Business prepares for mandatory climate reporting amid “ESG squeeze”

In the lead-up to the introduction of mandatory climate reporting from 1 January next year, the Climate Governance Forum 2024 (CGF2024), which attracted nearly 2,000 registrations in person in Sydney and virtually, encouraged directors to get started with reporting, to consider all stakeholders and to be transparent and accountable in communicating actions.

Organisations need to engage with stakeholders to meet their expectations on climate actions as reporting is set to become mandatory, said CGF2024 keynote speaker James Graham AM FAICD, chair of Coles Group.

The mandatory climate reporting bill — Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) — was passed by the Senate on 22 August, with the Bill expected to be passed in the House of Representatives in the September sitting period. The landmark legislation will require relevant organisations to make detailed disclosures about their climate-related risks and opportunities, commencing with the largest emitters and corporations from 1 January 2025.

In order to prepare for the changes, conversations and engagement are important, with customers “concerned about our progress”, said Graham. “We are on the journey. A clear climate action roadmap is essential, along with a desire for innovation. Everything we do must build trust among all stakeholders.”

On target-setting, Graham said, “there has to be ambition”, along with an understanding of what commitment really means.

“Coles has a lot of resources and people engaged in the market to help us with understanding the risks and the opportunities. Data is key, because it can’t be a matter of hope. The business strategy must be reasonable, but ambitious. We’re broadly on track, but we monitor quarterly and see where we are and what we need to do, and this leads to the board feeling we are well-informed.”

The Coles chair said the supermarket giant is working closely with its 8,000 suppliers to cut emissions by 75 per cent by 2030 and to net zero by 2050. It has already achieved a 34 per cent reduction in emissions.

It has installed solar power at 100 stores and distribution centres and has set a target to achieve 100 per cent renewable energy usage by the end of this financial year.

“This is just the beginning,” Graham told the forum. Coles is now turning its attention to emissions in its value chain generated by forest land and agriculture. Scope 3 emissions represent 90 per cent of its total emissions profile and 82 per cent of this is generated by purchases of goods and services.

“There are a range of challenges in Scope 3 emissions,” he said.  Coles is asking 75 per cent of suppliers to reduce their emissions by the end of the 2027 financial year. However this target relies on supply partners to provide relevant information.

In logistics, Coles has cut emissions by converting road transport to rail options. In the last financial year, transport partner Linfox converted road transport to rail in South Australia and the Northern Territory and achieved an emission cut of 16 times in emissions for every kilometre of rail travelled.

The Coles Nurture Fund also supports suppliers committed to sustainability and last year the company supported nine suppliers with grants.

Coles has a clear climate action roadmap to be more engaged with suppliers as part of its  whole value chain integrated solution.

“This is the journey we are all on now.”

Federal government inquiry

On the day that CGF2024 was held, Minister for the Environment and Water Tanya Plibersek and Treasurer Jim Chalmers announced the federal government had tasked the Productivity Commission to lead an inquiry into opportunities to boost circularity across the Australian economy.

In a circular economy, materials and products are kept in use longer, including by designing longer-lasting and recyclable products, and by boosting waste and recycling infrastructure. The inquiry will explore sustainable solutions that are good for the environment and good for business — helping to cut waste going to landfill, while also encouraging more efficient use of raw materials.

Plibersek joined CGF2024 via a video link. “We should be getting better life from the materials that we use,” she said.

Solar panels, for example, are ending up in landfill. “Demand is there for the future for recycling, but we want to know, what do we need to do now to make that happen?

“We can’t say we’ll never cut down another tree and we have to balance the economy with what’s needed… but if we can more than compensate for that nature loss, that is what we want to aim to do.” That was sometimes difficult to convince businesses to do.

Plibersek noted that while the government had no immediate plans to mandate biodiversity and nature reporting by corporates, it was clear this is an area where there is increasing global and domestic focus.

AICD CEO and managing director Mark Rigotti MAICD said directors and boards must adapt to the fast-moving nature of climate governance and the climate competency required, as it has been called the biggest economic transformation since the industrial revolution.

He welcomed the passage of the mandatory climate reporting legislation through the Senate in Australia and said the AICD had worked hard to make sure that the legislation would work for all different sectors of the economy.

“We are really pleased to see that the final legislation strikes a sensible and pragmatic balance, putting the onus on ASIC to stamp out bad behaviour. Yes, new climate-related reporting obligations will create new requirements for all of us, but they will also create opportunities and shine a light on how competitors and others are tracking on their decarbonisation pathways.”

He said expert assessments show that the world is significantly off course to meet the Paris Agreement goal of limiting global warming to 1.5 degrees Celsius, which would lead to increased expectations on corporations from investors, staff, customers and the broader community.

Directors must move from climate ambition towards navigation of the issue. The key message for directors is that climate change is intrinsic to strategy and risk management. Directors must work with management on ensuring that the “hard skills” such as finance, legal and audit are brought together on the issue.

Companies will need to make a “step change” and provide more granular detail on climate disclosure.

In this year’s Climate Governance Study 2024: Moving from vision to action, co-produced by the AICD with Pollination, a survey showed that 80 per cent of directors see the issue of climate change as a material risk but less than half are confident that their boards have the experience to address the issue. “We believe this is due to the complexity of the issues and policy uncertainty,” said Rigotti. “Climate change needs to be firmly embedded as an issue.”

Moving forward

In the panel discussing mandatory climate reporting, Stockland sustainability committee chair Andrew Stevens said the company had been voluntarily reporting for years and would now undertake gap analysis with the legislation. He suggested that organisations that are not well advanced in their preparations for mandatory climate reporting could consider developing a measuring process, look at boundaries (operational and financial, as they are quite different), work out how to estimate and measure carbon emissions and align incentives and remuneration to meeting targets being set.

“Don’t make outlandish claims and say what you don’t know,” said Stevens. “The moral of the story is you can only disclose what you have done. There is work to be done, but realise that the opportunities outweigh the risks. Learn along the way.”

ASIC Commissioner Kate O’Rourke said, “We recognise the scope of this change,” adding that ASIC chair Joseph Longo has previously described it as “the biggest in a generation”.

ASIC understands the transition required, said O’Rourke. ASIC would be “pragmatic and proportionate” in its enforcement approach and take action on “really egregious breaches” it sees in relation to climate change reporting. “This is not about nit-picking everything that people say. We see this as kind of an ecosystem. We're all in it together.”

Timothy Stutt, a partner at Herbert Smith Freehills, highlighted the uplift in reporting that the new regime would require and said companies have to have reasonable grounds for their future-looking claims and be able to substantiate them. Unpeeling some of the layers and putting assumptions in context would help organisations to show where there were areas of key uncertainty.

ESG pressure

AICD chair Naomi Edwards FAICD said recent recalibrations of targets by some organisations was more of an ESG “squeeze” than a “backlash”. “As reporting becomes normalised, maybe we will all be tweaking our targets,” said Edwards. “It’s a shift, not an abandonment.”

Non-executive director Ming Long AM GAICD suggested there was a lack of understanding in the community that change is required. “Change is hard for people, but where things are worth doing, there will always be pushback. Climate change is the most disruptive thing impacting the planet, pervasive in everything that we do. Directors need to understand that people are scared. We need to listen to their concerns, communicate and be transparent about the journey we are on and take them with us,” she said.

Non-executive director Ken Dean FAICD noted that “perfect is the enemy of good” when it comes to climate and “there is real value in starting” an organisation’s journey. Mandatory reporting “ups the temperature, particularly for boards”, said Dean, and organisations need to be sure, more than ever, about their ability to deliver.

“Make sure there is meaningful disclosure,” he said. “There’s an order of magnitude that makes it more difficult for some industries compared with others. Don’t be surprised if that causes management and boards to be more conservative.”

Investing in the future

The most popular question during the panel on investing in the future – regarding boards, investors and climate change – related to how we can address the problem that companies and investors appear to be underestimating the systemic risks of climate change.

“Slowly and carefully,” said Philip Foo, vice president APAC research and engagement at CGI Glass Lewis. “Demonstrate your commitment and build a reputation.”

Jun Bei Liu GAICD, portfolio manager at Tribeca Investment Partners, said, “Set the plan, set the framework and engage with all the parties. Don’t get distracted by short-term changes.”

For the listed market, it is essential that companies “be transparent”, because “investors don’t like to be surprised”, she said, noting that investors might consider the benefits of encouraging businesses to improve rather than divest assets. Forcing the selling of assets in order to achieve targets was not solving the problem, but instead moving it into private hands.

Damian Graham GAICD, CIO at Aware Super, said boards in all sectors need to show understanding of the issue and how they are working through it. “Whether they’re private or public, we look to ensure that we understand their strategy around the transition and how they’re going to ensure that their businesses are robust from a long-term perspective,” he said.

“As a bit of a counter… we’ve had much more effect on transition planning in the private market than we have in the public markets, where it’s been more complex,” he said.

Investment processes are still evolving, particularly in the context of Australian asset owners. Graham acknowledged that sometimes there are differing views among investors on how a portfolio company manages climate risks and that approaches are maturing with time. Policy settings are also relevant, especially sectoral pathways currently being developed by the federal government.

Aware’s approach was generally not in favour of divestment from climate risk exposed companies, except where it was deemed as jeopardizing long term returns - such as the decision to remove thermal coal producers from their investment portfolio.

Jun Bei Liu agreed the investor community is evolving: “It’s very hard for us to sit here and say, ‘We’re going to invest in transition policies, but we will not see any return for a very long time.’ That is very difficult to stack up for any investment,” she said. However, fortifying a business during the transition would make it stronger in the long run, and investors are increasingly recognising this. “We are getting better at understanding the change,” 

Boards need to have a clear narrative and be able to adapt to the challenges. “If you’re dealing with climate change as material ... when you’re getting poked externally on climate change, you might be tempted to rule with an iron fist. But I’d encourage boards to look to someone who’s diplomatic and open to engage on these issues. If you take that approach, you’ll find you’ll have much greater support from shareholders.” said Foo.

Not-for-profit considerations

The NFP session at the forum heard that ACNC registered charities are currently exempt from the mandatory climate reporting legislation.

AICD senior policy adviser Anna Gudkov, who moderated the NFP session, said that in the AICD climate governance survey released this year with Pollination, 44 per cent of NFPs were extremely or moderately concerned that climate change is a risk but 40 per cent of NFP boards nevertheless see climate change as an opportunity.

Their climate action has been driven by a mix of stakeholder pressure and materiality. Policy uncertainty is seen as a challenge and many NFPs do not know where to start on climate change action.

However, all charities still need to understand their footprint with climate change, the risks and opportunities involved and to set a strategy and metrics accordingly, Jon Chadwick GAICD, Global Energy transition Lead, PWC Australia told the forum.

“National governance of climate change is really about governing risk,” he said. These risks may involve people risk for volunteers as well as staff, delivery risks, insurance and what harm may be experienced due to hot weather and severe weather events. “You understand that climate is a material issue when you start to see it as a risk.”

Chadwick, who serves as a director on the Board of Cricket for Climate, said change can happen at the grass roots level. Sports identities such as Australian Men’s Cricket captain Pat Cummins, who founded the board, were helping to drive climate action.

“Over time he got more interested in what was happening and saw how climate change was starting to impact the sport he loves.” Cummins acted by buying his home cricket ground in Penrith and installing solar power and batteries. Now Cummins has mobilised support amongst his fellow players for Cricket for Climate, which will push to get solar power installed at local 4000 local clubs.

The solar conversion has already happened at the National Cricket Centre in Brisbane.

Nat Walker MAICD, a board director on the Climate Council, Paul Ramsay Foundation, Life without Barriers and Goodstart Early Learning, said it was very important for NFP boards and organisations to have a clear position on climate that aligns with purpose. “That has to frame everything else you do. Include how you may price climate risk into funding proposals for example. This is important for those who are seeking philanthropic funds. The costs need to include transition costs and adaptation.”

NFPS need to be prepared to discuss the issue when a funder or donor asks questions.

Keith Rovers, Partner at MinterEllison, who heads the social impact and sustainability finance team, and sits on the board of the Westpac Foundation, said that some banks now require oversight of sustainability plans before funding organisations.

The Westpac Foundation looks at the ESG strategies of organisations to ensure they do no environmental harm. He added that NFPs must understand their own supply chains and the environmental impact of their suppliers and partners as part of their sustainability strategies and the impact of their climate change footprints.

Breaking down this impact into “digestible chunks” to ensure a minimal footprint and commitment to do no harm would protect organisational reputation. “Understand your own business model and risks.”