ESG issues and mandatory sustainability reporting drive “the biggest changes to financial reporting and disclosure standards in a generation” (Joe Longo, ASIC Chair)

July 5, 2023
5 min read
Louise Horrocks

Final ISSB standards to get the ball rolling on mandatory disclosure obligations

In his address to Committee for Economic Development of Australia (CEDA), Joe Longo identified three ESG areas specifically for corporations to consider more closely, including:

  • climate change adaptation and the protection of people’s livelihoods, infrastructure, and quality of life as we experience the effects of climate change;
  • the global push to reach net zero, protection of biodiversity and efficient use of resources; and
  • elevating diversity, equity, and transparency in business, policy, and community decision making.

Since the time of those remarks, the ISSB finalised its two standards (S1 and S2), the first setting out general sustainability disclosure requirements and the second providing guidance on climate-related disclosures.

The standards will be effective for annual reporting periods beginning on or after 1 January 2024, with companies to integrate these standards into sustainability-related disclosures by 2025.  It is these standards that Treasury intends to align with as far as possible for Australian disclosure with further consultation now open with respect to S2 particularly (see below).

Exactly what this practically means in terms of disclosure will be different for every corporation however the following is a general outline of what the standards require.

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information

International Financial Reporting Standards (IFRS) Standard 1 (S1) is the General Requirements Standard for the ISSB framework and sets out the core content for sustainability-related disclosures. This standard provides the baseline for reporting under the ISSB framework, and topics in this standard require material information about exposure to sustainability-related risks and opportunities.

S1 requires reporting entities to disclose all material information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity. The standard identifies core content that every reporting entity must report on, including:

  • governance processes, controls and procedures that are used to monitor and manage sustainability related risks and opportunities;
  • the strategy used by the entity to identify and assess sustainability-related risks and opportunities;
  • the sustainability related risk management processes that are in place; and
  • the reporting entity's sustainability performance including progress made towards any targets that have been set by the entity or are required to be met by law or regulation.

IFRS S2 Climate-related Disclosures

The IFRS Standard 2 (S2) contains the framework for climate-related disclosures. This standard is based on the Taskforce for Climate-Related Financial Disclosures (TCFD) and used the TCFD framework to guide reporting companies on disclosing and assessing their climate resilience. Standard 2 also sets out the requirement for companies to report on Scope 1, 2 and 3 emissions using the GHG Protocol Standards framework.

Disclosures made in accordance with this standard must address the climate resilience of an entity's strategy climate-related changes and uncertainties. For example, reporting entities must use climate-related scenario analysis to assess resilience and the capacity to adapt the entity's business model to climate change over the short, medium, and long-term.

ASIC Recommendations

The effect of the impending release of the ISSB standards was addressed by ASIC Chair Joe Longo in his speech before the CEDA State of the Nation conference earlier this month, which discussed the major changes underway for reporting by Australian corporates. ASIC, as well as the Australian Prudential Regulation Authority (APRA), have endorsed the draft ISSB Standards as the framework to set the scene for future mandatory sustainability reporting.

Longo issued advice for companies preparing for the upcoming ESG changes, urging firms to be well advanced in embedding robust corporate governance practices ahead of the more rigorous reporting requirements that will come from the release of the final ISSB standards. Following the release of the ISSB standards, the federal Treasury has released a second consultation paper to seek views on the government’s proposed implementation of internationally-aligned disclosure requirements for climate-related financial risks and opportunities in Australia.

Some of Treasury’s proposals for consultation include:

  • application to be phased in for three groups of reporting entities in accordance with the following table:
  • from commencement, information would be required to be disclosed about governance processes, controls and procedures used to monitor and manage climate-related financial risks and opportunities;
  • primary users should be able to understand an entity’s strategy for identifying and addressing climate-related risks and opportunities. As indicated by the ISSB, disclosures relating to an entity’s strategy would include information about the current and anticipated effects of risks and opportunities faced by the reporting entity (for the reporting period and over the short, medium and long term) on the entity’s business model and value chain, decision-making (including any transition plan) and financial position, financial performance and cash flows. It also includes information on the climate resilience of its strategy and business model to both transition and physical risks;
  • transition plans would need to be disclosed, including information about offsets, target setting and mitigation strategies;
  • information would be required about any climate-related targets and progress towards these targets;
  • information would be required about material climate-related risks and opportunities to their business, as well as how the entity identifies, assesses and manages risk and opportunities; and
  • scope 3 emissions reporting would be required from their second reporting year onwards.

With the first round of Treasury consultation universally supportive of the adopting of the ISSB Standards, any further submissions (due by 21 July), are not expected to materially impact the overall approach which will set ambitious requirements and require a substantial amount of work from companies including with the adoption of a systematic approach to collecting data across both the company itself and its supply chain. No wonder Longo recommended that preparation begin now in anticipation of the likely implementation of these standards into Australian law over the next 18 months.

Joe Longo explained that these incoming changes will be the biggest change to reporting in a generation. The regulator is engaging heavily at both the domestic and global level to ensure that Australia’s approach to ESG and greenwashing aligns with what is happening in the global financial system. As mandatory reporting obligations are introduced, ASIC plans to be proportionate and reasonable with its expectations and will expect a good faith attempt from companies to comply with new standards and will commence actions against behaviour that willfully ignores standards.  In the meantime, until mandatory reporting commences ASIC recommends that companies continue to voluntarily report under the recommendations of the TCFD for the current financial year.

At McR ESG we recommend that companies at every stage of their sustainability journey remain informed on upcoming disclosure obligations. Companies should also assess whether they have the appropriate oversight and systems in place to ensure the board is confident in the company’s sustainability disclosures, in preparation for when mandatory standards are introduced, which will require a concentrated effort.

Implementation Plan ensures integrity as reforms for the ACCU scheme are released

In June, the Department of Climate Change, Energy, the Environment and Water released the government's Australian Carbon Credit Unit (ACCU) Implementation Plan to ensure the ACCU scheme is effectively designed to support Australia in meeting its net zero transition ambitions. The Implementation Plan was released in response to the 2022 Independent Review of the scheme where 16 recommendations to maintain the integrity of the scheme were put forward. All 16 recommendations have since been accepted.

The Implementation Plan sets out the timeline and approach for implementing each reform. Immediate steps have been articulated to ensure the ACCU scheme remains fit-for-purpose, with several longer-term broad reforms also proposed, supported by new governance and transparency arrangements to ensure confidence in the scheme. Under the proposed reforms, the development of new high-integrity ACCU method processes, including the prioritised development of the new Integrated Farm and Land Management (IFLM) method, will be supported by the introduction of criteria to address integrity, scale, and co-benefits.  

Several reforms from the Implementation Plan are already underway, including those impacted by the introduction of the Safeguard Mechanism reforms in March. Other priority reforms should be progressed in a timely manner to optimise the scheme, and we expect to hear how government consultation is developing on these reforms by the end of 2023.

The ACCU Scheme review and Implementation Plan forms part of a broader increasing landscape of carbon market integrity initiatives. In June, the Voluntary Carbon Market Initiative (VMCI) provided guidance through the release of its Claims Code of Practice. The Code of Practice offers a blueprint for high-integrity use of carbon credits by corporates looking to make net zero-aligned claims.

Standards for the voluntary carbon market have also been issued by the Integrity Council for the Voluntary Carbon Market, who provide oversight of the market. As the role of carbon markets increases to support the transition to a low carbon economy, the Australian regulatory framework needs to catch up to align with international best practice and keep Australian companies competitive as global markets are adapting to the transition. The increasing standards and integrity initiatives developing for the carbon market show that steps are being taken at a market level to strengthen benchmarks and restore confidence in the quality of purchased credits. This assists companies to maximise their climate impact by including high-integrity carbon credits as part of a credible sustainability strategy which first prioritises emissions avoidance and reduction.

We recommend any companies looking to enter the Voluntary Carbon Market conduct thorough due diligence and continue to follow VCMI direction and the Integrity Council for the Voluntary Carbon Market as they continue to develop supporting materials for adoption of the codes and standard.

Please contact the McR ESG team to understand how any of these developments may apply to your organisation and how you can be best placed to respond.