Mandatory climate disclosures | ISSB, IFRS

Part 2: What will ISSB mean for Australian companies experienced in NGER reporting?

Experience in NGER (National Greenhouse and Energy Reporting) reporting can take you a long way; but the new ISSB Climate Disclosures standard contains some important differences, especially with regard to sector-specific reporting requirements.

ISSB and NGER reporting: is there a difference?

There are many places where ISSB and NGER reporting differ, starting with their purpose and how inventories are developed and structured.

The NGER Scheme was established in 2007 by the  Australian Government to enable the development of national inventories for energy (production and consumption) and greenhouse gas emissions (production). NGER reporting requirements focus on provision of accurate emissions and energy data to the government. Because the NGER regime is robust, it has become the de facto Australian standard for emissions reporting to financial stakeholders even by companies that are not obliged to comply with the scheme.

The establishment of the International Sustainability Standards Board (ISSB) reflects the growing attention among international financial stakeholders to the implications of climate change and decarbonisation for businesses, and by extension, the global economy and financial system. The ISSB has been working on IFRS S2 Climate-related Disclosures, a standard that codifies the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This was published in draft for comment in 2022, and the final version is expected for release 29 June 2023[1].  This means that ISSB reporting goes well beyond an emissions inventory. Companies adopting the standard will need to understand and cost their transition plans, report on progress made in achieving these, and also report on physical climate risk management – all of this information will then need to be interpreted to inform the impact of these aspects on the financial performance of the business.

This article is the second instalment in Energetics’ series on the incoming ISSB disclosure standard which will consider these wider implications. Today, however, we focus solely on the new ISSB standard’s requirements for scope 1 and scope 2 emissions reporting, and examines where ISSB differs from NGER reporting requirements.

Industry classification: ISSB requires reporting in line with SICS

NGER uses standard ANZSIC (Australia and New Zealand Standard Industrial Classification) codes to identify the industries in which companies operate. ISSB requires companies to report in line with SICS (Sustainable Industry Classification System classifications). These classification standards can differ at the highest level of aggregation. Companies need to check how the ANZSIC classification of their assets map to the classifications in the SICS. The impact of these differences will depend on the sector in which assets are located.

Boundary definition: operational control vs equity based reporting

This is also referred to as the control model. NGER requires companies set boundaries based on a form of operational control similar to that defined by the Greenhouse Gas Protocol. Under NGER only one company is ever responsible for reporting the inventory for a site or facility. As noted above, care is taken to ensure that data points are only reported once for the country. ISSB allows companies to report either using operational control or equity share as defined by the Greenhouse Gas Protocol.  For international companies this could require aligning Australian reporting practices with that of the global company. Given that the focus of ISSB is to align sustainability information with financial information, we are seeing companies moving to equity based reporting for their sustainability information set.  

Scope-related requirements: potential greater complexity and a smaller number of items under ISSB

NGER requires scope 1 and scope 2 emissions to be reported by all reporting entities. By contrast, ISSB requires reporting of certain groupings of scope 1 and scope 2 (and sometimes scope 3) emissions, with different groupings, and combinations of groupings, for different SICS codes. For example, companies classified as ‘building products and furnishings’ need to report emissions within the ‘stationary energy’ grouping of scope 1 and scope 2 emissions, while companies classified as ‘agricultural products’ need to report emissions within the ‘scope 1 and 2 emissions and energy consumption’ grouping. The table below summarises these groupings and the emissions within each.

Table 1:ISSB Climate Disclosures standard emissions groupings

A company that reports its scope 1 and scope 2 emissions under NGER is well-placed to supply this information to ISSB. However, there are some notable differences:

• For NGER, scope 2 emissions (emissions from the consumption of grid-purchased electricity) are reported using location-based emissions factors. ISSB requires a market-based method of emissions estimation which consider the purchase and use of renewable electricity in calculating emissions. NGER is trialling allowing companies to report using market-based emissions approaches for the 2023/24 reporting year. An example of a location-based emissions factor is the emissions factor published on an annual basis for NSW grid connected sites. The market-based emission approach takes into account the actual mix of electricity consumed by that site for that period, where relevant renewable sources need to be considered. Instead of using a state-based emission factor, either a supplier specific factor or a country residual mixed factor will be applied onto the residual electricity usage (i.e. those that not sourced from renewable sources) to calculate the market-based emissions. This assessment of scope 2 emissions, although much more challenging to assess, allows companies to report the impact of their voluntary decarbonisation actions more accurately. We strongly recommend that companies track this on a monthly or a quarterly basis.

• Some industries will need to disclose their methane emissions separately from other greenhouse gas emissions.

There are further sector-specific requirements not captured in Table 1. Many of these will apply to companies that may use NGER methods but do not report to NGER. For example, commercial banks will need to report scope 3 financed emissions of all industries by asset class. A longer table at the end of the note outlines the scope 1 and scope 2 emissions reporting requirements ISSB has defined for specific SICS sectors. This is an extract from a more detailed report contrasting ISSB and NGER which is available on request

Emissions estimation methodologies: NGER should be transferable

ISSB will consider country-specific emissions estimation methodologies, as long as these are aligned with industry practice. Our expectations are that the majority of the emissions estimations methodologies provided in the NGER Determination will be transferable to ISSB.

Disclosure requirements and expectations: you will need to report in line with financial information and make it available to investors

NGER information is reported online to the Clean Energy Regulator (CER). It is reported at facility level and aggregated at company (controlling corporation) level. Once a year the CER releases reported scope 1, scope 2 and energy production and consumption information for reporting companies that exceed defined thresholds. Some companies’ information may be kept confidential if it reveals too much information about their business model. However, their data is included in provision of aggregate results.

ISSB information needs to be consolidated and reported in line with financial information and be accessible to investors – this could pose a problem to companies who report their information on an operational control basis only. There are potential timing implications here where financial information is available very close to the end of the financial year, sometime within weeks. NGER gives companies four months to report.  

Further, there is a strong recommendation that it be located in the company’s annual report. There are some expectations that the information be disclosed at the front of annual reports, and not only in the detail in the financial statements. This is expected to be clarified when the final version of the ISSB standard is released at the end of June. ISSB requires that companies report not only on their current state but also how they are tracking against target. NGER does allow companies to report on this on a voluntary basis, there has been limited uptake of this aspect.

Audit requirements and providing assurance to financial information standard

NGER requires that organisations subject to audit, such as those selected by the CER for periodic compliance audits, must engage an NGER auditor to provide assurance at financial information level. NGER auditors are typically experienced financial auditors who are practiced in NGER reporting requirements. Similarly, as ISSB concerns financial information, it needs to be audited by financial auditors as part of the annual financial audit. In this case, reporters who have been reporting to and audited against NGER requirements are relatively well placed, as they are accustomed to having energy and greenhouse information audited to financial information quality. However, the additional aspect of linking energy and greenhouse information to its financial implications is non-trivial and additional to current NGER obligations.

Prepare now. NGER is a good basis, but ISSB goes further

In conclusion, while reporting to NGER sets a company on the right road to meeting the requirements of ISSB with respect to building scope 1 and scope 2 emissions inventories, ISSB goes much further. Companies should consider the specific requirements of reporting for the sector within which each of their assets falls. In addition, attention needs to be paid to scope 3 reporting, the assessment and reporting of transition plans, as well as physical climate risk.

Click here for further insights into emissions reporting requirements by industry.