On 27 March, 2024, new legislation was introduced to parliament that will dramatically change corporate reporting in Australia. For the first time, sustainability reports – initially specifically targeting climate – will be tied to financial reporting.
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No longer will sustainability be a “nice to have”, it will be required by law.
The new Mandatory Climate-Related Financial Disclosure legislation is largely based on the recently adopted international sustainability reporting standards coming into effect in July this year and will be introduced using a phased approach. It will begin in January next year for larger companies with over 500 staff and $500 million in revenue or $1 billion in assets and then flow on to smaller companies, year-on-year.
However, the legislation will impact many more businesses much sooner, since reporting includes measuring, setting targets and creating credible decarbonisation plans for a company’s scope 1, 2 and 3 emissions.
Scope 1 and 2 emissions are direct emissions from fossil fuels used and from electricity consumption and are relatively easy to identify and implement actions for.
Scope 3 emissions, however, come from a company’s supply/value chain, which includes all the contractors, suppliers, outsourced work, freight, business travel etc. This is by far the most challenging part of emissions reporting for any company. This is also the reason why large companies, who may have thousands of suppliers, will start early to understand these emissions, and reduction opportunities.
The easiest way to set scope 3 emission reduction targets is to force the targets on suppliers.
Some procurement and supply chain networks are seeing increasing signals that to be a supplier of choice, businesses need to start to report on their carbon emissions, as well as identify strategies to reduce them.
As a result, large companies have been inserting clauses into contracts and creating procurement processes that ensure they are able to collect climate and emissions data from suppliers.
While there are various ways reporting companies can calculate emissions from suppliers (using dollars spent on a supplier), to set targets for Scope 3 emissions reduction and to demonstrate a credible reduction plan, companies will have no choice but to engage with their suppliers.
The easiest way to set scope 3 emission reduction targets is to force the targets on suppliers.
And this is where it gets tricky for small and medium enterprises (SMEs).
Only 36 per cent of Australian businesses captured in the first tranche of mandatory reporting currently publish a sustainability report and up to 49 per cent of reporters have not disclosed climate management practices, which will be required
To set targets, an SME needs to know its baseline emissions, and identify actions they can take to ensure targets are realistic, achievable, and thus credible.
If targets or plans aren’t realistic, it could be deemed misleading and deceptive conduct under Australian Consumer Law or Australian Competition and Consumer Commission. It’s for this reason that we’ll see businesses of all sizes starting their climate journey regardless of whether they meet the reporting threshold.
The reality is, if businesses don’t get on board, they’ll be left behind.
A recent survey from global accounting and consulting firm RSM showed that only 36 per cent of Australian businesses captured in the first tranche of mandatory reporting currently publish a sustainability report and up to 49 per cent of reporters have not disclosed climate management practices, which will be required.
There’s clearly a lot of work to do for reporting entities, but similarly for all businesses, as climate related requests for data will travel up and down the supply chain.
As ASIC Chair Joe Longo said, “It’s simply not an option to put this off until after legislation has passed, and then scramble to comply. You have to figure out how you’re going to marshal data, support and capabilities and start keeping the necessary records now – today.”
Businesses should not underestimate the level of time and resource investment needed to get prepared, and government must do a better job of explaining how mandatory climate reporting will impact Australia’s over 2.5 million SMEs, and how they can comply with the laws.
Australian business owners are resilient, adaptable, and innovative, but they need more support and education to properly measure and reduce emissions, so they can play their crucial role in reaching our nation’s climate targets.
