Mandatory climate reporting

What changed from draft to final regs for mandatory reporting?

With the passing last month of the enabling legislation for mandatory climate reporting and the Australian Accounting Standards Board’s (AASB) approval of the Australian Sustainability Reporting Standards (ASRS), businesses have both a firm start date and clear requirements for their disclosures. While ERM Energetics’ Olivia Kember points out in her recent article, “Mandatory climate reporting is here. How ready are businesses to meet their obligations?”, that the draft documents gave enough clear information for action, there were changes between the draft reporting requirements and the final form of the scheme.

To help businesses that have begun preparing for disclosure, but would like to understand what did and did not shift between the exposure drafts and final legislation, ERM Energetics has outlined the principal differences.

Overall, a closer alignment to the International Financial Reporting Standards (IFRS)

The enabling legislation as passed in early September requires businesses to disclose their mitigation plans, as well as the financial risks and opportunities of climate change. Reporting needs to align with the Australian Sustainability Reporting Standards (ASRS) as developed by the Australian Accounting Standards Board (AASB).

The ASRS standards comprise two parts, AASB S1 and AASB S2 that follow the structure of the IFRS Sustainability Disclosure Standards – and there are few differences between what we now have and what was originally proposed in the draft regulations. These changes are described below:

• AASB S1 is now a voluntary standard which enables reporting across broader sustainability impacts than only climate change, such as biodiversity. This means that the mandatory element of the disclosures is significantly reduced. We do foresee AASB S1 being mandated at some point in time, but not in the near future.
• AASB S2 features the main elements of IFRS S1. With its focus on climate, it is the mandatory standard for all entities.
• The final regulations require that disclosures must be made against two temperature scenarios[1]:
  • 1.5^oC as a low global warming scenario
  • 2.5^oC or higher, to provide a high warming scenario.

While there is value in understanding these two “bookends” to our potential environmental future, both of these futures are unlikely to occur. The most useful climate scenario against which to stress test your business strategy is one that lies between these two extremes.

• In the regulations as enacted, the requirement that performance against each material climate related risk and opportunity be measured by a metric has been removed. However, it is our recommendation that you consider metrics and collate the necessary information. Metrics are required in the mandatory disclosure regimes of other jurisdictions, and investors may ask for this information. It is also likely that the requirement to disclose performance in sectoral metrics will be mandated over time.
• With respect to control, an entity can choose to assess and disclose their emissions by either an approach based on the equity they hold, or the control they exercise. The reasons behind that choice will need to be explained in final disclosures. ERM Energetics’ recommendation is that you align this with your current approach to financial disclosures.
• All companies are required to report scope 2 emissions as location-based emissions. Market-based scope 2 emissions accounting and reporting are not required (but can be disclosed if an entity chooses).
• Based on IFRS S2, the new Australian regime takes on the GHG Protocol Corporate Standard for the measurement of emissions. Where reporting companies fall under NGER, they can continue to use NGER methodologies for the calculation of scope 1 and 2 emissions. We note that there is the possibility for NGER to lag the GHG Protocol Corporate Standard in transitioning between updated versions of the global warming potentials (GWPs) and resulting emissions factors associated with some gases. GWPs are typically reviewed and adjusted in the IPCC’s Assessment periods and are referred to as IPCC AR 6, for example. NGER can take up to an additional 24 months to adopt these updates. There is value in understanding how these changes will impact your emissions estimates sooner rather than later, particularly in that they will impact your emissions trajectory included in your transition plan. We recommend an alignment with the GHG Protocol Corporate Standard.
• Entities that manage assets, provide insurance services or are in the business of commercial banking will need to disclose financed emissions. This is different from the exposure drafts, where relevant entities needed to only ‘consider’ disclosing financed emissions. Reporting on financed emissions is not an insignificant task, and impacted companies should begin work as soon as possible.

Does your business need help to work through the reporting requirements?

Australian companies that haven’t begun their preparations for the new reporting regime, will need to get started quickly. It should also be noted that even companies which have reported under TCFD will find compliance challenging, especially for aspects relating to Strategy. There is a need for a company’s finance and sustainability functions to work together to develop a common view of financial materiality. Remember, if your business can leverage mandatory climate reporting to drive risk mitigation and value creation, you will gain more than compliance alone.

ERM and Energetics have undertaken ASRS gap analyses and compliance roadmap development for Group 1 reporting clients in all sectors of the economy. We have worked with over 50 companies to integrate climate risk management into their business processes and disclosures. We go beyond providing independent advice. What sets us apart is our deep technical expertise that is delivered throughout our end-to-end ASRS service. Our approach leverages clients’ existing work, together with tailored tools to help companies meet ASRS requirements – efficiently and effectively. The solutions we develop are actionable, from capacity building to executive strategy and operational execution.