As widely reported, the International Sustainability Standards Board (ISSB) published its first two IFRS Sustainability Disclosure Standards on June 26, 2023. These standards are effective from January 1, 2024, but will not be mandatory unless regulated by jurisdictions.
On the following day, the Australian Treasury released its second consultation paper on climate-related financial disclosures for Australian businesses. This consultation builds on the previous discovery consultation in December 2022, but proposes more definitive positions to facilitate standardised reporting requirements that align with international standards.
The paper proposes that the standards be mandatory for all Australian companies listed on the ASX from 2025.
The second consultation paper is seeking key points of feedback on the following areas:
- Reporting entities: a phased implementation of the standards, depending on the size of the reporting entity.
- Assurance requirements: a phased move from limited assurance to reasonable assurance for climate-related financial disclosures.
- Reporting framework: a framework for the location, frequency, and timing of disclosures.
- Liability and enforcement: a modified liability approach to forward-looking statements.
- Reporting content: that the content of disclosures be broadly consistent with IFRS S1 and IFRS S2.
Submissions can be made up until close of business 21 July 2023. In this article we provide further insights into the changes ahead.
Largest change in financial reporting since the GST
The release of the ISSB's standards is a key part of what ASIC Chair Joe Longo recently commented as "the biggest changes to financial reporting and disclosure standards in a generation." This is part of a major shift in the finance sector driven by ESG factors, with comparisons being made to the introduction of the GST.
The ISSB standard requires companies to disclose their scope 1, 2 and 3 emissions, as well as their climate-related risks and opportunities.
With this shift, organisations will need to develop their capability and understanding around climate risk aligned with the Taskforce on Climate-related Financial Disclosures (TCFD), including scenario analysis.
The Treasury consultation paper provides greater clarity on the companies that will need to report, the breadth of the reporting required (including governance, risk management and transition planning) as well as an indication of reporting that is both auditable and required for inclusion in annual financial reports. Reporting will be required of all companies registered under the Australia Corporations Act that exceed two of the thresholds relating to revenue, gross assets, and number of employees. Interlinkage with the current AASB process is also clarified, as is the role of ASIC.
Who does the standard apply to?
The standards apply to both listed and non-listed entities. Listed entities are subject to more extensive requirements than non-listed entities. For example, listed entities are required to disclose more information about their sustainability risks and opportunities, and their disclosures will need to be assured by an independent third party.
Reporting companies are grouped into three categories. As mentioned previously in this article, companies need to meet two of these triggers to be included in a group. These groups will commence reporting in a staggered fashion.
Value of consolidated gross assets*
Consolidated revenue for the financial year*
* of the company and any entities it controls.
The auditing will also be staggered, for example, the first year of audit will require reasonable assurance of scope 1 and scope 2 emissions, and limited assurance of scope 3 emissions. After three years the entire report will be subjected to reasonable assurance.
How will the disclosure requirements be legislated?
Consideration is also being given as to whether the ISSB standards are legislated into the Corporations Act. These measures would likely be drafted as civil penalty provisions and centred on misleading and/or deceptive conduct, as it pertains to climate related financial disclosure. This would therefore make it mandatory for certain types of entities in Australia to comply with the ISSB's standards, however, a decision is yet to be made.
Will there be a “Safe Harbour”?
There is no Safe Harbour provision in place for the ISSB standards. Earlier this year, legal experts suggested that Safe Harbour provisions are not necessary and that in Australia, disclosure statements are required to be made on “reasonable grounds”, heightening liability risk for company directors. It was put forward that the ISSB's draft standards are likely to help expose bad practices, improve sub-par practices, and standardise reporting and disclosure that accompanies good practices. A Safe Harbour would only undermine these beneficial effects by removing the incentive (liability risk) that drives them.
While there is no Safe Harbour, it seems there will be an expectation on Australia businesses to ensure their disclosures are made with reasonable and supportable information that is available to them at the reporting date (without undue cost or effort). The current proposal from Treasury is that scope 3 emissions information and other forward looking statements will be subject to regulator-only review (in this case ASIC), for three years.
What do Australian businesses need to do?
As both regulatory and policy positions accelerate globally, it seems inevitable that more rigid frameworks will be installed by government. Corporate Australia must equip themselves for the future climate-related disclosure environment that is fast becoming a part of regular business as usual operations. Businesses that have embraced TCFD are currently ahead of the curve, but must now have an enterprise-wide approach to future proof their business operations and reduce their environmental footprints.
There is greater acknowledgement of complexity, uncertainty, resource commitments, scenario analysis, and scope 3 estimations. The ISSB has recognised that not all entities are equal and that some will face greater challenges in reaching compliance. To combat this, the ISSB has developed the concept of proportionality, allowing entities to tailor disclosures to their specific circumstances. For example, a company that operates in a heavily polluting industry may be required to provide more extensive disclosures about its environmental impact than a company that operates in a “clean” industry.
The implementation of the ISSB standards in Australia will be a major step forward in improving sustainability reporting. By requiring companies to disclose more comprehensive information about their climate risk practices, the standards will help to ensure that investors have the data they need to make more informed investment decisions.