The Australian Treasury has released a proposal setting out the climate-related information many companies may soon need to disclose.

The recent exposure draft released by the Australian Accounting Standards Board (AASB) outlines the proposed disclosures in full. 

Under the proposal, companies will need to disclose climate-related information as part of their general financial reporting, starting as early as July 2024 for some companies. 

Australian Security & Investments Commission chair Joe Longo described the shift as the ‘biggest change to corporate reporting in a generation’.

Why does Australia need mandatory climate-related financial disclosures?

The world is not on track to reach the Paris Agreement goals of limiting global warming to 1.5 degrees Celsius

The Australian Government has committed to reduce greenhouse gas emissions by 43 per cent below 2005 levels by 2030 and achieve net zero emissions by 2050

Major investments are required across the Australian economy to achieve these commitments. 

A comprehensive sustainable finance system that provides the appropriate structure, tools and information to the market can mobilise, scale-up and channel investment to drive the transition.

The proposed mandatory disclosure of transparent and comparable climate-related data is a critical first step in this transition.

Why does transparent climate-related financial data matter?

Transparent and comparable climate-related data is crucial for both companies and their stakeholders to identify, assess and manage climate-related risks. It also gives stakeholders, including financial institutions, insight into opportunities arising from the transition to a low-carbon economy. 

Increased transparency of climate-related data can also:

  • reduce the risk of greenwashing, supporting regulators and stakeholders in holding companies accountable for their claims around climate commitments
  • support policy makers and regulators in better understanding broader systemic risks to the financial system associated with climate change
  • enable consumers to make informed decisions about where they want to spend, invest, or even work
  • foster an environment of collaboration around climate change and sustainability across value chains. 

What do the Australian mandatory climate-related financial disclosure requirements mean for companies?

Rather than reporting from a compliance-based mindset, companies can use the disclosures as an opportunity to better understand their climate risks and opportunities and build long-term value.

Companies that already report using the Taskforce on Climate-related Financial Disclosures (TCFD) framework should be well placed to meet new requirements. However, the disclosures proposed by the Treasury will require more detailed and quantitative information. 

Companies new to climate-related reporting will have an opportunity to bring climate to the forefront of their core business strategy.The proposed disclosures also help companies demonstrate their value to investors and customers in order to attract investment in a decarbonising economy.

The disclosures also provide many of the elements required to create credible transition plans.

Are there international standards for climate-related financial disclosures?

The International Sustainability Standards Board (ISSB) issued two new standards in June 2023

The standards are designed to form a baseline for sustainability (IFRS S1) and climate-related (IFRS S2) disclosures around the world. 

They consolidate numerous reporting frameworks and are structured around the TCFD’s elements of governance, strategy, risk management, and metrics and targets.

Jurisdictions are able to adapt the standards to their local needs whilst maintaining interoperability with international financial markets. 

Treasury’s proposal signals Australia’s intent to follow many other jurisdictions in introducing mandatory climate-related disclosures closely aligned with the ISSB’s climate-related standard (IFRS S2).

What are Australia’s proposed climate-related financial reporting requirements?

Under Treasury’s proposal, companies will have to disclose their current and anticipated climate-related risks over the short, medium and long term. This represents a significant change from previous financial reporting by requiring substantial forward-looking information. 

Disclosure requirements include: 

  • greenhouse gas emissions from all sources – scope 1 (direct emissions generated by operations), scope 2 (indirect emissions from energy purchased and used) and scope 3 (indirect emissions along the wider value-chain)
  • climate resilience of strategy and business models, informed by scenario analysis
  • responses to anticipated material climate-related physical and transition risks and opportunities
  • any climate-related targets, offset contributions and transition plans.

Companies will also be required to obtain assurance by a third-party. 

Treasury is proposing a staged approach to implementation, starting with large businesses and financial institutions from the 2024/25 financial year and expanding to cover all other proposed groups by the 2027/28 financial year. 

What comes next?

Mandatory climate-related disclosures represent a key first component of a wider sustainable finance system that is capable of facilitating and accelerating economy-wide decarbonisation. 

As the disclosures are implemented, a wealth of new data will enter the market that decision-makers throughout the economy will be able to use to support company, sector and national transitions to net zero in line with Paris Agreement goals. 

Companies should act now to integrate climate and other sustainability considerations into their overall strategy to better prepare for further developments, including the upcoming release of Treasury’s sustainable finance strategy.

Companies that do this successfully will demonstrate a competitive advantage and value to investors and customers in a decarbonising economy.

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