Climate reporting frameworks have proliferated over the last decade. Stakeholders are increasingly interested in climate risk and concerns about greenwashing are growing. For companies, climate risk management is becoming more sophisticated. Against this backdrop, updates to accounting standards for non-financial disclosure have been lagging current practice.
The International Sustainability Standards Board (ISSB) was established at COP26 with the objective of developing a comprehensive global baseline of sustainability disclosure standards that local jurisdictions can adopt. Initially the ISSB sought to harmonise the recommendations of the Task Force on Climate Related Disclosures (TCFD) and the standards of the Sustainability Accounting Standards Board (SASB).
Recognising that the TCFD has been widely adopted by Australian businesses, this article focuses on where the ISSB consultation draft goes further and how that may influence the way organisations manage climate-related issues.
Integrating climate reporting frameworks into international accounting standards
The ISSB recently published two consultation drafts. One is on the disclosure of general sustainability-related financial information, and the other is specific to climate-related disclosures.
The latter, the Climate Exposure Draft, is generally more prescriptive (an organisation “shall disclose”) particularly in relation to financial impacts. Other areas where the Climate Exposure Draft goes further than TCFD include:
- A requirement to specify how targets compare to international agreements (i.e. aligned with a 1.5°C or less than 2°C trajectory)
- The need to describe how your organisation plans to use offsets (including the quantity, quality and type of offsets)
- The need to better understand current climate impacts on your financial position, performance and cash flows
- Specific mention of value chain risks, opportunities, and where the risks are concentrated
- The need to identify direct and indirect (value chain) adaptation options
- Greater scrutiny on the sources, inputs and assumptions used for scenario analysis
- A greater focus on plans for investment / research and development (R&D) and the financing required. Any impacts to the viability of the organisation’s business model including the repurposing of any legacy assets.
Implications for business
There are several implications:
- Few businesses have comprehensively disclosed the financial impacts of climate change (on cash flow, financial position, and financial performance) to date. A significant uplift will be needed in their data collection and analytics capability. For many organisations this will also require more cross functional collaboration and capacity building, both for accounting teams on climate-related matters and for sustainability teams on accounting matters.
- Those who have undertaken scenario-based quantification may need to supplement this work with a greater consideration of the near-term, reasonably foreseeable financial impacts.
- The expectations of veracity, breadth and depth of financial disclosures will present a challenge for reporters and auditors alike. Comparability across industries, while maintaining relevance to the reporting entity, could be a difficult balance to achieve.
- The draft standards also require greater transparency of transition challenges (such as access to capital, and value chain risks and adaptation) and decarbonisation plans (such as use of offsets). This will enable reporters to demonstrate to investors and other stakeholders how their organisation is building climate resilience, and how it will perform in a decarbonising world.
If your business already reports under the TCFD or SASB (or any other similar framework), mapping out how the Climate Exposure Draft differs from your current practice will help prepare your organisation for future disclosure obligations.
What does this mean for Australian standards?
The Australian Accounting Standards Board (AASB) plans to prioritise international alignment using the ISSB Exposure Drafts as a baseline and modifying, where necessary, for the Australian context. This will add to the chorus of standards, guidance and recommendations now aligning with the TCFD, including:
- APRA’s Prudential Practice Guide on Climate Change Financial Risks (CPG 229)
- ASIC’s Corporate Governance Principles and Recommendations.
In recent years, momentum has also accelerated globally towards mandated climate reporting requirements. Jurisdictions have begun implementing disclosure laws. New Zealand, Singapore and Hong Kong have mandated disclosure of climate-related risks. Other countries including the UK and US have also committed to implementing climate-related disclosure regulations. In Australia, the Investor Group on Climate Change (IGCC) has called for Australia to adopt mandatory financial disclosure for climate change risks by 2024.
What can my organisation start doing now?
In addition to progressing TCFD adoption, companies should focus on how climate-related risks are currently, and may foreseeably, translate into financial impact. This could include:
- Physical impacts of climate change including asset damage, more frequent maintenance requirements, productivity loss, health and welfare impacts, and supply chain disruption
- Transition costs, including those you voluntarily assume and those you incur through the value chain.
In our experience, understanding current and historical costs is a vital input into understanding how these costs may change in the future.
Other important strategic aspects will include:
- Defining how your emissions targets align with the Paris Agreement, whether they are consistent with a 1.5°C or less than 2°C trajectory, and your plans to increase your ambition if your target is not aligned.
- Forecasting your future need for offsets in the context of decarbonisation strategies or customer demand, strategically planning your procurement and originating options, and setting criteria around the quality and type of offsets to ensure you are purchasing robust units. This should be coupled with an expectation of increasing cost and demand for offsets over time.
- Obtaining a greater understanding of the exposure of your value chain to physical and transition climate-related risks, where these risks are concentrated, the adaptative capacity of the supply chain and your business to potential disruption, and the opportunities for value creation.
- Understanding adaptation options for your operations, their cost, and timeline for implementation informed by physical risk projections.
- Quantifying your upstream and downstream scope 3 emissions and identifying opportunities to reduce them .
These aspects will also need defensible assumptions and a robust audit trail to justify the inclusion or exclusion of items in financial statements. There will also be an increasing need for environment experts to competently engage with finance and accounting teams, and to build the climate literacy of cross-functional executive teams and boards.
Energetics can provide advice based on the goals of your business and assess where opportunities lie for improving your strategic approach to climate risk within your operations and value chain, ahead of any changes to reporting standards. Please contact the authors or any one of Energetics’ experts.