Australian Mandatory Climate Reporting – What, why, and how?

The surge in interest of environmental, social, and governance (ESG) matters globally and in Australia is reshaping reporting and disclosure standards. Investors, customers, employees, and regulators increasingly rely on climate-related information for decision making and accurate disclosure is crucial.

Recent drivers for reporting on ESG activities by companies include:

Demonstrating positive social impact, environmental friendliness, and ethical practices to its stakeholders (customers, staff, investors) under ‘corporate social responsibility’, ‘triple bottom line’ (people, profit, planet), or ‘integrated reporting’
Satisfying information demand from investors regarding investments and their activities

Focussing on the environmental aspects of ESG, mandatory reporting is expected to relate to greenhouse gas (GHG) emissions. Focus in the mainstream and in industry is on carbon emissions, but it is only one of the GHGs. The GHG Protocol Corporate Accounting and Reporting Standard, which is commonly used internationally, covers carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3)[1].

This points to a misnomer in “Carbon Accounting”, particularly in the naming of software tools and platforms, where although carbon is the GHG of greatest concern currently, the other major GHGs should also be considered in accounting and reporting.

In this article, we’ll look at:

the historical context of the demand for reporting, leading to
today’s status with the Paris Agreement and how it affects Australian businesses,
proposed mandatory reporting requirements, and
how to prepare for Australia’s mandatory climate-related financial disclosures.

The Demand for Reporting – How did we get here?

Ecological awareness, climate change, and environmental activism can be considered an age-old concern with human records and stories of such dating back at least 65,000 years with Australian indigenous communities and their land management practices, or ‘caring for country’[2]. The knowledge and concept of global warming began 200 years ago when Jean Baptiste Fourier determined scientifically that the Earth’s atmosphere trapped heat like a greenhouse[3].

Key milestones in the demand for environmental reporting.

In relatively modern, mainstream culture, it wasn’t until the 1960s that automobile emissions concerns (extensive smog especially in US cities) were finally being tackled with mandatory emissions control equipment for cars[4] , the implementation of the US Clean Air Act[5], and creation in 1970 of the US Environmental Protection Agency.

Similarly in Australia, public concern for the environment was finally recognised by the government in the 1970s with the passing of the Environmental Protection Act 1974, National Parks and Wildlife Conservation Act 1975, and the Great Barrier Reef Marine Park Act 1975[6].

With continuing and growing public concern and activism, landmark international policy came in the 1990s in the form of the United Nations Framework Convention on Climate Change (UNFCCC) in 1992, and the Kyoto Protocol in 1997 among others[7].

Fast forward to the 21st century, “Climate Change” and its denialism spread like wildfire with the aid of broad international communications and information availability thanks to the internet. 2007 saw the Bali Action Plan, followed by the 2009 Copenhagen Accord, and the 2015 Paris Agreement. It was the Paris Agreement, signed by 195 members of the UN in 2016, that addresses the need for reporting.

The Paris Agreement works on a five- year cycle of increasingly ambitious climate action carried out by countries. Every five years, each country is expected to submit an updated national climate action plan - known as Nationally Determined Contribution, or NDC[8].

With the Paris Agreement, countries established an enhanced transparency framework (ETF). Starting in 2024, countries will report transparently on actions taken and progress in climate change mitigation, adaptation measures, and support provided or received. It also provides for international procedures for the review of the submitted reports[9].

Transparency arrangements under the UNFCCC enable the availability of regular data on countries’ GHG emissions among other topics[10]. There are common reporting formats and a National Inventory Report to be submitted biannually by signatories of the Paris Agreement[11].

As a result, the International Sustainability Standards Board (ISSB) is developing standards that aim to produce a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets[12].

This builds on the previously voluntary reporting many companies have conducted using the Task Force on Climate-Related Financial Disclosures (TCFD) which developed a framework to help public companies and other organisations more effectively disclose climate-related risks and opportunities through their existing reporting processes[13].

To date, in addition to the TCFD reporting framework, various ESG reporting frameworks have been used by Australian businesses on a voluntary basis including:

GRI Global Reporting Initiative https://www.globalreporting.org/
International Sustainability Standards Board https://www.ifrs.org/groups/international-sustainability-standards-board/
Sustainability Accounting Standards Board https://www.sasb.org/
UN Sustainable Development Goals (17 goals) https://www.undp.org/sustainable-development-goals
World Economic Forum (4 pillars) https://www.weforum.org/stakeholdercapitalism

Some 40 countries have had mandatory reporting of GHG emissions. In the USA, for example, the Environmental Protection Agency has required approximately 8,000 companies to report since 2009[14]. California since 2006[15], and the E.U. for various companies since 2005[16] and 2015[17].

Since 2007, about 870 Australian businesses have been subject to mandatory reporting under the Australian National Greenhouse and Energy Reporting Scheme (NGERS)[18].

In 2019, the Australian Securities and Investments Commission (ASIC) issued regulatory guidance for providing useful and meaningful information to shareholders including sustainability reporting, including material risks[19], and further reiterated in 2021 that disclosing and managing climate change risks (as one component of ESG) is a key director responsibility[20].

To date, Australia has been reporting to the UN using these and data from other reports collated nationally[21].

The Paris Agreement – How it Affects Australian Businesses

Paris Agreement approved at COP21 Climate Change Conference 2015, United Nations Climate Change.

Towards meeting the Paris Agreement, the Australian Treasury is leading formulation of a comprehensive Sustainable Finance Strategy[22], aligning with the government's pledge to attain net-zero emissions by 2050[23]. This Strategy encompasses a Sustainable Finance Roadmap[24] which sets out Priority 1: Improve transparency on climate and sustainability. This describes the implementation of mandatory climate-related financial disclosure requirements for large businesses and financial institutions.

The Australian Government Australian Accounting Standards Board (AASB), with a range of stakeholders, has been preparing new Australian Sustainability Reporting Standards which are expected to be passed into law later in 2024[25]. The Exposure Draft was released in Oct 2023 and the public comment period closed 1 March 2024.

The new standards are intended for the mandatory disclosure of climate-related financial information for entities preparing general purpose financial statements (GPFS).

It’s worth noting that this work has been a long time coming, being formally added to the AASB’s work plan in 2022 following public invitation to comment in Oct 2021.

Proposed Mandatory Reporting Requirements

The Australian Government’s current proposal[26] will require different Groups of entities, with some exemptions, to report at different stages as the reporting requirements are implemented. Metrics are expected to include Scope 1, Scope 2, and Scope 3 GHG emissions, however Scope 3 inclusion may not be required until the entity’s second year of reporting.

In May 2024, the Australian Government has pushed back the proposed commencement date for Group 1 entities to 1 January 2025[27].

New assurance standards are planned to be phased in from 1 January 2025 towards auditing from 1 July 2030. The standards will be made and maintained by the Australian Auditing and Assurance Standards Board (AUASB).

Small Businesses- The majority of Australian small and medium businesses will not fall within these Groups. ASIC has flagged that once the requirements are in effect, it expects that small businesses will need to work with larger entities in order for them to satisfy their Scope 3 emissions that occur up or down the supply chain.

From commencement, it's proposed that entities would need to disclose an annual sustainability report for the financial year consisting of:

A climate statement - This is expected to include (among other things):
- 'material' climate-related financial risks/opportunities;
- any metrics/targets including Scope 1 and 2 GHG emissions targets;
- details of any climate or GHG related governance/risk management processes, controls and procedures.
A directors’ declaration about the statements and notes.

As with other financial reporting and related record keeping, entities must keep records that correctly explain and record its preparation (including all workings and calculations) of the climate statement and notes for 7 years[28].

How to Prepare for Australia’s Mandatory Climate-Related Financial Disclosures

“The draft legislation gives companies the opportunity to build capacity to make high quality climate risk disclosures by providing early visibility of the proposed reporting requirements and expand the breadth of entities required to report over time.”
- The Hon Dr Jim Chalmers MP, Australian Government Treasurer[29]

With that background, how do businesses prepare for the mandatory climate reporting?

Here’s a high-level step-by-step guide:

5 Steps to Prepare for Mandatory Australian Climate-Related Reporting.

Understand whether the new reporting regime applies to your organisation, and when;
Monitor announcements about the proposed legislation and corresponding reporting standards for what information you are likely needing to disclose;
Review whether your strategy encompasses the mandatory reporting requirements, and potentially an extended set of ESG reporting;
Understand the gaps between current and future resourcing, data, and disclosure needs, developing transition plans as required;
Determine if the right systems, processes, and controls are in place to ensure consistency, completeness and accuracy of reporting and record keeping.

Whilst there is a compliance requirement once the legislation is passed, consider how your business could use climate data and reporting as a competitive advantage. Being an early adopter could provide support to customers wanting their suppliers to have reliable data available to support their own Scope 3 reporting requirements. All else being equal, having progressive decarbonisation plans in place with reliable data backed forecasts can be beneficial for corporate planning and provide transparency in tracking sustainability targets. Also, being able to accurately provide GHG emissions data on a per product, service, or customer basis can set you apart from other suppliers, allowing climate-conscious buyers to make informed decisions. From risk management perspective, it can also be leveraged to drive or supplement your business continuity risk management and supply chain reviews.

Many businesses will eventually be subject to mandatory climate reporting, we at TUTXI Consulting also want you to consider how can you leverage this work to your competitive advantage.

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The Demand for Reporting – How did we get here?

The Paris Agreement – How it Affects Australian Businesses

Proposed Mandatory Reporting Requirements

How to Prepare for Australia’s Mandatory Climate-Related Financial Disclosures

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