How to prepare for mandatory climate reporting

Wednesday, 01 November 2023

Domini Stuart, Christopher Niesche, Narelle Hooper MAICD, Elise Shaw, Steph D’Souza

    New guidance has been released to help boards prepare for mandatory climate reporting. 

    Mandatory climate disclosures are the biggest change to corporate reporting in a generation, according to Australian Securities and Investments Commission (ASIC) chair Joe Longo. While the details of the government’s position are not yet finalised, the strategic direction is clear.

    The Climate Governance Initiative (CGI) Australia chapter, hosted by the AICD, has issued A director’s guide to mandatory climate reporting, a living document to assist directors in the considerable upskilling required as requirements progress. The guide and associated resources have already had 12,000 downloads reflecting member need and the scale of the change.

    In its foreword, Longo pushed for a concerted focus and investment by companies. “As stewards of long-term value, boards have a critical role to play in overseeing this shift to high-quality climate reporting, and building organisational resilience in the face of the escalating physical and transitional risks posed by climate change,” he said. “At its heart, good-quality reporting must be underpinned by strong and effective governance. Boards must think about both the risks and opportunities facing their organisation, now and into the future.”

    Directors will need to bridge the gap between their current climate disclosures and what will be required under the proposed mandatory regime, and determine their resourcing and prioritisation in advance. Australian Accounting Standards Board (AASB)–Auditing and Assurance Standards Board (AUASB) research around the annual reports of ASX-listed companies found climate-sensitive industries are more likely to voluntarily disclose climate-related information with extant reporting standards and/or guidelines, and companies in all industries are increasingly voluntarily recognising the importance of these disclosures to their investor stakeholders.

    “However, in no industries were disclosures at 100 per cent, with the lack of reporting and associated assurance commentary suggesting that there is an under-consideration of climate-related matters, or that such matters are not material to all listed entities, even some entities in climate- sensitive industries,” the report said. 

    Longo encouraged Australian directors and executives to show leadership at a critical juncture, noting that the most successful companies will not consider the requirements as a compliance exercise, “but an opportunity to demonstrate how they are building long-term value”.

    The CGI recommends directors consider climate governance structures, representations and disclosures in company materials, climate competency at board/management levels, and the data/systems needed to compile the reporting. “If gaps are identified, directors should work with management to... upskill, make technological investments and/or seek out external support.”

    Directors must exercise due care and diligence when overseeing the robustness of mandatory climate reporting systems and processes. This forms part of the directors’ broader duties and obligations under the Corporations Act 2001 (Cth), including ensuring that corporate disclosures present a true and fair view of the company’s financial position, performance and prospects. This obligation means even those organisations not initially covered by mandatory climate reporting might need to disclose material impact.

    In this feature, we capture the foundational steps for directors to act early on the proposal and approach climate reporting as a strategic opportunity rather than a “tick-box” exercise. We examine what the government has proposed to date, the requirements timeline, and practical steps to support mandatory climate reporting at a board level. We encourage directors to review the CGI guidance in full and related standards from international and domestic accounting bodies.

    What the government is proposing

    The Corporations Act already requires disclosure of climate-related risk in the financial and/or directors’ report if these disclosures are material to the financial position/prospects/performance of the company. In June 2023, Treasury proposed to require certain companies to make climate disclosures under the International Sustainability Standards Board Climate Standard (ISSB S2).


    Descending by size, three cohorts of reporting entities will be subject to the proposed requirements over three reporting periods:

    • 2024–25 onwards (commencing 1 July 2024), cohort 1 comprises public companies, registered schemes and large private companies that fulfil two of three thresholds: over 500 employees, over $1b in consolidated gross assets, or over $500m consolidated annual revenue. Reporting entities that are National Greenhouse and Energy Reporting Scheme (NGERS) “controlling corporations” that meet the NGER publication threshold are included in cohort 1.
    • 2026–27 onwards (commencing 1 July 2026), cohort 2 comprises reporting entities that fulfil two of three thresholds: over 250 employees, over $500m in consolidated gross assets or $200m in consolidated annual revenue. Reporting entities that are NGERS controlling corporations that meet the NGER publication threshold are included.
    • 2027–28 onwards (commencing 1 July 2027), cohort 3 comprises reporting entities that fulfil two of three thresholds: over 100 employees, over $25m in consolidated gross assets or $50m in consolidated annual revenue, plus all reporting entities that are NGERS controlling corporations, regardless of NGER publication threshold.

    What to report

    The content of the disclosures will be based on IFRS S2, which builds on the Taskforce for Climate- related Financial Disclosures pillars: governance, strategy, risk management and metrics and targets.

    Under the proposal, organisations will need to provide phased (limited and reasonable) assurances in the first three years of reporting, with the objective being reasonable assurance over all disclosures from the fourth reporting year, applying to all cohorts of disclosing entities from the reporting period commencing 1 July 2030.

    How to report

    The government proposes to require organisations to include climate disclosures in annual reports — specifically within the financial and directors’ reports. Listed entities are also given the option of reporting “metrics and targets” in a separate report, provided it is referenced in the directors’ report.

    The IFRS S2 also requires detailed disclosures of scope 1, 2 and 3 emissions. While directors are not expected to know the details of emissions calculations, they should have a broad awareness and understanding of their organisation’s carbon footprint, and be aware how data necessary for the disclosure of emissions is sourced.

    Failure to report or inadequately report will attract civil penalties, which the government proposes to introduce as provisions into the Corporations Act. In an effort to address liability concerns, the government is also proposing a three-year period of regulator-only enforcement for scope 3 emissions and certain forward-looking representations like transition planning. 

    Timeline to mandatory climate reporting in Australia

    • November 2021: ISSB announced at COP26 
    • March 2022: ISSB publishes S1 and S2 exposure drafts
    • March–July 2022: ISSB/AASB extensive consultation process
    • July 2022–April 2023: ISSB makes progress changes to S1/S2
    • November 2022–February 2023: ISSB/AASB extensive consultation
    • December 2022–February 2023: Treasury’s first consultation on mandatory climate reporting in Australia
    • June 2023: Finalised IFRS S1/S2 standards
    • June 2023: Treasury’s second consultation on mandatory climate reporting in Australia
    • Q4 2023 (indicative): AASB to issue exposure draft on ISSB alignment for consultation and Treasury to issue a final position paper
    • January 2024: Effective date of final IFRS S1/S2
    • Early 2024 (indicative): AASB to issue final Australian climate standard and government to introduce Climate Reporting Bill into Parliament
    • July 2024: First reporting period for which mandatory climate reporting in Australia applies 

    Practical steps

    Three pillars for director attention and action in readying their organisation for the next phase of climate disclosure requirements. 


    Approximately half of the companies within the ASX 50 are consciously integrating environmental concerns into their board charters, with a specific focus on their environmental impact as of 30 June 2021, according to the CGI. However, only 13 per cent of ASX 200 companies have made provisions to include “climate change” in their risk committee charters — 11 per cent making a similar gesture in their audit committee charters. For organisations that haven’t established a dedicated sustainability committee, such climate responsibilities often get relegated to either the risk or audit committees.

    Updating charters to reflect proposed disclosure requirements will support effective oversight and clearly delineate the role of climate considerations within existing structures. While the creation of specialised committees can augment a board’s efforts in prioritising climate- related risks and opportunities, the ultimate responsibility should reside with the entire board.

    Beyond this high-level governance, the on- ground execution of strategies pertaining to climate-related risks and opportunities rests with the organisation’s management team. It becomes essential for directors to have a clear line of sight into who shoulders these responsibilities — from understanding the role of the CFO in financial report preparations to the chief risk officer’s strategy in weaving climate considerations into broader organisational risk frameworks.

    Once responsibilities are allocated, directors must ensure performance incentives, remuneration structures and executive rewards are in alignment with the company’s climate-related objectives. Directors should remain proactive, ensuring they are equipped with a fundamental level of climate competency, possibly through structured briefings, formal education or even by diversifying the board composition to include climate expertise. Ensuring there is sufficient climate competency within board structures, including committees, is essential for supporting detailed climate disclosures. Directors, although not expected to be experts, should have an adequate level of climate literacy and be seeking to build their capability over time. A review of the board composition and the skills matrix might be required to identify and address any competency gaps. This can be supplemented with upskilling initiatives like boardroom briefings.

    If gaps are found in the identification of material climate-related risks and opportunities, directors could consider bringing in an external adviser. However, determining which risks are material remains a board-level decision. It is paramount for directors to ensure their materiality decision-making process is thorough and rational.

    Strategy and risk management

    Key to a company’s response to the changing climate landscape is its strategic approach. Every organisation must recognise, assess and report how climate-related risks and opportunities might reshape their business prospects. These evaluations need a short, medium and long-term lens.

    Broadly, risks fall into two categories. The first is physical risks, which arise from the direct impact of acute weather events affecting the likes of supply chains, physical assets, product delivery and service efficiency. The second category, transition risks, is more intangible. These relate to the broader shifts in the business environment as economies transition from fossil fuel dependence to a more sustainable low-carbon trajectory. Such shifts encompass regulatory changes, technological advancements and evolving customer preferences.

    The immediate financial implications of these risks are multifold. They could range from revenue disruptions due to extreme weather events, to cost implications emerging from new policy measures such as carbon taxes. Management will need to provide both qualitative and qualitative assessments of climate’s impact on business models, financial health and operational efficiency.

    The ISSB climate standard also requires disclosure of transition plans, including details of climate targets, such as the time period over which the target applies, any milestones and interim targets, and critically, how the target has been informed by the latest international agreement on climate change (currently, the Paris Agreement).

    A rigorous, science-based scenario analysis can underscore the physical and transitional consequences of climate change and demonstrate an organisation’s resilience to such impacts. Directors should expect management to showcase their due diligence processes and the reasoning behind every forward-looking climate disclosure.

    “Companies should do this not because they’re forced to, but choose to, because it’s a great way to communicate to the market and attract capital,” said ISSB vice-chair Sue Lloyd in the CGI guidance. “A company that is thoughtful on how it is managing sustainability risk and has a great transition plan should be able to attract capital.”

    Climate-related opportunities may present numerous benefits for businesses. A bolstered corporate reputation can lead to greater customer demand and revenue. Companies can also achieve substantial savings and improved operational efficiency through technological innovations and a more resource-efficient approach. From a cost perspective, by transitioning to low-emission energy sources, organisations can significantly reduce their annual energy expenses.

    Actively seeking novel market opportunities enables diversification of activities. Developing resilience and adaptability ensures businesses are better equipped to manage climate risks and capitalise on arising opportunities.

    Metrics and targets

    Measurement is the backbone of action. The IFRS S2 builds on the granularity of TCFD disclosures, introducing new metrics. The onus is on directors to critically evaluate the organisation’s processes for measuring greenhouse gas (GHG) emissions. They should be in a position to rigorously challenge the methodologies, assumptions and uncertainties inherent in these calculations.

    IFRS S2 mandates the disclosure of scope 1, 2, and 3 emissions. Scope 1 emissions derive directly from company controlled sources, such as owned vehicles and machinery. Scope 2 emissions emerge from purchased electricity consumed by the organisation. Scope 3 emissions encapsulate indirect emissions across the company’s value chain, from product conception to end of life. This includes both upstream and downstream emissions, with 15 categories defined by the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard.

    Calculating scope 3 emissions is complex due to the need for data beyond the company’s direct purview. These calculations introduce uncertainties, categorised into parameter, scenario and model uncertainties. Parameter uncertainty arises from data availability and quality; scenario uncertainty from varying methodological choices; and model uncertainty when used models don’t mirror real-world scenarios. IFRS S2 emphasises prioritising data derived from direct measurements over estimations. The scope 3 GHG protocol recommends providing exhaustive uncertainty disclosure to aid users, emphasising qualitative descriptions and quantitative visual tools.

    IFRS S2 delineates disclosure requirements, including judgements and choices in applying the GHG protocol, prioritising direct measurements over estimations. When utilising estimated data, primary activity data should be preferred.

    With the eventual ubiquity of mandatory climate reporting, organisations might consider introducing contractual obligations to ensure the accuracy/reliability of emissions data from their supply chains. Australian law states representations as to future matters will be deemed misleading or deceptive if, at the time they were made, there weren’t reasonable grounds for making them.

    Scenario analysis evaluates the potential change in temperature and the resulting physical and transitional impacts. Such analyses enable organisations to gauge their resilience and the robustness of their climate strategies against various climate scenarios. Investors utilise these scenarios and evaluations to incorporate climate risk into their investment decisions. The government plans to make scenario analysis mandatory for entities covered by the mandatory climate reporting regime. Initial steps would involve qualitative scenario analysis, at least two scenarios, with one aligned to a 1.5/2°C scenario in line with the Paris Agreement. This would evolve into a quantitative analysis by the 2027 reporting period. NFPs not under this regime should begin with qualitative analysis, progressing to quantitative elements as they advance further. 

    What directors should do to get ready now


    • Undertake a holistic review of board committee mandates and consider other climate governance structures and processes

    • Consider board climate competence and upskilling requirements

    • Consider the nature and frequency of reporting to the board in light of mandatory climate reporting requirements

    • Assess resourcing and prioritisation required to implement quality reporting

    • Periodically review governance structures and processes

    Strategies & risk

    • Identify climate-related risks and opportunities over the short, medium and long term

    • Assess current and future financial and strategic effects of climate change, including through scenario analysis

    • Set a climate strategy and develop a transition plan to manage risks and seize opportunities

    • Oversee communication of reporting

    • Monitor and review climate strategy

    Metrics & targets

    • Understand your organisation’s current carbon footprint

    • Identify gaps in data, processes and capabilities

    • Understand and get comfortable with assumptions, contingencies, uncertainties and judgements

    • Assess assurance and/or verification options noting mandatory assurance requirements

    • Monitor ongoing accuracy of targets and whether they need revision 

    Beyond compliance

    Why senior directors are considering and prioritising climate capabilities at their organisations — and abandoning the “tick-a-box” mindset. 

    “We’ve spent 100 years building a global economy powered by fossil fuels and that needs to be replaced within the next 10 years,” says Geoff Summerhayes GAICD, senior adviser at climate investment advisory Pollination and chair of Zurich Financial Services Australia and Beyond Zero Emissions, as well as the Climate Governance Initiative (CGI) steering committee.

    “Every aspect of the economy will change as we decarbonise. The disclosure requirements will help to unpack opaque risks in the system so that organisations can make more informed decisions about their position, the risks they may face and the opportunities that might arise. From a director’s point of view, I’d look at this less as a compliance burden and more a way of securing the competitiveness and sustainability of the organisation in a radically changed economy.”

    “Sustainability and addressing climate change is now a core part of any strategic conversation around the board table,” says Penny Bingham-Hall FAICD, non-executive director of Fortescue Metals Group, Dexus Property Group, Supply Nation and the Crescent Foundation, and chair of the CGI advisory committee. “It is not a ‘nice to have’ or a corporate function that sits to the side of operations and finance any more. How you manage environmental and social factors will determine your licence to operate and the long-term sustainability of your organisation.”

    AICD CEO and MD Mark Rigotti says the generational shift in corporate reporting will require leadership and focus from the boardroom down. “Remaining profitable and competitive in a decarbonising economy is a key strategic challenge and opportunity for Australian business.”

    Management capabilities

    David Armstrong GAICD, a non-executive director and chair of the audit committee at National Australia Bank and at insurer IAG, says boards will need the information for climate reporting well ahead of time so they can contemplate how it is handled. “There are many decision points, including what is material and how to present the information in a way most useful to readers. That requires having the information in front of you to be able to form that judgement. It’s quite complex, and you really need to start early. No-one’s really got the right answer just yet.”

    “Boards need to be aware of both the mandate and ISSB standards, be confident that their management teams are allocating appropriate attention to them and ensuring that data, processes and systems are in place and fit-for-purpose,” says John Stanhope AM FAICD, former chair of Australia Post. “Boards should stay closely involved in an ongoing oversight capacity and bear in mind that the limited supply of suitably qualified external advisory resources will be in high demand.”

    Directors should also note that Treasury’s recent paper also proposed mandatory assurance of climate-related financial disclosures, limited assurance on metrics and reasonable assurance of disclosures about associated governance. Boards should talk to their assurance providers now.

    Armstrong expects companies’ finance functions to be responsible for climate reporting because of their experience in completeness and accuracy. “We’re all still trying to operate in an environment of ensuring that accurate information is put into the market,” he says. “So whether it’s financial or non-financial, you still need to be able to make a judgement on the quality of backup. Non-financials are a little harder, but nonetheless, what is the basis for us being able to say what we intend to say in the non-financial space? Let’s evaluate that evidence.”

    He suggests companies avoid adjectives and adverbs in their climate reporting and says he can foresee a class action industry developing out of climate statements that don’t come to fruition.

    “Directors should be working with their CFOs to ensure they’re prepared for the mandatory reporting requirements, arguably the biggest and most significant change to financial reporting in decades,” says Bingham-Hall. “It’s a great opportunity for finance and sustainability teams to work together to unpack how their organisation will address the new disclosure requirements.”

    Amanda Heyworth FAICD, chair of UniSA Ventures and a non-executive director of Housing Choices Australia, and Heritage and People’s Choice, flags the additional workload it will demand. “For boards, it will be important to make sure the sheer volume of work in disclosing climate risk doesn’t become a distraction from the main game.”

    A true and fair view

    The CGI mandatory reporting guide emphasises the importance of presenting a “true and fair view” of material climate-related impacts on a company’s prospects, including cash flow, access to finance and cost of capital in short, medium and long term.

    “Directors apply similar thinking when they’re overseeing the preparation of general-purpose financial reports,” says Deloitte’s Rebekah Cheney GAICD. “IFRS S2 is about enhancing the connectivity between financial statements, which are at a point in time, and climate-related financial disclosures, which are forward-looking.”

    What should companies that aren’t facing immediate mandatory disclosure be doing now? “Climate risk is systemic,” says Summerhayes. “It will affect every aspect of both the economy and society. All firms have an opportunity to accept the direction of travel and embrace the transition as quickly as possible, potentially lowering their costs and maximising opportunities.”

    Entities not covered by mandatory climate reporting might still be required to disclose climate change risks and opportunities where they are material. “Directors need to consider what skills they have within their organisation to address the various risks and opportunities that climate change presents — or whether they need to bring in additional skills,” says Bingham-Hall.

    Integrated strategy

    As members of the Net Zero Banking Alliance, Australian banks already voluntarily monitor their carbon emissions and will welcome a common platform for climate reporting, says Armstrong. “The use of a consistent framework is certainly going to be a step in the right direction. The challenge with a common framework is that it probably won't meet everyone’s objectives.”

    Banks operate on two levels in terms of their emissions profile. The first is in relation to their own emissions, and looking to net zero as quickly as possible. “Then there’s the conduct of your business and the impact that has,” says Armstrong. “In banking, it comes down to fossil fuels and lots of interesting challenges.”

    Along with reporting emissions produced by its own activities and by generating the electricity it uses, a company will be required to report emissions produced by its suppliers and the customers in its value chain (scope 3 emissions).

    Companies must be confident the data from members of their value chain is accurate. Armstrong expects that rather than each company carrying out its own validation of each supplier and customer, a new shared regime will develop — something like the controls and custody reporting for fund managers.

    Companies will have more sway with Australian-based organisations in their supply chains, but might struggle with overseas entities “If it’s an international supplier of services, is Australia in aggregate a major customer of that international business? Are we going to be top of the tree for their attention on this problem? If there are reservations or inability to get access to reliable information, we’re just going to say that,” says Armstrong, adding that even when reporting standards come into force, there will still be changes to come, including for third-party confirmation of scope 3 emissions, which will become the basis of others being able to report. 

    This article first appeared under the headline 'Imminent Disclosure’ in the November 2023 issue of Company Director magazine.  

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