Climate Disclosure: Optional becomes obligatory with ASRS
As the effects of climate change become more apparent, organisations and governments worldwide are agreeing that climate-related financial disclosures are key to providing transparency to the public and investors on a business’s exposure to the effects of climate change.
The Australian Government’s recently released consultation on climate-related financial disclosure outlines how the mandatory reporting of climate information will occur from July 2024 onwards, with a phased-in approach depending on the size of the company and reporting obligations under the National Greenhouse and Energy Reporting (NGER) Scheme. This consultation continues the discovery and design consultations held in December 2022 and June 2023, respectively.
Figure 1 Mandatory reporting phase in period (Source: treasury.gov.au, Mandatory climate-related financial disclosures)
The aim is to capture companies that have the most exposure to climate-related risks and opportunities, while also having the capacity and ability to report to the standard required.
What will you need to report?
Climate-related financial disclosures will form part of the new sustainability report, a report required to be submitted annually as part of existing financial reporting obligations. In the future, other sustainability-related information such as water, waste, biodiversity, and air quality could be added to the requirements of this sustainability report.
Currently, the climate-related information required will be:
Scope 1, 2 and 3 greenhouse gas (GHG) emissions:
Scope 1 – Direct emissions that result from the activities of the organisation.
Scope 2 – Indirect emissions that result from the generation of purchased energy.
Scope 3 – All other indirect emissions, other than Scope 2, that occur in the value chain of the organisation but are not controlled by the organisation.
Industry-based metrics,
Climate scenario analysis, and
Information relating to governance, strategy, risk management and targets.
While Scope 1 and 2 emissions will be required from the first reporting year onwards, Scope 3 emissions will be required from the second reporting year onwards. Those familiar with GHG reporting will know that globally, there has been a struggle to provide reliable Scope 3 GHG emissions, and as such, Scope 3 disclosures have initially been limited to those that are available without undue cost or effort.
Industry-based metrics are currently limited in relation to climate and will seemingly be developed alongside the first few years of these new reporting obligations. As these metrics are required to be disclosed from July 2030 onwards, it is expected they would be available prior to that date.
Climate scenario analysis will be a difficult part of the new disclosure requirements. Organisations will be expected to apply at least two scenarios to their operations to understand the risks and opportunities (e.g., rising sea levels being a risk to fixed coastal assets and changing energy markets being an opportunity for development). One of these scenarios must align with limiting global warming to 1.5 degrees, as outlined in the Climate Change Act 2022. While companies can initially use qualitative analysis, from July 2027 onwards, they will be expected to use quantitative analysis.
Finally, surrounding these disclosures, organisations will also have to describe the governance, strategy, risk management and targets specific to climate-related issues. Organisations will have to describe how the governance of climate is integrated into their existing structures, who is responsible for it, how it is reported to the board and how the board makes informed decisions on risks and opportunities related to climate.
This all sounds remarkably familiar?
Those accustomed to financial disclosure procedures and structures will note that this sounds very familiar and purposefully so. The language and structure of climate-related reporting has been based on existing financial disclosure, to as easily as possible incorporate climate-related disclosure into existing organisational structures.
While this makes things convenient, it also brings with it the associated liabilities. Directors familiar with the Australian Securities and Investments Commission Act 2001 know that any forward-looking statements must be based on reasonable grounds, and climate-related statements are no different. The Government has recognised, however, the difficulty in this new mandatory reporting and has modified the liability for climate disclosure. Only the regulator will be able to take action against breaches of the provisions surrounding forward-looking statements and disclosure of Scope 3 GHG emissions for reports issued between financial years 2025 and 2028.
How do I get started?
Reading through the exposure draft can make it difficult to understand your reporting obligations. First is understanding when you need to report, and then what to report as various metrics may or may not be required depending on the financial year the organisation is reporting in.
The best way to start is to talk to us here at Greenbase. With over 20 years of understanding the obligations of environmental reporting and calculating GHG emissions, we are here to help you navigate through the confusing stages of climate-related financial disclosure.
Greenbase. Makes Sense.