New director climate target setting guide

As more companies set their climate targets, a new Climate Governance Initiative Australia resource provides guiding principles for boards.

As part of the Climate Governance Initiative (CGI) Australia, and in collaboration with the Insurance Council of Australia and Herbert Smith Freehills, the AICD has released Principles for climate target setting: A guide for Australian boards (Guide).

The Guide uses the insurance sector – a key ‘shock absorber' of climate change – as a case study, however, it is intended to apply to boards of all industries. A snapshot of the resource provides a concise summary and reference document for board meetings.

With mandatory climate reporting planned to commence from January 2025 for the largest entities (see this AICD article on what the mandatory climate reporting Bill proposes), the Guide helps boards to consider how to develop, implement, communicate and review climate targets. Under each of the four identified phases, the resource provides suggested questions for directors to ask of management to support effective oversight.

The planned introduction of globally-aligned mandatory climate reporting is likely to elevate scrutiny on the robustness of organisational climate targets and their underlying transition plans (being the actions an organisation is taking and/or intends to take to meet their climate targets). While the draft Australian climate reporting standards do not mandate having a climate target or transition plan, they do require the disclosure of relevant information for organisations with such targets or plans.

In practice, it is expected that mandatory climate reporting, and the heightened accompanying market scrutiny, will accelerate the trend towards more entities setting climate targets and publishing transition plans (see further below). Some investors and financiers are already imposing conditions on those seeking access to capital– from 2025, Australia’s largest banks will be requiring that customers in certain high-emitting sectors have a transition plan in place in order to access funding.

Guiding principles across four suggested phases of climate target setting

The Guide sets out 10 principles across four suggested phases of climate target setting: target development, target communication, target implementation, and target review – these include:

Target Development phase

1. Collect reliable baseline data
2. Develop a target that meets agreed ambition and is aligned to the organisation’s broader strategy
3. Undertake verification and assurance
4. Establish a record-keeping system

Target Implementation phase

5. Clarify executive accountability
6. Identify and allocate required resourcing
7. Develop an implementation plan

Target Communication phase

8. Communicate targets clearly and consistently
9. Disclose underpinning assumptions, contingencies, uncertainties and risks

Target Review phase

10. Establish a monitoring system

Climate target setting – what is current Australian market practice?

Climate targets are increasingly common for listed companies, with recent research by the Australian Council of Superannuation Investors (ACSI) into ASX200 climate disclosures finding 66 per cent of the ASX200 and over 90 per cent of the ASX50 have made a net zero commitment as of 31 March 2024.

However, the robustness of these targets (notably, whether they are evidence-based and realistic) and organisations’ ability to meet them, remains varied. For instance, seven per cent of the ASX200 with net zero commitments have not set any short- or medium-term targets, although this number has halved from 2023. Further, less than half of ASX200 targets are self-identified as ‘science-based’.

Reduction in near-term targets

The ACSI report observed a 14 per cent reduction in the setting of short-term targets (0-5 years) over the last year which ACSI attributes to constraints posed by the short 5 to 10-year target timeframe; increased stakeholder scrutiny; the uneven nature of decarbonisation pathways (some are dependent on steep emissions reductions at the end of the timeline); and changes in the composition of the ASX200.

Companies revising, and in some cases dropping, their nearer term climate targets has attracted headlines recently. For example, in a market announcement on 30 July 2024, Air New Zealand acknowledged that supply chain issues and issues with the affordability and availability of sustainable aviation fuels led it to abandon its 2030 science-based carbon intensity reduction target and withdraw from the Science Based Targets Initiative.

Air New Zealand has said that it remains committed to reaching its 2050 net zero target and that it will develop new near-term targets that will “better reflect the challenges relating to aircraft and alternative jet fuel availability.”

While some may view these developments as discouraging target setting, others see the re-evaluation and reissue of targets as a natural consequence of organisations leaning into the complexities of transitions, especially in emissions-intensive (also known as ‘hard-to-abate’) sectors.

As the Guide makes clear, what is key is being transparent throughout the target setting process as to what assumptions, estimations and dependencies targets are based upon, and updating targets and disclosures where those elements shift materially. 

What other guidance is the AICD providing?

The Guide is the latest in a comprehensive suite of CGI Australia climate governance resources. Other key resources include the Director’s Guide to mandatory climate reporting, which has been accessed more than 20,000 times, and will be re-issued shortly to reflect the latest market developments.

To complement Principles for climate target setting: A guide for Australian boards, the AICD is looking to develop a detailed board resource on transition planning, to be released later this financial year.