Australia is in the process of moving to mandatory reporting for climate related financial and associated risks. Treasury released a consultation paper in December 2022 that will be a major catalyst to making such disclosures mandatory and standardising the way corporate entities report such risks to stakeholders.
In recent years the requirements have largely been based on materiality of the likely risk or the reporting entity choosing to include disclosures to meet stakeholder needs or to meet best practice standards. Traditionally these disclosures have been made outside of the financial statements, if at all.
Accounting standards (AASB/IASB Practice Statement 2 Making Materiality Judgements) provide companies with direction when assessing materiality. However, as investors are increasingly considering climate related risks when making investment decisions they are demanding improved reporting on such non-financial risks and issues.
While 2023 has included a growing focus on cyber-security and technological innovation (AI) risks investors have identified climate-related risks as central to decision making. Stakeholders including employees, investors, suppliers, and customers are demanding specific information around exposure to climate related risks and what management are doing to mitigate any identified risk exposure.
There have been numerous examples in recent years of stakeholders taking action to gain better access to information relating to climate related risks. In 2020, Woodside Petroleum became the first Australian company to receive a majority vote on a shareholder resolution related to climate change. The majority of shareholders (50.1%) wanted the company to adopt stricter greenhouse gas emission targets.
The consultation paper released by Treasury in December 2022 sought feedback and initial views on key considerations for the design and implementation of standardised, internationally- aligned requirements for disclosure of climate-related financial risks and opportunities in Australia. The paper also highlighted the need to build a structure that could ensure Australia’s financial reporting bodies can keep pace with the expansion of international standard-setting priorities on climate and sustainability reporting.
The process undertaken by the paper released by Treasury highlights the Governments commitment to standardising climate disclosures by working closely with financial regulators and standard setting bodies.
The paper identifies 6 key principles that the reformed reporting structure needs to adhere too:
- Support climate goals
- Improve information flows
- Internationally aligned
- Scalable and flexible
- Proportional to risks
The increased reporting requirements in the climate space has been well known and accepted for years, however the exact timing of the proposed changes in Australia are yet to be locked in. However, the international implementation has seen a staged approach with many countries setting obligations for an initial set of entities and gradually widening the range of entities covered. Many of these initial reporting obligations will commence in 2023 (UK and New Zealand) and 2024 (Canada, Switzerland) for example.
Large private companies, listed ASX companies and financial institutions are expected to be the first entities required to adopt the new reporting requirements.
The paper highlights three potential structures that could be utilised as a framework to support climate risk disclosures.
Potential Structure 1 – Confirm the AASB as the entity responsible for developing, making and monitoring climate and sustainability related standards.
Potential Structure 2 – Establish a separate sustainability standards board.
Potential Structure 3 – Reform existing financial reporting bodies into a single, flexible entity.
Until further guidance is provided in Australia entities must at a minimum report and disclose any material risks which can include climate related risks. The best framework to report the risks are by following the recommendations released in 2017 by the Taskforce on Climate Related Financial Disclosures (TCFD).
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