Climate-related financial disclosure reforms signal the national transition to a sustainable financial system, once and for all

The consultation paper, released alongside the announcement, refers to the International Sustainability Standards Board’s (ISSB) draft standard on climate-related disclosures (IFRS S2), and poses several questions relating to global alignment, the scope of mandatory disclosures, assurance, materiality, and many other important considerations.

Despite previous inaction by the federal government, large companies in Australia have already recognised the demand for sustainability information, and in particular, climate-related disclosures. This is apparent through KPMG’s 2022 Sustainability Reporting Survey, which found 74% of the ASX100 to be voluntarily reporting climate risk in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

The IFRS S2 standard is leveraging the four pillars of the TCFD recommendations – Governance, Strategy, Risk Management, and Metrics and Targets – meaning there is an extent of preparedness at the top end of town. Although, without mandated climate-related disclosures, the comparability of TCFD disclosures between entities is relatively limited, given the variety of methods and scenarios that can be selected.

However, the government’s hand now signals a wider economic transition, whereby the rigour and reliability of sustainability reporting can be optimised within a sustainable financial system. This, in turn, instils confidence in preparers, investors, the community, and businesses alike.

In his address, Chalmers identified three key benefits of mandated disclosures[1]:

1. To support and guide investor and customer decision making.
2. To assist regulators with the monitoring of greenwashing.
3. To improve the management of sustainability-related risks and opportunities.

Chalmers also recognises the importance of being in-step with global reporting developments, in order to ensure that Australian businesses remain internationally competitive.

Phased approach:

The consultation paper from Treasury states that “larger entities have more resources to adequately respond to new requirements.” While the first reports would be required for the 2024-25 financial year, a phased approach will provide smaller firms with “time to benefit from the institutionalisation of reporting in the market prior to their own reporting.”

The scope of mandate is yet to be confirmed, with Treasury surveying the appropriate size thresholds for large entities and financial institutions.

By way of comparison, the UK’s mandatory climate-related disclosures[2], which commenced on 6 April 2022 in line with the TCFD recommendations, applies to “many of the UK’s largest banks and insurers, as well as private companies with over 500 employees and £500 million in turnover.” The UK is also applying a phased approach, committing to mandatory climate disclosures across the economy by 2025.

The EU has cast a wider net[3], requiring any company with more than 250 staff and a turnover of €40 million to disclose its risks and opportunities across all areas of environmental, social, and governance (ESG). Scalable requirements for smaller listed companies will also be mandatory from 2028.

SMEs

The consultation paper notes that sole traders, partnerships, trusts, and a host of other entities would be excluded if the requirements are to be applied through the Corporations Act 2001.

While SMEs may not be subject to equal regulator or government scrutiny, these reforms communicate certainty of the demand for sustainability information within Australia’s financial system. The details of this reform will influence the information that is requested from members of a small business’s supply chain, their customers, bank, lenders, and other stakeholders.

For small-to-medium practitioners (SMPs), there is clearly an opportunity to develop sustainability as a service. The big four have leapt at the sustainability assurance challenge already, although SMPs can begin equipping themselves to do the same.

Where to begin?

• Read through the two ISSB Draft Standards (IFRS S1 and IFRS S2) to develop an understanding of what type of disclosures are going to be required.
• Review resources available from the TCFD, as the ISSB is leveraging these recommendations for IFRS S2.
  • The TCFD Learning Hub has free online courses available that can assist you to get started with climate disclosures today.

Overall, this move from the government should quash any doubt about the role of sustainability reporting in the future of our economy. Mandatory reporting requirements are set to improve comparability and enhance clarity for all stakeholders.

To help shape the future of the profession, members are encouraged to take the opportunity to respond to the consultation or keep an eye out for the chance to contribute to the IPA’s submission.

[1] https://www.smh.com.au/business/banking-and-finance/a-logical-step-finance-industry-backs-push-on-mandatory-climate-disclosure-20221212-p5c5kt.html

[2] https://www.gov.uk/government/news/uk-to-enshrine-mandatory-climate-disclosures-for-largest-companies-in-law

[3] https://www.reuters.com/business/sustainable-business/eu-agrees-deal-company-disclosures-combat-greenwashing-2022-06-21/