Mandatory Climate- Related Financial Disclosures For Australia: What You Need to Know

What Needs to Be Reported?

Businesses must prepare an annual sustainability report as part of their regular financial reporting. These reports will include:

• Governance: How the board oversees climate-related risks and targets.

• Strategy: Impacts of climate risks on business operations and financial health.

• Risk Management: Processes for identifying and managing climate risks.

• Metrics and Targets: Greenhouse gas emissions (Scopes 1, 2, and 3), climate-related financial impacts, and progress toward sustainability goals.

Additionally, businesses must conduct a scenario analysis to test their resilience under two climate scenarios:

1. A 1.5-degree warming scenario.

2. A higher warming scenario exceeding 2 degrees.

Scope 1:

Direct emissions from sources owned or controlled by the company, like fuel combustion in vehicles or on-site energy production.

Scope 2:

Indirect emissions from purchased energy, such as electricity, heat, or steam used by the company but generated off-site.

Scope 3:

Other indirect emissions from the company’s value chain, including emissions from suppliers, product use, waste disposal, and employee commuting.

What Are the Key Dates?

• 2025-2027: Temporary liability relief for directors regarding disclosures on Scope 3 emissions, scenario analysis, and transition plans.

• 2025 Onward: Sustainability reports must be lodged with the Australian Securities and Investments Commission (ASIC) alongside financial statements.

• 2030 Onwards: full audit assurance (reasonable assurance) will be mandatory for sustainability reports to ensure their reliability. Before this, limited assurance will be bought in, focusing on key metrics such as greenhouse gas emissions and governance practices. Independent auditors, in collaboration with climate and sustainability experts, will verify these disclosures, enhancing transparency and accountability in corporate reporting.

Steps Businesses Should Take Now

Preparing for these requirements will take time and effort. Here are some steps businesses can take to get started:

Immediate Actions

1. Form a Cross-Functional Team: Include representatives from finance, risk, sustainability, and legal departments.

2. Assess Climate Risks: Identify and prioritize climate risks and opportunities that could impact your business.

3. Develop a Strategy: Define your response to climate risks, including setting emissions reduction targets and aligning executive incentives with climate goals.

Medium-Term Actions

4. Conduct Scenario Analysis: Test your business’s resilience under different climate scenarios.

5. Enhance Data Collection: Improve the measurement of emissions and other key metrics.

6. Prepare for Assurance: Begin early audits to ensure readiness when full assurance requirements come into effect.

Long-Term Actions

7. Build Capability: Train employees across the organization to integrate climate considerations into decision-making.

Explore Opportunities: Invest in innovative solutions, like low-carbon products or emissions reduction projects.

Government and Regulatory Guidance

ASIC has urged businesses to proactively engage with these requirements by implementing appropriate governance arrangements and sustainability record-keeping processes.

The commission acknowledges the transition period and intends to adopt a proportional and pragmatic approach to supervision and enforcement as industries adjust.

Implications for Businesses

While the new reporting requirements aim to align Australia with international climate reporting standards, concerns have been raised about the financial and administrative burdens, particularly for sectors like agriculture. Critics argue that the compliance costs may be passed onto consumers, potentially leading to higher prices. However, proponents believe that these measures will enhance transparency and better position businesses to manage climate-related risks and opportunities.steadfastconsul