sustainability Standards Board (ISSB), would require greater detail from a broader cohort of businesses.

    These reforms come as global efforts ramp up to meet capital market calls for better quality, internationally comparable disclosures as a key part of managing the risks of climate change to the global financial system.

    Global reporting dynamics

    “There’s a bit of an alphabet soup of acronyms for the various governing bodies and frameworks,” said McWilliams of the evolving climate governance landscape. The place to start is the Task Force on Climate-related Financial Disclosures (TCFD) and the ISSB — both of which have informed Treasury’s proposals. 

    The TCFD, formed by the Financial Stability Board of the G20, issued a suite of 11 climate- reporting disclosure recommendations in 2017, aligned around four pillars — governance, strategy, risk management, and metrics and targets. Since then, global demand for TCFD-aligned disclosure has increased, with a growing number of jurisdictions mandating the framework for reporting. McWilliams said analysis found that about 40 per cent of companies globally reported against at least five TCFD disclosures. In Australia, where the TCFD framework is incorporated into guidance from governing bodies such as ASIC and the ASX, it’s used, in some form, by 63 per cent of 250 ASX-listed companies.

    Despite the rapid uptake, McWilliams said the variability in global adherence led to calls for greater international alignment and, as a result, the ISSB was formed in 2021 to consolidate the various reporting frameworks and establish a global baseline for disclosure standards.

    The ISSB, which sits effectively as a “sister board” to the International Accounting Standards Board, had so far unveiled a general sustainability requirement standard, and a climate-focused one, expected to be the first in a series of “thematic” sustainability standards, to be likely followed by biodiversity and human rights.

    McWilliams said the ISSB’s draft climate- focused standard, expected to be finalised in June 2023, with an effective date of 1 January 2024, was likely to form the basis of the mandatory climate reporting regime proposed for Australian businesses.

    Fast-forward for Australian business

    AICD head of policy Christian Gergis GAICD, the panel session host, said that while the ISSB’s climate standard builds on the TCFD recommendations, it’s far more detailed. “A fast- forward button will need to be pressed in order for organisations to do the kind of reporting contemplated by the ISSB,” he said, noting the varying levels of climate reporting maturity in the Australian market.

    Armstrong, also a non-executive director of IAG, warned that embedding the disclosures may “take longer than you think”. “Getting an organisation aligned around the TCFD’s four pillars... will throw up a lot of ‘unknown unknowns’, the sorts of things that... require an iterative loop,” he said. “Those organisations... that have been on this journey since 2017 have had the opportunity of evolving their approach, but as we move to perhaps a more regimented regime, it’s going to be much harder to respond quickly to the sorts of demands that the ISSB requirements will impose.”

    Early preparation critical

    While the net for Australia’s mandatory climate reporting will likely initially catch large listed businesses, Gergis says it’s an “open question” as to how far the regime will ultimately extend, and he counsels all boards to consider the gap between their current and future practices to meet the standards. The challenge, however, is that some key questions, central to Treasury’s ongoing consultation process, remain as yet unresolved.

    These range from where a company’s disclosures will need to live, what data will need to be captured, and what assurance will be required, through to the more elevated, such as what is the right balance between aspiration and firm commitment, how governance structures should evolve and where the liabilities will lie.

    On the practical side, Armstrong predicted standalone disclosures separate from annual reporting would be likely. Regarding assurance, McWilliams said that the aim would be for “reasonable assurance”, but said that “limited” would be the starting point, adding that a licensing regime may also be needed to ensure the independence and quality of assurance practitioners. 

    In relation to higher-level questions, Armstrong believed directors would find many of the answers by “setting the right strategy” and warned against applying a purely “compliance mindset” to the disclosure obligations.

    “Coming to a balanced view of how you transition... is quite fundamental to the strategy of organisations,” he said, adding that the governance structure adopted should reflect the strategy, as opposed to the other way around.

    “If you’re clear on what you’re trying to do, then the end product is disclosures,” said Armstrong. “It’s integrated and part of the day-to-day from a risk management, performance and targets point of view. If you’re receiving regular updates on how your business initiatives are progressing, then arguably your reporting is a by-product of the many other discussions that have taken place.”

    Strategic, rather than compliance mindset

    Another big challenge would be the likely need for directors to make forward-looking statements in climate reporting, despite the inherent high uncertainty. While it was important for disclosures to stick to the facts, Armstrong viewed aspiration as key. “The trend is clear in what we’ll be asked to do,” he said. “We’ve got to communicate effectively with our broader stakeholders... in a way that acknowledges the challenges of data, but equally addresses the concerns.”

    Gergis highlighted the legal risks entailed with moving to a more detailed disclosure regime where much of the material would be predicated on forward-looking, uncertain data, and called for pragmatic policy solutions to drive useful disclosure.

    McWilliams believes mandatory climate reporting would provide long-term advantages for businesses, by forcing a drilling-down into how to embrace the challenges emanating from climate change and how to remain relevant, profitable and sustainable in the long term.

    “For some organisations, it will give them a far more granular understanding of how the risks and opportunities of climate change can affect their strategy,” she said. “Some don’t see the impacts. They’re focusing on emissions without thinking how customer or employee preferences might change, [or]... how increasing frequency of floods or bushfires might affect supply chains... Trying to unpack those risks at a granular level is important. It’s not just a compliance thing, it’s understanding the risks and preparing to address them.” 

    AICD position

    AICD strongly supports the establishment of a climate reporting framework that provides for high- quality, useful disclosures, which align with the ISSB as the global baseline on climate reporting, and which support the attainment of Australia’s climate change goals.

    In terms of scope, the AICD considers that the initial tranche of reporting entities should cover those companies with the largest carbon footprint, namely the ASX 200, large private companies and public sector entities, emitters that report under the National Greenhouse and Energy Reporting Scheme, and financial institutions with assets or assets under management equal to or greater than $5b.

    Moving from voluntary TCFD- based reporting to mandatory ISSB-based reporting should not be underestimated. Reports on ASX 200 current climate reporting practices reveal that a significant lifting of disclosure practices will be required to meet the heightened disclosure standards of the ISSB. For instance, in 2022, only 14 per cent of the ASX 200 undertook a comprehensive measurement of scope 3 emissions, including operational, upstream and downstream scope 3 emissions; only 18 per cent reported on anticipated impacts of climate risk; and only 21 per cent undertook physical risk scenario analysis. Further, there are significant data and capability gaps on climate inputs, methodologies and assurance that will need to be addressed. Plugging these gaps will take time and resources.

    In the AICD’s view, a major issue for policymakers to address is crafting appropriate liability and enforcement settings. Critically, Australia’s existing legal framework differs from comparative jurisdictions such as the US, UK and Canada.

    In particular, Australia lacks safe harbour provisions for forward- looking statements, has strict liability for misleading or deceptive conduct and has a system where generally regulators, rather than shareholders, are charged with enforcing directors’ duties. These factors, coupled with the detailed, often forward-looking disclosure required under the ISSB standards, means that, without policy adjustments, Australian directors have significantly more liability exposure than their international counterparts when making climate disclosures.

    Currently, forward-looking statements are deemed to be misleading unless they are based on reasonable grounds. However, satisfying that test is particularly challenging in a climate context, which requires the making of long-term projections on matters subject to significant data gaps and uncertainty. For instance, while the ISSB climate standards require the disclosure of scenario analysis and transition plans, there is debate as to the appropriate inputs and methodologies for these processes. These legal risks have been a key reason behind the limited extent of climate disclosures in the Australian market and promise to encourage further “greenhushing” if left unaddressed.

    In the AICD’s view, preserving the legal status quo creates a material risk that mandated disclosures will fail to meet market expectations and undermine the desired policy objectives. This is particularly the case in circumstances where reasonable assurance (or even limited assurance) over climate disclosures is currently not provided.

    To address these issues, the AICD is advocating for proportionate liability settings to incentivise good faith, fulsome disclosures on a best endeavours basis, without removing appropriate accountability.

    Potential solutions include a safe harbour for forward-looking statements, safe harbour for scope 3 emissions, and regulator- only enforcement action during a transitional period. In addition, the AICD considers the government should clarify the statutory tests for reasonable grounds and reliance on external advisers in the climate change context. 

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