Mandatory climate reporting is coming – are you getting prepared?

The federal government has released a consultation paper which seeks submissions on the development of an Australian climate risk disclosure framework. The AICD is liaising with members and stakeholders to support a framework which promotes meaningful, high quality and comparable climate disclosures.

Off the back of an election commitment of climate action, on 12 December 2022 the government released a consultation paper which seeks submissions on the development of an Australian climate risk disclosure framework. The AICD is liaising with members and stakeholders with the objective of supporting a regime which promotes meaningful, high quality and comparable climate disclosures.

What is being proposed?

The government is seeking stakeholder views on the following issues relevant to directors: 

• International alignment: In order to promote international comparability and business certainty, the government is proposing that entities disclose against the standards developed by the International Sustainability Standards (ISSB). The ISSB, whose standards are structured around the Task Force for Climate-related disclosure (TCFD) framework, consulted on its draft Climate and Sustainability reporting standards in July 2022. A summary of the ISSB standards can be found here, and the AICD submission can be found here. The AICD strongly supports the use of the ISSB as the basis for climate reporting. The ISSB is anticipating releasing its final standards by the end of Q1 2023.
• Scope: The government proposes that the regime initially cover listed entities and financial institutions, and seeks submissions on thresholds (such as revenue, emissions or number of employees) applicable to these two groups, as well as what other groups should eventually be covered. It is likely that the ASX 200 would be amongst the initial cohort of organisations subject to the new reporting regime.
• Timing: The government proposes a start-date of FY 2024/25 for those initially covered by the regime, and seeks views on whether a staged approach for subsequent groups of entities should be adopted. The government also seeks views as to whether specific disclosure requirements which are subject to data challenges, such as the reporting of scope 3, should be subject to a delayed phase-in (a definition of Scope 1, 2 and 3 emissions can be found here).
• Liability: The government seeks views on what considerations should apply to the disclosure of information based on uncertain information or assumptions, such as forward-looking statements, scope 3 emissions and scenario analysis. The AICD has consistently raised the need for liability settings to promote comprehensive disclosures, without creating undue litigation risk for corporates and directors.
• Location of disclosures: The government seeks views as to where within the company reports disclosures should be made. Suggestions include the Directors’ Report (specifically Operational and Financial Review for listed entities), a section of the Annual Report, or a stand-alone report.
• Assurance: Views are sought on what level of assurance should be required for climate reporting, who should provide assurance (auditor of the financial report or a separate expert), and independence and quality management standards for assurance providers.
• Integration with other sustainability reporting: With climate-reporting being the ‘first cab off the rank’ within the realm of sustainability reporting, the government seeks views as to whether the climate-reporting regime should be focused on climate only, or whether the framework design should be done in such a way as to allow later inclusion of other sustainability reporting topics, such as biodiversity (with the emerging Taskforce on Nature Related Disclosures gaining momentum – for a webinar on the topic click here).

Implications for Directors

Directors need to start preparing themselves for the introduction of mandatory climate reporting, and the role they can play in oversighting management on this complex issue.

If you are only just beginning your climate journey, the AICD’s Climate Risk Governance Guide is a good place to start.

It is encouraging to see that there has been a big uptake in climate reporting in recent years, with just over 50 per cent of the ASX200 disclosing against the TCFD and 45 per cent adopting net zero commitments for scope 1 and 2 emissions. However, studies suggest that the content and quality of reporting requires significant work. Key areas cited for improvement include disclosure on board climate competency, scope 3 emissions, physical risk analysis, quantification of climate change risk, ensuring transition plans and scenario analysis are aligned to a 1.5 degree warming pathway, and assurance of climate disclosures.

In the meantime, to prepare for mandatory climate reporting, we suggest directors ask the following questions: 

Governance

• Has the question of mandatory climate reporting been discussed at board level? How prepared are we as an organisation? What expert support will we need? What do we currently disclose?
• Do our existing governance structures need to be adjusted? Do we need a dedicated board committee to oversight climate change issues? For further guidance, the AICD together with HSF recently released a guide on board structures and sustainability.

Strategy and Risk Management

• Has the board considered the key short, medium and long-term risks (physical, transitional and liability) arising from climate change and its impact on the business? Has the board documented the process to undertake that analysis, as well as the outcome? What scenario analysis has been undertaken?

Metrics and Targets

• Does the board have sufficient information to confidently approve disclosures on scope 1, 2 and 3 emissions and set climate-related targets? If not, what are the barriers, such as data gaps, that prevent this? If yes, are these metrics and targets subject to validation or external assurance?

Next Steps

The AICD is currently liaising with members and stakeholders and is in the process of drafting a detailed response to the consultation, which closes on 17 February 2023. Key areas of focus for the AICD, in line with the main implications for directors, include:

• Scope and phase-in, with a focus on ensuring that initial reporting requirements fall on those companies which have the resources to undertake meaningful disclosure, and to ensure that the companies that are covered include those that contribute the most (i.e. large emitters).
• Liability, including ensuring that organisations and their directors do not face unreasonable litigation risks for making disclosures based on inherently uncertain information, such as scope 3 emissions, forward-looking statements and scenario analysis.
• Alignment with the ISSB, with the AICD strongly supporting alignment with a global baseline so as to provide comparability, consistency and business certainty.

We will continue to engage with AICD members for their views on this important topic. In the meantime, for practical resources on effective climate governance, we encourage you to access the Climate Governance Initiative hub of our website.