While the details are still being finalised, thousands of companies will need to start reporting from July 2024 for the 2025 financial year (FY25), so the clock is ticking to get prepared.
In this blog, we'll share 7 things you need to know about the reporting requirements proposed for Australian companies, including the key differences with the International Sustainability Standards Board (ISSB) International Financial Reporting Standards (IFRS) S1 and S2 that were finalised in mid 2023.
While voluntary climate action has been rising in Australia, incoming legislation certainly changes the game. Mandatory disclosure puts climate strategy and importantly, risks and costs of inaction, in the spotlight for thousands of Australian companies. It forces boards and senior leaders to address this topic and ensure the right steps are being taken now to enhance the company's future resilience to climate change. Expanded corporate reporting gives policy makers a blue-print of the economy, demonstrating the industries who are doing well, and those who are lagging.
After two rounds of consultation, the Australian Treasury released the draft exposure legislation on mandatory CRFD in January this year. This sets the direction for when and who the upcoming requirements may apply to.
Additionally, the Australian Accounting Standards Board (AASB) has been tasked with developing the detailed standards that will underpin the legislation. In October 2023, the AASB released its first draft of the rules that will guide these disclosures, the Australian Sustainability Reporting Standards (ASRS). The rules were modelled closely to the ISSB's IFRS and consists of three documents: ASRS 1 on general requirements, ASRS 2 on climate-related disclosures and ASRS 101 as a source of reference, giving reporting entities their first look at the detailed requirements they will need to follow to put together their reporting.
Overall, we can see that the proposed requirements, particularly where it differs from the IFRS, intends to make it more relevant for the Australian context and easier for companies to initially comply.
However, there will be high levels of scrutiny of disclosure compared with international counterparts as Australian companies will require auditing and provisions for regulator action (even though with limited scope).
1. The scope is clearly focused on climate:
The signal is clear that Australian companies should focus on climate first. Unlike the IFRS S1, the scope of ASRS 1 will not initially include the broader topics of sustainability, only climate-related matters. This means that expectations under ASRS 1 and 2 are currently fairly similar and ASRS 2 is a relatively short standard as it simply refers to ASRS 1 where requirements are identical.
Focus on the key climate elements you have yet to do and dedicate resources to priority activities like measuring your GHG footprint and conducting climate-risk analysis.
2. A 1.5°C climate scenario is required:
Use of a 1.5°C climate scenario is clearly stated. This relates primarily to transition risks and opportunities assessment, as a 1.5°C future is one where these would be high. While the IFRS does not explicitly stipulate a temperature warming outcome, its predecessor, the TCFD, had specified a 2°C or lower scenario. However, since the publication of the TCFD framework the more ambitious 1.5°C transition scenario has generally been regarded as the latest international best practice scenario for transition risk assessment.
When conducting your climate scenario analyses for transition risks and opportunities, make sure to assess a 1.5°C-aligned scenario. This should go hand in hand with assessing a 4°C-aligned scenario to reflect a high physical risk future. As scenario analysis is about understanding the potential impacts to your business under different possible futures, using two opposing scenarios allows you to effectively manage business impacts regardless of whatever future we face. Having these insights integrated into your disclosures should be a secondary benefit.
3. A different industry-specific lens can be used for disclosures:
Under the IFRS S2, Sustainability Accounting Standards Board (SASB) is used as a reference for identifying climate risks and opportunities. However, SASB's industry sectors do not need to be considered under the Australian draft requirements. By proposing not to use SASB, this may make it easier for Australian companies when identifying and reporting on their climate risks and opportunities. It does not prevent companies from still relying on SASB if that is the preference, however, the draft standards propose use of the Australian and New Zealand Standard Industrial Classification (ANZSIC) industry groupings for industry-based metrics as it is more specific to the Australian context.
You have more flexibility when reporting on your climate-related metrics. Your climate performance monitoring and the climate strategy you create as a result can be more tailored and relevant for the unique complexities of your industry, meaning they will be more likely to drive genuine action.
4. When calculating GHG emissions, local sources will be prioritised over foreign sources:
The ASRS suggests a hierarchy for methods and sources used to measure GHGs in favour of local Australian sources and factors (i.e. as set out in the National Greenhouse and Energy Reporting Act 2007 (NGER) Scheme legislation for scopes 1 and 2) over foreign data. If that is not practical or if the entity is not listed in Australia and may need to report to another jurisdictional authority, then entities can use alternative methods. Scope 3 emissions – emissions the company is indirectly responsible for up and down its value chain – should be calculated using a standard consistent with the GHG Protocol, drawing upon Australian-specific emission factors where relevant.
You must clearly know the key sources used in calculating your GHG emissions. You may need to adjust these in upcoming financial years and disclose any year-on-year changes in methodology accordingly.
5. Both market-based and location-based approaches must be used for reporting Scope 2 emissions:
Scope 2 emissions – emissions that a company causes indirectly and come from where the energy it purchases and uses is produced – should be reported using the market-based approach in addition to location-based, the latter being required under the IFRS. Location-based scope 2 emissions reflect the average emissions intensity of grids, while the market-based approach reflects emissions from electricity that companies have purposefully chosen to procure, e.g. by using contractual instruments such as renewable energy certificates (RECs). There will be a three-year exemption period during which reporting only location-based scope 2 is acceptable. This should provide extra relief to entities who are still figuring out their decarbonisation and energy procurement strategies, which may include renewable energy.
If you have, to date, been calculating only location-based or only market-based scope 2 emissions, you will need to measure and report using both methods by the end of FY27.
6. Scope 3 emission reporting will be mandatory:
The ASRS requires scope 3 GHG emissions - all other indirect emissions that occur in the value chain of an organisation - to be disclosed for material categories. However, the Treasury’s latest draft legislation in January 2024 mandates scope 3 emissions reporting without mentioning whether it is for material scope 3 categories only. There are some outstanding questions as to whether the Treasury’s intention is to supersede the ASRS’s stance to require only material scope 3 categories. If so, it would be in line with the IFRS requirements, along with allowance for companies to use prior year information instead of the current reporting period and only require disclosure of scope 3 from a company’s second year of reporting.
You should measure your scope 3 GHG emissions then disclose this (prior year information is acceptable). While we await the final requirements, it is advised that you should consider all scope 3 categories, not only your material ones. Many companies find reporting scope 3 emissions quite challenging. These new Australian requirements send a clear message that reporting on scope 3 emissions is increasingly expected and will force companies to work together with their value chain to decarbonise.
7. Financial Institutions have some leeway for reporting their financed emissions:
Financed emissions refer to emissions associated with the investment and lending activities of financial institutions and are captured under category 15 of an entity’s scope 3 emissions footprint (per the GHG Protocol framework). Under the ASRS, financial institutions are expected to disclose their scope 3 emissions and “consider the applicability” of additional disclosures required under the GHG Protocol such as disaggregating emissions by industry or asset class or linking the amount of assets under management with each scope. There is not much detail on what suffices to demonstrate that entities have “considered the applicability” of this category. So calculating emissions using methodologies under the NGER Scheme may not provide financial institutions with the additional information as required under the IFRS.
If you are a financial institution, you should start to review your investment and lending portfolio to understand your financed emissions. While the Australian requirements only require you to demonstrate that you’ve considered the applicability of your financed emissions, it is just a matter of time before you will be required to disclose this with more granularity.
For those in sustainability teams that have been working on climate action already or those that find themselves with a new remit to support mandatory disclosure, there is some critical work to be done to underpin the final disclosed report. This includes some of the foundations of a holistic climate strategy, such as conducting climate risk scenario analysis and understanding your carbon footprint across all scopes. These activities take time to do well. But now is the time to get started. Companies that do the groundwork will be set up to move beyond compliance to genuine action.
Take the next steps to align your climate disclosure.
