How should boards prepare for mandatory climate reporting? What are investor expectations in the regime’s first year? What are the common reporting pitfalls boards should be aware of and mitigate? In an AICD webinar ahead of the mandatory climate reporting legislation passing Parliament, non-executive director Penny Bingham-Hall FAICD and Ed John from the Australian Council of Superannuation Investors (ACSI) share their views on the challenges, opportunities and potential pitfalls for boards navigating the mandatory climate reporting regime, expected to begin next year.
With four joint sitting weeks remaining this year, significant attention is on the Australian Parliament’s capacity to legislate in important areas, including the mandatory climate-related financial disclosure bill (Bill) currently under review in the Senate (see this AICD article summarising the Bill). If the legislation is enacted by 2 December 2024, it will come into effect from 1 January 2025, starting with the largest emitters and organisations.
Although the legislation has not yet passed, directors of large organisations are already preparing for the reforms, lauded by the Australian Securities & Investments Commission (ASIC)’s Chair, Joe Longo, as “the biggest change to corporate reporting in a generation.” The Bill mandates that those covered by the regime make annual climate disclosures within a separate Sustainability Report, comprising a mandatory fourth report within the Annual Reporting suite (the other reports being the Financial Report, Directors' Report and Audit Report).
Disclosures must be made in line with the Australian Sustainability Reporting Standards (ASRS), which are currently being finalised by the Australian Accounting Standards Board (AASB). The ASRS are an Australianised version of the International Sustainability Standards Board (ISSB) standards, which build on the Taskforce for Climate-related financial disclosures (TCFD) framework but require significantly more detailed and granular disclosures. The move to mandatory and internationally comparable climate disclosure has been sought for many years by investors, who were dissatisfied with the variable rate of voluntary climate disclosures.
In the AICD webinar, Ready, Set, Report: Preparing your board for mandatory climate reporting, Penny Bingham-Hall FAICD, Chair of Vocus Group, Co-Chair of Supply Nation and Non-Executive Director of Fortescue, was joined by Ed John, Executive Manager of Stewardship at the Australian Council of Superannuation Investors (ACSI), in conversation with AICD Senior Policy Adviser Anna Gudkov. The wide-ranging discussion included areas of greatest uplift for organisations needing to report under the new regime, investor expectations for the first year of reporting, and pitfalls for boards to avoid under the new reporting framework.
What will require the greatest uplift for boards to meet the requirements of the mandatory climate reporting regime?
“Getting prepared,” said Penny Bingham-Hall FAICD. She said the current disclosure areas that will require the greatest uplift for boards to meet the requirements of the mandatory climate reporting regime include data collection and accountability for this collection. This is particularly as organisations shift from qualitative to quantitative reporting, with the latter typically managed by finance teams.
“These are the current areas that the companies I'm involved with are really focusing on. Directors have got to be comfortable that their organisations have got the systems and processes in place to collect the data. Uplifting the maturity of systems is going to be key.”
She adds that board focus will be on uplift across organisations. “It's in your marketing material, in any media releases and statements. Boards are going to have to make sure, as they do with all disclosures, that they are consistent, that they are not greenwashing in any way. It is going to be important, I think, and it sounds very basic, but just getting the right processes in place to make sure that the data is accurate, that you are consistent in what you are saying.”
From the investor side, Ed John from ACSI said information gathering and provision will require more board focus, but that investors recognised that disclosure standards were still developing. He said where there are uncertainties or estimations, clarity and honesty are essential.
“Being clear about where some of the gaps or challenges are, is a really important point of focus. I commend the work done to date, but there's a lot of learning happening with more upskilling and engagement to happen,” he said.
“Companies that have done significant work over time, such as TCFD reporting, you may not be at the final destination, but you're in the right neighbourhood.”
What are you expecting will be the most challenging aspect of the reforms in first year and what should organisations focus on?
“I think one trap or perception out there is that this reporting must provide very precise or perfect information. None of us have a crystal ball of what the pathway to net zero or the next 20 or 30 years will be. I don't think we'll seek perfect reporting in the first year. A lot of entities are on the right track. But there will be a few aspects and areas that will pose challenges,” said Ed John.
Investment analysis, risk assessment, and due diligence will need focus from a number of entities, he added. “Many investors are interested in the opportunities for companies and how companies are not only surviving through the energy transition but the potential for new investments and business opportunities.
“Remember, investors want to report under this regime as well. In order to have a comprehensive climate strategy at a fund level, and to be able to fulfil reporting obligations, that will necessarily require entities to be providing that information.”
Penny Bingham-Hall FAICD said defining the material risks to organisations will be difficult at the outset especially around scope 3 emissions, which requires data from customers and suppliers.
“However, it's easy to focus on scope 3 as being the difficult disclosure area, but a lot of organisations are going to need to uplift their reporting around the basics – around scope 1 and 2. At the moment there may be multiple data owners within an organisation,” she said.
“Even for smaller entities which maybe aren't required to report, they are potentially going to have customers that want information from them. Getting your data systems in place does have a broader implication across the ecosystem.
“But the other side of responding to climate reporting is the opportunities and the prospects. And that's where we're moving more into the unknown. A lot of organisations have started to think about climate risk. But when we've now got to disclose what the impacts might be from an opportunity perspective and put dollars around that, I think that is going to be far more challenging for people.”
When reporting under the regime, how can boards avoid pitfalls and learn from better practices?
For Penny Bingham-Hall FAICD, it is all about being transparent about what you don’t know, or where the data is unclear or estimated. “Be clear about the underlying assumptions,” she said. “You're going to have some customers, for example, who aren't going to want to share the information with you, or they may share it in a different format, and you don't really have a lot of assurance around that data that you're potentially getting from customers.”
Ed John agreed: “Avoid claiming certainty where certainty doesn't exist and be clear about any limitations, whether around data or other aspects of reporting. There's a lot of knowledge in corporate Australia, with companies working through these areas.
“They're not new themes, and there are plenty of examples. So things like forward-looking statements or strategic elements, we've seen a number of companies setting net zero ambitions, a number of companies setting short-, medium-, and long-term targets, and a number of companies conducting scenario planning,” he said.
Penny Bingham-Hall FAICD referred to her own experience on the board of Fortescue Metals Group, which operates in a heavy industry sector, but which is broadly considered a leader in its approach to climate, having set ambitious climate targets and transition plan.
“I think about Fortescue, or really all the iron ore companies in Australia that are selling iron ore to China. You're going to be relying on data from a number of Chinese steel mills. The only way you can really do that is to understand what sort of emissions would come out of the steel-making process or what your customers are doing based on how much iron ore you're sending to China and then do a guesstimate. I think all you can do is be very clear about that.”
She said that as reporting matures and data and methodology gaps will be addressed, the quality of disclosure will improve. But in this fast-moving and imprecise space, organisations need to carefully monitor and review their disclosures and make sure they remain accurate. Adjusting disclosures and even targets may become a regular occurrence.
“I think we're all going to have to get used to the idea of restatements,” she said. “In financial statements, the last thing you want to do is have to go back and restate something because it's been a mistake.
Transition plans are becoming an important strategic marker
Investors have made it clear that companies must have credible transition plans if they wish to retain and attract quality, long-term capital. Further, some financiers, including banks, are now requiring certain customers to have transition plans in place to access finance.
As a result, climate transition plans are no longer a ‘nice to have’ but rather, an important marker of an organisation’s strategic commitment to decarbonisation and evidence of its resilience and profitability in a net-zero economy.
Strategic framing of climate reporting is now seen as critical. For example, in the foreword of the AICD, Deloitte and MinterEllison’s Director’s Guide to mandatory climate reporting, ASIC Chair Joe Longo stated, “the most successful and resilient companies will look at mandatory climate reporting not as a compliance exercise, but as an opportunity to demonstrate how they are building long-term value.”
How are boards approaching the development and reporting of transition plans and climate targets given they require planning over 5-, 10- and 15-year time horizons and are marred by significant uncertainties?
The panel noted that other jurisdictions who were ahead of Australia in their climate disclosure journey, may hold some valuable insights.
“If you look at the rules of the UK and other jurisdictions, transition plans are a hallmark of reporting for better-performing companies. Investors not just in Australia but globally are looking at that. One difference in transition planning versus basic statutory disclosure is the focus on strategy,” said Ed John.
Penny Bingham-Hall FAICD noted that taking a strategic focus means looking at the long-term interests of the company and forming a view as to the organisation’s strategic position on the issue of climate change. “If you're a publicly listed company, there's going to be pressure from investors to show what you're doing. And if you go back to one of the obligations of a director, it's about saying what's in the best long-term interests of the company and how it is going to be sustainable in the broader sense,” she said.
“So to ignore it, I think you're ignoring a significant risk but also a significant opportunity. And I guess the organisations I'm involved with certainly take that view. Organisations really need to think about where they want to sit, whether they want to be leading the pack, whether they want to be fast followers, or whether they just want to go along with the market. And that will dictate how you think about your transition plan.”
Ready, Set, Report: Preparing your board for mandatory climate reporting was recorded on 19 June 2024, you can access the free webinar here.
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