Mandatory climate risk reporting for Australian companies has been a hot topic in boardrooms around the country for more than a year now. The final guidance from the Australian Security and Investments Commission (ASIC) has been released, and the spotlight now turns to the accountants, analysts and sustainability experts who will support companies in complying. Here’s what you need to know.
ASIC’s regulatory guide RG 280 on complying with the requirements of the new Australian Sustainability Reporting Standard (ASRS) shifts the goalposts from carbon accounting towards the broader implications of climate change for business operations and long-term value.
In addition to quantifying emissions, entities will need to consider climate risk scenarios in both the short and long-term across acute physical risks from climate-related events, chronic physical risks from longer term shifts in weather patterns, and transition risks associated with the decarbonisation of energy, industry and other businesses in the organisation’s value chain.
Scope 3 emissions will also become part of mandatory reporting in an entity’s second annual reporting cycle. ASIC acknowledged the challenges around obtaining data for scope 3 and there are provisions for using industry-based estimates or other means to quantify those emissions.
Look into the future
ASIC is also requiring organisations to incorporate climate scenario modelling for two possibilities: the more optimistic one where warming is kept to 1.5 degrees global average temperature rise, and the more confronting scenario of “well exceeding 2 degrees Celsius above pre-industrial levels.”
There’s also a need to consider and report on upsides in the form of climate-related opportunities, such as new revenue streams or business benefits from action to mitigate or adapt to climate change.
Who benefits?
The primary beneficiaries of mandatory reporting are expected to be existing and potential investors, lenders and other creditors.
“Climate-related financial information that is consistent, comparable and of high quality, facilitates confident and informed decision making by investors and other users of that information,” ASIC commissioner Kate O’Rourke said in the media statement.
O’Rourke said the Regulatory Guidance RG 280 is a “critical piece that supports the implementation of these sustainability reporting requirements passed by the Australian Parliament.
“We will continue to expand our broader suite of publications related to sustainability reporting over time as market practices evolve.”
While the staged introduction of reporting will only affect the largest businesses in the first two years, ASIC notes that small to medium entities, including those operating below the small business reporting threshold are already feeling pressure from their clients and stakeholders.
Specific information for entities within the value chain of reporting entities, including small businesses and the agricultural sector has been prepared, to provide these entities with practical advice for responding to requests for climate-related data.
Accountants ready for action
Certified Practising Accountants Australia has been building capacity within its membership and the broader business community to support the profession to deliver the financial aspects of reporting.
CPA Australia’s sustainability lead Patrick Viljoen told The Fifth Estate that resources have included guidance documents and sustainability micro-credentials. A series of ESG webinars for accounting and finance professionals has also kicked off, which will help attendees integrate ESG frameworks into practice across key topics including climate risks, biodiversity impacts and social responsibility.
“It’s important that accountants prioritise their professional development in this emerging and critical area for the profession,” Viljoen said.
The emergence of mandatory ESG reporting also has impacts for the standing of the accounting profession, he said. As the reporting becomes a key part of financial and corporate accountability, accountants will ensure transparency, compliance and sustainability.
Viljoen notes that reporting is still evolving, and that while Australia has taken a “prudent and pragmatic” approach by focusing on climate first, there is more to consider.
“…Climate viewed in isolation of nature and social impact may lead to unintended consequences and decisions that may adversely impacts on other topics. CPA Australia advocates for holistic thinking and an integrated approach identifying connectivity and potential trade-offs as critical to secure success across the entirety of the sustainability space.”
Ripples down the value chain
Already, the organisation’s members are hearing from their SME clients that they are being asked to provide upstream stakeholders with climate-related information.
“We are aware that some larger entities are already reaching out to their value chain participants, particularly to aid the calculation of scope 3 requirements,” Viljoen said.
“Market practice does allow for a mix of direct measurement and estimation which acknowledges both the data sourcing burden on small entities and allows for flexibility and pragmatism.”
From an accounting perspective, sustainability information is material for business decisions just as financial reporting is.
“Beyond the numbers, the overarching aim of climate-related disclosures is to provide users of information with an understanding on how the organisation has identified its exposure to climate risks and opportunities.
“More importantly, it also evidences the proposed response to such risks and opportunities in securing ongoing business resilience. Explaining that climate is a risk without quantifiable rigorous data does provide reasonable comfort.”
Alignment between reporting and strategy
Sustainability consultancy and B Corp, BWD Strategic, supports large organisations in sectors including energy, property and finance in Asia-Pacific and the US with ESG strategy and disclosure. Reporting lead Susan Dyster tells The Fifth Estate the new ASIC guidance will support both organisations mandated to report and those interested in voluntarily reporting climate-related information.
As each organisation’s approach to climate matters matures, she also expects to see their disclosures improve. This will have positive benefits for their overall business.
“Corporate reporting – mandatory or voluntary – is a great test of whether your strategic intentions and practical initiatives align, as well as whether they align with the expectations of your organisation’s stakeholders,” Dyster said.
It’s the “strategic lens” of the organisation between “their narrative and the strategic insights derived from stakeholders and the external environment.”
It’s also tool for communicating strategic intention and goals, and performance and progress over time.
One benefit that businesses may not have expected is the level of engagement it creates among employees, Dyster said.
“We have several clients who have begun reporting to communicate their sustainability story to their workforce, and moved to reporting externally as their approach has matured.”
Four steps to get started
The consultancy has prepared guidance for clients to help them prepare for mandatory reporting and make it part of business as usual. There are four steps, starting with undertaking a gap analysis and a materiality assessment.
The next step is educating the organisation’s board, management and internal stakeholders on what is changing and how it impacts their duties, while also building climate knowledge more broadly.
Third step is to embed the ASRS requirements into governance, data collection and record-keeping processes.
Finally, “enact”.
“Don’t wait for your mandatory reporting period to start, take action now to prepare.”
Dyster said embedding the mandatory reporting into business as usual takes time.
“We’ve seen our New Zealand clients, for example, shift to a more BAU approach to their required climate-related disclosures under the XRB in their second year.”