Climate Governance Initiative Australia Newsletter December 2022

This month’s newsletter highlights the launch of Treasury’s consultation on mandatory climate reporting standards, the outcomes of COP27, and the latest Government and regulatory updates. This includes the first Annual Climate Change Statement and ASIC’s current focus on sustainability-related disclosures.

On behalf of the Climate Governance Initiative (CGI) Australia and the AICD, we wish you a happy and safe Christmas and holiday period. Thank you for your ongoing interest in this important work. In 2023, we look forward to hosting more events and sharing additional resources for directors to build their climate capability. To catch up on the latest CGI Australia material and recordings, scroll down to the end of this newsletter.

Mandatory climate reporting consultation gets underway

On 12 December, Treasury released a discussion paper on the development of an Australian climate risk disclosure framework. The Government will introduce standardised, internationally-aligned reporting requirements for businesses to make disclosures regarding governance, strategy, risk management, targets, and metrics (including greenhouse gas emissions). These reporting requirements are expected to be mandatory for large listed entities as well as financial institutions, and phased in over time.

In short, the discussion paper invites comment on the following proposals relevant to boards:

• Coverage – Large listed entities (expected to be the top ASX200 companies) and financial institutions (e.g. banks, insurers, credit unions and superannuation funds).
• Scope – TCFD-aligned and able to integrate the International Sustainability Standards Board (ISSB) standards when finalised (expected to be finalised in early 2023).
• Timing – Phased approach, with first reports being required for FY 2024-25.
• Reporting – Requirement to disclose material Scope 3 emissions, albeit on a phased-in basis.
• Regulatory framework – Legislation to set out details of covered entities, location for reporting requirements (e.g. annual report or operating and financial review), and requirements to follow prescribed disclosure standards.
• Proportionate application of liability – How climate disclosure will impact liability (including director liability) under misleading or deceptive conduct legislation. A safe harbour regime similar to the US Securities and Exchange Commission’s proposal for Scope 3 emissions disclosure is flagged as a possible mechanism to balance incentivising disclosure and penalising misconduct.
• Offset and transition plans – Whether and how entities should be required to provide information about how they are managing climate risks, including what transition plans they have in place and any use of offsets to meet their published targets.
• Financial reporting framework – Three potential structures to support implementation of climate risk disclosure standards (e.g. Australian Accounting Standards Board (AASB), separate sustainability standards board, or reforming existing financial reporting bodies – FRC, AASB, AUASB – into a single, holistic entity).

The Government has also tasked Treasury with developing a comprehensive sustainable finance strategy, that includes the development of new standards or taxonomies for sustainable investment, further initiatives to reduce greenwashing and strengthen ESG labelling, and more ambitious participation in global forums to support climate and sustainable finance frameworks and investment.

The AICD will be closely engaged with the consultation (which closes 17 February 2023) and will provide an in-depth analysis of the proposals in the January edition of the Climate Governance Initiative newsletter.

Outcomes of COP27

COP27 concluded on 20 November 2022 in Sharm el-Sheikh, Egypt. Government, public and private-sector leaders from across the world came together to take action to limit global warming to 1.5°C, as stated in the Paris Agreement.

Agreement was reached at COP27 to provide loss and damage funding to vulnerable countries. However, the Conference was criticised for failing to set the world on an emissions path consistent with the Paris Agreement given current commitments are insufficient. Global emissions are not decreasing, and even if current pledges by national governments are fully implemented, the world is on track for 2.5°C warming by the end of the century. Further progress was made in delivering the promised US$100bn of climate finance, despite recognition that investments of at least US$4tn will be required to transform to a low carbon economy.

COP27 also highlighted nature-related risks, with a strong focus on our oceans (particularly vulnerable countries impacted by coastal erosion), natural capital and biodiversity. COP15 (the UN's biodiversity summit) is currently underway in Montreal, Canada with a focus on agreeing a new set of goals to guide global action through 2030 to halt and reverse nature loss. Australian Environment Minister Tanya Plibersek commented, "this conference in Montreal can really do for nature what the Paris Agreement did for climate change and carbon pollution reduction". Look out for our commentary on COP15 in 2023.

For more on COP27 and its implications for directors and business see here from Climate Governance Initiative Australia partner, Deloitte.

Latest Government and regulatory updates

First Annual Climate Change Statement

The Government delivered its first Annual Climate Change Statement, as required by the Climate Change Act 2022. This included the Emissions Projection report, which shows Government actions and policies so far place Australia on track for a 40% emissions reduction by 2030.

ASIC’s current focus on sustainability-related disclosures

Last week, the Australian Securities & Investments Commission (ASIC) published its expectations on sustainability-related disclosures. Directors should also be aware that ASIC continues to encourage listed companies to use the TCFD’s recommendations as the primary framework for voluntary climate-related disclosures, including the Guidance on Metrics, Targets, and Transition Plans.

As the International Sustainability Standards Board (ISSB) progresses with its proposals and other related developments evolve, directors will need to consider what governance structures might need to be developed now to best support sustainability disclosure and reporting in the future. Refer to CGI Australia’s new guide to help elevate ESG matters to the board – Bringing together ESG: Board structures and sustainability.

Other Australian climate governance news

• The Climate Leaders Coalition has released a practical, eight-step roadmap to address Scope 3 emissions.
• The proportion of financial statements impacted by climate-related risks is increasing year on year around the world. Over a third of the financial statements that CAANZ reviewed disclosed impacts of climate risks.
• Climate & Clean Energy Venture Capitalist, Ramez Naam, presented to the 2022 Sohn Hearts & Minds Conference on the risks and opportunities of the clean energy transition in Australia.
• The Investor Group on Climate Change notes that recent climate policy improves the investment environment – in 2021 around 70% of investors highlighted policy uncertainty as a key barrier to investment in Australia, compared to 56% in 2022. Priorities for climate policy reform by investors include setting 1.5°C aligned sector pathways and plans and national emissions targets, and an improved approach to carbon pricing.
• Latest research from Guerdon Associates highlights that Europe, the U.K., Australia (ASX100), and South Africa lead the market with over 80% of large companies incorporating ESG measures into their executive compensation incentive plans.
• Gas giant Santos loses appeal against Tiwi Islands traditional owners for failing to consider Tiwi People as part of its consultation when applying to drill for gas in the Tiwi Islands as part of its Barossa gas project.
• And for football fans, NFP ‘Carbon Market Watch’ brought a complaint against FIFA to various European advertising watchdogs alleging that FIFA’s advertising of the 2022 World Cup as “carbon neutral” was misleading or deceptive.