LONG READ: How new climate disclosure laws are shaping Australia’s economic future

Disclosure laws are rarely a cause for excitement. Yet mandatory laws for climate-related financial disclosure could help shape the fortunes of companies and the economy by putting Australia back on the path for green growth.

Aletta Boshoff, National Leader of Sustainability at BDO Australia, one of the world's largest accounting networks, believes this move could be a watershed moment for Australian business. “As part of that legislation, from January 1, 2025, certain entities, depending on their size, will be required to report on their governance around climate risk as well as their opportunities around climate risk." 

The new requirements are aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), a globally recognised framework for climate-related financial reporting. This alignment positions Australia alongside other major economies that have adopted similar measures, including the UK, EU, New Zealand, and Singapore.

Under the new rules, impacted companies will be required to conduct scenario analyses, perform financial modelling of potential climate impacts, report their carbon footprint and disclose their progress against emissions reduction targets. The legislation also mandates the disclosure of Scope 1, 2, and 3 greenhouse gas emissions, transition plans in accordance with Australia's commitment to net zero emissions by 2050 and climate scenario analysis. 

Boshoff believes this mandatory reporting will be a catalyst for action. "One would imagine that this kind of reporting will drive action, and if it drives action, it means that businesses will say, 'Let's reduce our carbon footprint, let's mitigate climate risk and explore climate opportunities.'"

This push towards greater transparency and accountability could accelerate Australia's progress towards its climate goals while driving economic growth. By requiring companies to report on their climate-related risks and opportunities, the new rules are likely to drive innovation and investment in sustainable technologies and practices.

Disclosure laws to have a ripple effect

Treasurer Jim Chalmers and Minister for Climate Change and Energy Chris Bowen believe the new law will "help protect consumers and support the stability of Australia's financial system as we manage the risks and opportunities of climate change." The purpose is to provide investors, lenders, and insurers with the information they need to make informed decisions and support the flow of finance towards Australia's decarbonisation efforts.

However, the impact of these regulations extends beyond large corporations. Boshoff points out that smaller businesses in the supply chain will be impacted. "We have to remember that, especially when you look at carbon footprint, you have to look at the footprint across the whole value chain," she says.

Small business will be impacted by new climate disclosure laws

This ripple effect means that even smaller businesses not directly subject to the new reporting requirements may need to measure and manage their carbon footprint to remain competitive. "While these businesses don't have to conduct all the climate risk assessments, or all of the mandatory reporting, their stakeholders will be asking for information to help them do their reporting across the value chain,” Boshoff says. “This will require a response, otherwise, you lose customers, you lose investors, and you lose people in your business."

The implications for Australia's business landscape are significant. As companies of all sizes begin to prioritise sustainability, it's likely to drive innovation and efficiency across the entire economy. This could position Australian businesses more competitively on the global stage, particularly as investors and customers worldwide increasingly prioritise sustainability performance. 

"Increasingly we see that PE (private equity) funds, super funds, large investors globally and in Australia, are now looking very carefully at where they invest their money because they are caught by all of these reporting obligations," Boshoff says. "And the banks are looking very carefully at who they provide financing to. So, if you've got good credentials, or you've got good sustainability health, it should give you access to capital, whether it's debt or equity."

Access to capital expected to widen

Greater access to capital could fund green technologies and sustainable practices and drive economic growth while reducing the nation's carbon footprint. 

The new legislation also includes provisions for climate-related financial risk disclosure by financial institutions. This is particularly significant given the role of these institutions in shaping investment patterns and economic development. Disclosing climate-related risks aims to strengthen the resilience of Australia's financial system to climate-related shocks and support the transition to a low-carbon economy.

The implications for Australia's economic growth and green ambitions are significant. By aligning with international standards, Australia positions itself as an attractive destination for global capital, particularly from investors increasingly focused on sustainability metrics. However, the transition will not be without its challenges.

"Whether an entity needs to report and prepare a full set of climate disclosure or is part of the supply chain for disclosure, if it doesn’t do that it may find the organisation less competitive and potentially priced out of the market," Daen Soukseun, a senior adviser to the Institute of Public Accountants (IPA) says. She also cautions companies that do not disclose climate-related information may be viewed as riskier propositions by investors, potentially facing higher costs of capital.

Push for standardisation to boost transparency

Soukseun says the push for standardised climate reporting comes as a response to the current inconsistencies in sustainability reporting. Many entities, especially larger ones, have been voluntarily disclosing climate-related information, but the lack of a unified framework has created difficulties for investors interpreting climate information for their decision-making.

"Essentially, a few years ago, investors demanded that Australia provide high quality, climate-related financial disclosure that is transparent, consistent, and comparable, both domestically and internationally," she says.

The new legislation requires the Australian Accounting Standards Board (AASB) to develop Australian Sustainability Reporting Standards. These standards will be based on the International Sustainability Standards Board (ISSB) Sustainability Disclosure Standards that set the global baseline for sustainability reporting and aligning Australia with international best practices.

"The ISSB Standards aim to provide useful information for the users of those reports about the climate-related risks and opportunities that affect the entities' cash flow, access to finance, or cost of capital," Soukseun says. This information will cover governance, strategy, risk management, and metrics and targets over short, medium, and long-term horizons.

The legislation prescribes a phased approach, categorising entities into three groups based on their size and financial metrics. Group 1, comprising the largest entities, will need to report by 31 December 2025, or 30 June 2026, depending on their financial year-end. Groups 2 and 3 will follow in subsequent years.

Small companies face disclosure costs

While the move towards comprehensive climate disclosure is generally seen as positive, it does come with challenges, particularly for smaller entities. "It is costly to do this," Soukseun says, "but if an entity is exposed to the material risks of climate change, it needs to consider this along with any opportunities it can harness. There will be a cost initially to implementing climate disclosures, but the cost of not dealing with climate change may be even greater.”

The IPA has taken a nuanced stance on the issue, differing from other accounting bodies. While some organisations have called for the government to exempt Group 3 entities (smaller businesses) from reporting all together, the IPA believes in a more principles approach.

"IPA has taken a holistic view," Soukseun says. "If fundamentally we believe that climate reporting is worth doing, which we think it is, then everyone in the size thresholds should be reporting it, but the cost-benefit of the report has to be proportionate to the entity's complexity."

This perspective is reflected in the IPA's submission to the AASB, where it advocates for a simplified disclosure framework for smaller entities. The submission says: "The IPA supports the AASB's proposal to develop a separate, standalone sustainability reporting Tier 2 disclosure framework for smaller entities... This framework should be proportionate and appropriate to the size and complexity of these entities."

The IPA's approach recognises the importance of climate disclosure across all business sizes. It aligns with existing financial reporting practices, where different tiers of disclosure requirements already exist based on entity size and complexity.

The impact of these new reporting requirements extends beyond the companies directly affected. Soukseun points to the example of Coles Group, one of Australia's largest retailers. In its 2023 Annual Report, Coles says: "We have recently announced we will work in partnership with more than 75% of our suppliers, by spend, to help them set science-based emissions reduction targets by the end of FY27."

This commitment from Coles illustrates how larger companies' climate disclosure requirements will cascade down the supply chain, affecting smaller businesses that may not be directly subject to the new legislation. "Even though an entity may fall outside the three groups for mandatory climate reporting, the entity may need to provide the larger entities that report for their Scope 3 disclosure,” Soukseun says.

The AASB is currently in the final stages of considering the remaining issues for the climate disclosure standards, with the aim of issuing it in the next couple of weeks.

Complexity to add to compliance burden

Boshoff also acknowledges the complexity of the new regulatory environment. "It's a complex environment for businesses to have different pieces of legislation," she says. The challenge for companies, particularly larger entities, will be to integrate these various reporting requirements into a cohesive sustainability strategy. For smaller companies wanting to support larger clients needing to disclose Scope 3 performance, aligning to the reporting standards could become an issue.”

Despite these challenges, Boshoff sees the new regulations as an opportunity rather than a burden. "Climate risk should just be part of your overall business approach to managing risks," she says.

This integrated approach to risk management could lead to more resilient and adaptable businesses and drive new climate-related business opportunities. "Conducting a climate risk assessment can reveal opportunities that not only mitigate risks but also enhance profitability," Boshoff says. 

With Europe leading the way in ESG reporting, Australia's move to align with international standards could make Australian companies more attractive to global investors. "Let's look at the countries that are similarly aligned, making progress across climate risk and sustainability," Boshoff says.

This global alignment could position Australia as a leader in the Asia-Pacific region when it comes to sustainable business practices.

Broader sustainability disclosure yet to be tackled

Boshoff cautions against viewing these new rules as a solution for all sustainability issues. "Initially, it's only climate, not all sustainability topics," she says. "Other topics will be introduced over time. And I think they are mindful of building climate first and just sticking to one aspect being mandatory, and then over time, introducing others." 

This phased approach could allow businesses to adapt gradually to the new reporting requirements, potentially minimising disruption while still driving meaningful change. 

Many businesses are already aligned with the new rules or seeking guidance. "We've really seen that clients are reaching out and saying, 'Let's do a sustainability health check,'" Boshoff says. This proactive approach suggests that many Australian businesses are ready and willing to embrace the challenges and opportunities presented by the new ESG accounting rules.

The Australian Securities and Investments Commission (ASIC) will play a crucial role in implementing and enforcing the new disclosure requirements. 

"If you have to report on it in an annual report for everybody to see, entities will be serious about improving all of these things in order to look better than competitors," Boshoff says.

Read the IPA's submission to the AASB