In 2023 temperature records were smashed, and the outcomes of COP28, especially the final UAE Consensus, spoke to the criticality of containing global temperature increases and the need for nations to do the work to keep “1.5 alive”. How that shifts the demands on business in 2024 remains to be fully understood. In Australia we know we need to:
- build climate risk management capability
- prepare for mandatory reporting
- increase the pace of decarbonisation
- manage the risks and identify the opportunities in Australia’s volatile energy transition.
We can expect big conversations over the year. To follow are what we see as the major themes and areas to watch.
Board-driven responses to climate impacts
We are now in an era of undeniable climate change. The increasing impact of climate on the human experience, and ultimately on human health will remain in the headlines. This will be the background and the context for company decision making going forward. Further, climate impacts and thus physical climate risks are increasingly knowable risks with profound implications for Australia’s boards to consider as they fulfill their fiduciary duties.
Readiness for the new era of mandatory climate related disclosures
Australia’s response to the call for adequate climate related financial disclosures by the investor community will be known soon. As has been Energetics’ position for some time, it would be foolhardy for our Australian form of mandatory disclosures to not track closely with the framework and details of the ISSB. Significant variation could prove a barrier to investment in Australia, and result in an additional reporting burden on Australian multi-national companies. If you would like to have your say, consultation on the Exposure Draft is open until 9 February 2023. The AASB’s consultation on the draft Sustainability Standards relating to climate related financial information closes 1 March 2023.
In terms of preparations, other than the development of rigorous and robust scope 1 and scope 2 emissions inventories, attention needs to be paid to:
- Aspects of governance including capability and capacity to both develop and engage with the detail of climate related financial disclosures from board level and down through the company.
- Scope 3 reporting, development and implementation of transition plans, and a clear understanding of physical risk based on the best available science. Noting that in this first year of reporting companies may not be able to report in line with the detail of all three of these aspects of disclosure. They must, however, be able to report on a plan for how they will comply with these requirements in time.
- Market based and location based reporting of scope 2 emissions. This is not a trivial change. It is often easier to complete these calculations on a monthly or quarterly basis and not leave them to the end of an operating year.
Energetics can help your business conduct a ‘current state’ assessment to better understand your position and develop a roadmap to readiness. Please reach out to your Energetics’ contact to discuss your needs.
A clearer view on what a good transition plan “looks like” (remembering, a net zero plan is only one part of a transition plan)
What constitutes a good plan for how your business will transition to a net zero economy is still being determined under a mandatory disclosure regime. While it may be that all that can be audited is the provenance of the data used to develop the plan, the plans consider all aspects of the transition – circular economy, the just transition for people, and nature and biodiversity. They also need to include a process for review, re-evaluation and redirection. They cannot be a set and forget outcome.
A response to the growing concerns about methane – Australia is a signatory to the Global Methane Pledge
The Climate Change Authority’s review of the NGER regulations has recommendations for improving both the estimation and reporting of fugitive methane emissions. These activities cannot happen in isolation. Our commitment to the Global Methane Pledge requires a significant reduction in methane emissions, and the Climate Change Authority’s review of NGER regulations may show that emissions are greater than initially estimated and reported to date. Companies in sectors with significant methane emissions should focus on addressing methane emissions in the near term.
Transparency. While there is greater scrutiny and measures to counter greenwash, disclosure need not be exposure
In December, the ACCC released its guidance for business “Making environment claims”. This guidance highlights that even as the need to disclose more detailed and extensive climate information is regulated, the scrutiny of this information will increase. Consumers will become better informed. While false or misleading environmental claims will contravene the Australian Consumer Law, and companies might be tempted to step back from disclosures, they should disclose and tell the whole story – what has worked well, where improvements have been made, what is not up to scratch (and how this will be addressed) and where performance may have eroded over time or where targets have not been met. Clarity in reporting will be paramount. Companies should recognise that the proposed mandatory reporting regulations offer some relief from prosecution for misleading reporting in the short term.
Readiness in case national climate and energy policies change
At COP28, Australia clearly supported a tripling of renewable energy installations and a doubling of energy efficiency by 2030 (both relative to 2020 levels). While the announcements of additional finance being made available for renewable energy projects leading up to COP28 are intended to deliver the majority of the renewable energy commitment, timing for these projects remains unclear as does the delivery of adequate infrastructure to bring the electricity to market. We will shortly release a more detailed discussion in an article by Dr Gordon Weiss who has examined the challenges Australia faces to achieving the 2030 renewable energy and national emissions targets.
Further, we expect a revised National Energy Productivity Strategy in the near term. Whether we see grants and other forms of encouragement or if the strategy will rely more on mandated performance requirements remains to be seen.
Management of energy procurement risk in the face of ongoing price volatility
With the renewable energy commitments referred to above, retirement of coal assets from the grid, and on-going challenges in the LNG market, 2024 will remain a challenging year for energy procurement. Companies need to understand the current and future price ranges that will result from these significant drivers of energy market volatility. In the coming weeks we will share some insights and advice from Gilles Walgenwitz on the outlook for energy markets and strategies to mitigate your exposure to risk.
Follow the finance sector – they pull the levers
With the global rise of climate related financial disclosures, the finance sector is engaged with both understanding, and, more importantly, financing the change we need to see. The sector, in moving from a passive role of being subject to climate risk to an active role in understanding and taking hold of the climate opportunity, will be interesting to watch. There is great scope for innovation.
Have you put the “just” in “just transition”?
As TCFD sunsets and rolls into IFRS S2, we see additional resources being made available to the finalisation and deployment of the framework proposed by the Taskforce on Nature-related Financial Disclosures (TNFD). Globally attention is turning to “what’s next”, with many suggestions that this will be TIFD – the Taskforce for Inequality-related Financial Disclosures. Coupling this with the rising need for transition plans to directly consider a "just transition" in their development and execution means that companies need to have justice and equality in their sights now.
A busy year ahead
Companies will need to be clearer and more ambitious in their responses, and make sure that outcomes meet initial forecasts. At the same time, there is great opportunity in addressing the coming changes head on.
Companies should also focus on building the company they want to be in 2050, ensuring they understand this opportunity, and are not only managing the risks of operating in 2030.
We are happy to talk through any of these areas with you. Looking forward to a productive and outcomes focused 2024.