Another financial year has come and gone, and as we look to the other side and start planning for what is ahead, sustainability for most, is front of mind. What progress will you make? How can you make sure you are not left behind? What can you do to seize this opportunity? And what indicators tell you you have achieved this?
Amidst the 2022 Federal Election, Australians voiced climate change as their number one issue. This was raised above any other topics which, in turn, contributed to the election of Greens candidates and Teal Independents, typically strong advocates for climate action. Consequently, we now have in our hands, a parliament that will and is following through with what Australians want.
The Need for Sustainability Reporting
Increasing demand for transparent communication is being driven by consumers, investors, and regulators who are all pushing for more information on environmental, social, and governance (ESG) issues. While these demands are growing, many organisations have yet to produce a sustainability report. This means that there is a significant gap between the expectations of stakeholders and the actual reporting practices of many organisations.
To bridge this gap, organisations need to start thinking seriously about their sustainability journey. This involves not only producing sustainability reports but also adopting a more holistic approach to ESG issues. By focusing on sustainability, organisations can improve their reputation, build trust with stakeholders, and create long-term value.
Of course, embarking on a sustainability journey is not always easy. It requires a significant commitment of time, resources, and expertise. However, the rewards of sustainability are significant, and the risks of not addressing ESG issues are growing. So, if you haven't started your sustainability journey yet, it might be time to consider taking the plunge. With FY2023 ahead of us, now is the perfect time to start thinking about how your organisation can become more sustainable and meet the growing demands of stakeholders.
Australian disclosure standards
The Australian government has made a firm commitment to enhance transparency and accountability in relation to climate-related plans, financial risks, and opportunities for large businesses and financial institutions. To fulfil this commitment, standardised reporting requirements aligned with international standards will be introduced. These requirements will support businesses to disclose crucial information concerning governance, strategy, risk management, targets, and metrics, including greenhouse gas emissions.
The government's second consultation paper on climate-related financial disclosure has been released amid growing pressures from investors, businesses, and consumers. This consultation builds on the previous discovery consultation that occurred between 12 December 2022 and 17 February 2023 where Treasury received 194 submissions from peak bodies, businesses, individuals, academics, research institutes and public sector entities.
Whilst legislation date is not clear, Treasure has proposed three different timeline with limited assurance of Scope 1 and 2 emissions and reasonable assurance of governance disclosures coming into effect as early as 2024-25
Legislation currently before the Parliament will give the Australian Accounting Standards Board (AASB) the ability to develop climate-related standards in the immediate future. The AASB has already published a position paper supporting the voluntary adoption of recommendations made by the TCFD. Its intention is to promote consistent and comparable extended external reporting (EER) between organisations.
Sustainability reporting in Australia
While sustainability reporting is not currently mandatory in Australia, many parties are showing significant interest in sustainability reports and the methodology behind them, while keeping an eye on the developing international standards.
Regulators in Australia are joining forces to crack down on greenwashing. ACCC deputy chairwoman Catriona Lowe highlighted the global movement to address this issue, with different jurisdictions considering various approaches. ACCC have identified companies' overreaching claims as the primary cause of greenwashing. Instead of delivering on their promises, these companies are often achieving a fraction of the environmental progress they claim. Actions are being taken against broad and vague language used in sustainability claims. In Europe, some jurisdictions have even banned specific terms or imposed guidelines for using terms like "net zero."
The Australian Securities & Investments Commission (ASIC) has demonstrated an increased level of interest in sustainability disclosures in the past year. In a recent media release, ASIC emphasised the need for organisations to provide investors and other users with meaningful information while preparing their end-of-year and half-year financial reports. Although sustainability reporting was not the sole focal point, ASIC specifically highlighted the potential risks associated with evolving circumstances, including governmental commitments and policies pertaining to climate and carbon emissions. Furthermore, ASIC cautioned that organisations with significant carbon footprints might encounter heightened challenges.
The Australian Securities Exchange Limited (ASX) has also recently begun a crackdown on greenwashing, to ensure companies are accurately portraying the environmental and social aspects of their business or products.
Sustainability reporting standards developing around the world
ISSB Climate-related Disclosures
There is a growing international push for sustainability reporting standards, which is expected to catalyse the development of Australian sustainability standards in the future.
In June 2023, the International Sustainability Standards Board (ISSB) issued its first two IFRS® Sustainability Disclosure Standards as they aim to guide disclosure on sustainability-related risks and opportunities:
- The IFRS S1, which is about disclosing sustainability-related financial information, requires companies to share information about risks and opportunities related to sustainability. This information should be useful to people who use financial reports to make decisions about supporting the company.
- IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. It integrates and builds on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and requires the disclosure of information about both cross-industry and industry specific climate-related risks and opportunities.
In summary, companies must disclose:
- The processes they use to monitor and control sustainability-related risks and opportunities.
- The strategy they use to manage sustainability-related risks and opportunities.
- The processes they use to identify and assess sustainability-related risks and opportunities.
- How well they're doing with respect to sustainability-related risks and opportunities, including progress toward any targets they've set or targets required by law or regulation
Australia's new sustainability disclosure standards are being developed based on the ISSB's work and the International Accounting Standards Board's (IASB) specific sustainability benchmarks published in June 2023. However, NetNada anticipates that the next set of standards released will address ESG in its entirety with environmental, social, and governance matters beyond climate.
Task Force for Climate-Related Disclosures
In December 2015, the Financial Stability Board (FSB) established the Task Force for Climate-Related Disclosures (TCFD) with the goal of assisting companies so they may consistently publicise voluntary financial disclosures related to climate. The framework is designed to help businesses better understand and manage climate-related risks and opportunities, provide investors with more transparent and comprehensive information on climate-related risks, and ultimately contribute to a more sustainable global economy.
Their recommendations, published in 2017, were developed collaboratively with input from global investors, banks, and reporting issuers. These recommendations focused on four key areas for disclosing risks and opportunities within a business:
- Governance
- Strategy
- Risk management
- Metrics and targets
The International Sustainability Standards Board (ISSB) integrated the TCFD approach along with SASB 77 when creating IFRS S2. Many regulators worldwide have also begun incorporating the TCFD recommendations into their jurisdictions. To learn more about the history and framework of TCFD, you can refer to the following resources:
- TCFD Recommendations
- TCFD History and Framework
European Sustainability Developments and Climate Disclosures
Australian businesses selling goods and services in Europe are expected to comply with their harsher requirements which will be in force from 2023 - with the climate disclosures being one of several disclosures including biodiversity.
The climate disclosure requirements arrived in April 2021, when the European Commission adopted a legislative proposal for a Corporate Sustainability Reporting Directive (CSRD). It enables companies to “report reliable and comparable sustainability information that investors and other stakeholders need” and requires companies within its scope to report using a double materiality perspective in compliance with European Sustainability Reporting Standards (ESRS) adopted by the European Commission as delegated acts.
The rollout is neatly shown in this Timeline for the Corporate Sustainability Reporting Directive - note that in FY2026, SMEs are included in the reporting standards.
What is sustainability reporting, and why is it important?
Sustainability reporting is the process of measuring, disclosing, and communicating an organisation's environmental, social, and governance (ESG) performance. It involves gathering data and information related to a company's impact on the planet, people, and profits. By reporting on their sustainability efforts, organisations demonstrate their commitment to responsible business practices and accountability.
Sustainability reporting offers several benefits for businesses. It enhances their reputation, improves stakeholder trust, attracts investors, identifies operational efficiencies, reduces risks, and drives innovation. It also helps businesses adapt to changing market dynamics and meet customer expectations.
What is the Task Force for Climate-Related Disclosures (TCFD)?
The Task Force for Climate-Related Disclosures (TCFD) is a global organization established by the Financial Stability Board (FSB) in 2015 to improve public reporting of climate-related financial information.
How are European sustainability developments affecting reporting requirements?
European sustainability developments are affecting reporting requirements through the EU Non-Financial Reporting Directive, which requires large companies, their suppliers, and soon SMEs to report on their environmental and social impacts and how they are managing them. Countries around the world are following the steps of EU, so looking at what is happening in Europe allows organisations to prepare themselves before legislation is in place
Is sustainability reporting mandatory in Australia?
NetNada predicts that mandatory reporting will come into effect in 2024-25. This aligns with the latest timeline proposed in Group 1-3 of Treasury Climate-related financial disclosure guidelines. Many organisations are choosing to make disclosures in response to growing stakeholder demands. Boards and leaders are also seeing the potential for a focus on sustainability to create long-term value in corporate reputation and brand, risk reduction, opportunity management, company culture and employer value proposition.
What are the disclosure standards in Australia for sustainability reporting?
The disclosure standards in Australia for sustainability reporting vary, but some commonly used frameworks include the GRI Standards and the Integrated Reporting Framework.
Mandatory climate disclosure standards in Australia are yet to be finalised but they will align with and leverage the pre-existing ISSB and TCFD frameworks.
While the TCFD recommendations and ISSB standards are currently focused on financial disclosure, particularly for investors and financiers, it’s important to identify and address the needs of all stakeholders, some of whom have interests beyond financial disclosure.
Why should organisations consider starting their sustainability journey in FY2023?
Organisations should consider starting their sustainability journey in FY2023 as this will align with the start of the new TCFD reporting requirements, which will require companies to report on their climate-related risks and opportunities.
As the start of a new financial year is typically a time of planning ahead, now is the ideal time for organisations start ti getting all the data, tools and resources ready to ensure a seamless process.
Where should sustainability reports be published, and what are the options available?
Reports from listed companies should be shared in a public forum accessible by all stakeholders.
The AASB and ASIC have not yet provided guidance on where sustainability reports should be positioned. Options include:
- In financial statements, or
- As an independent sustainability report.
The naming schemes of reports may vary by company and can include but is not limited to: sustainability reports, corporate social responsibility reports, CSR reports, corporate responsibility reports, CR reports, citizenship reports, or ESG reports.
If published in a financial statement, the sustainability report will also be subject to an audit.
On the other hand, if it is not published in a financial statement, an auditor still bears a responsibility to ensure the sustainability report is consistent with the audited reports, but there is a choice over getting assurance. Whichever road is taken, organisations should consider publishing all reporting elements around the same time for a holistic view of the organisation.
Sustainability reporting isn’t mandatory, so why bother?
A plethora of organisations are choosing to make disclosures in response to growing stakeholder demands. Boards and leaders are realising the potential for a firm-wide sustainability focus, which creates long-term value in corporate reputation and brand power, risk reduction, opportunity management, company culture and employer value proposition.
As the start of a new financial year is typically a time of planning for the twelve months ahead, now is the ideal time for organisations to set the wheels in motion to start their sustainability journey.
We’re here to help
If FY2023 is the year to start sustainability reporting, reach out to NetNada today.
