New Sustainability and Climate Reporting Standards Agreed

Australia’s leading financial and business bodies have agreed on the need for consistent sustainability and climate reporting standards.

The group of 20 peak bodies include the Insurance Council of Australia, Financial Services Council, Australian Banking Association, the Australian Council of Superannuation Investors, CPA Australia, Chartered Accountants Australia and New Zealand and the Institute of Public Accountants.

Collectively the group represent more than 400 companies, approximately 300 investors with US$33 trillion assets under management and 500,000 business and finance professionals.

The group welcomed the new International Sustainability Standards Board (ISSB) draft sustainability standards published in March 2022.  The group believes that clear, transparent, comprehensive and comparable disclosure of sustainability-related information to be part of the foundations of a well-functioning global financial system.

The group also recognised that climate is a “first order risk” to the Australian economy and stated that it supported the Paris Agreement and its objective to achieve net-zero emissions.

The only caveat…the group said the transition to achieving a net-zero emissions economy needed to be undertaken with care.  The group said, “To avoid large-scale financial risks from a disorderly transition to net zero emissions and the physical impacts of climate change, there must be clear and comparable disclosure of sustainability-related and in particular, climate-related information.”

The ISSB Will Lead Sustainability & Climate Reporting

The ISSB released two exposure drafts in March 2022.  They set out general sustainability-related disclosure requirements and specified climate-related disclosure requirements while also providing stakeholders with the opportunity to comment on the proposed standards.

Just days earlier, the effort to establish a global baseline for sustainability disclosures took another positive step with the consolidation of the Value Reporting Foundation (VRF) into the IFRS Foundation.

The IFRS Foundation is home of  both the ISSB and the International Accounting Standards Board (IASB), the global standard-setter for financial reporting.

In recent years, investors with global investment portfolios have been calling for more transparent environmental, social and governance (ESG) reporting by companies.  The ISSB was launched by the IFRS Foundation at last year’s COP26 summit and was tasked with developing a single set of standards to meet the information needs of investors.

In March 2022, the U.S. Securities and Exchange Commission’s (SEC) proposal on thorough environmental reporting by American public companies also came in response to a shift in investor interest and public opinion.

Sustainability & Climate Reporting Next steps

The agreement provides the foundations for taking further steps towards sustainability and climate reporting reporting. Moving forward:

• There will be a global approach to the development of sustainability disclosure standards.  The coordinated approach helps ensure there is no regulatory fragmentation in definitions, terminologies, and metrics on disclosure.
• The ISSB will be the global body overseeing these standards.
• There will be collaboration and coordination between sustainability disclosure initiatives and financial accounting standard setting.
• The goal will be to achieve a globally consistent and verifiable corporate reporting system.
• The new disclosure standards will impact Australia’s capital markets and participants, as investors continue to demand comparable disclosures.
• The 20 peak bodies will work with the Australian government as well as other national and international stakeholders.
• The assurance providers including Registered Company Auditors, will need to expand their skill set in order to keep up with a fluid environment.

The agreed approach now provides the foundations for taking steps towards sustainability and climate reporting reporting.

Financial institutions like banks and insurers and well as listed companies will need to stay vigilant and engage with their peak bodies.  Also, risk, investment, finance, audit and assurance professionals will need to stay ahead of developments and keep their skill set up to date.

The Challenges

Recently, 86 finance chiefs from across the globe signed a letter sent to the ISSB insisting on the improvement of its proposed reporting standards in 6 areas:

1. Alignment with relevant existing sustainability reporting standards “to the greatest extent possible.”
2. Clarity on what constitutes enterprise value, recognizing that investors may need disclosures on broader social and environmental impacts to assess risk and make investment decisions.
3. Clear definitions and guidelines for preparers.
4. Disclosure requirements should enable a “continued focus on setting science-based, ambitious targets and the actions needed to achieve them.”
5. Promote integrated thinking through frameworks such as the Integrated Reporting Framework.
6. Address the environmental, social, and economic issues that impact decision-making.

The Benefits

More than 80% of mainstream investors now consider ESG information when making investment decisions. There are currently $23 trillion of assets being professionally managed under responsible investment strategies, an increase of 25% since 2014 which exceeds the gross domestic product of the entire USA economy.

Besides the clear benefits to the environment and reducing the financial impact of climate change, improved guidance will reduce the risk of ‘greenwashing’.  This is when an organisation spends more time and money on marketing itself as sustainable and environmentally friendly than on actually minimizing its environmental impact.  We saw this when Volkswagen admitted to cheating emissions tests by fitting various vehicles with a “defect” device, with software that could detect when it was undergoing an emissions test and altering the performance to reduce the emissions level.

12 ESG Questions

Achieving the desired ESG posture is not easy and there are lots of questions the board can ask.  Here are 12 questions to start:

• Does the organisation’s vision and values specifically reflect a commitment to ESG?
• Is the board approved ESG policy and framework aligned to the organisations vision and values?
• Are ESG responsibilities clearly described and included in positions descriptions and performance incentives?
• Is ESG on the board and leadership agenda?
• Has the organisation identified the ESG related compliance obligations and assigned responsibilities to monitor?
• Has the organisation identified the ESG related risks and developed the appropriate action plans?
• Are ESG practices embedded into day-to-day business processes and activities?
• Does your ESG framework extend to third parties, vendors and suppliers?
• Is there regular communication between your organisation and stakeholders?
• Is there regular reporting and monitoring of your ESG posture to the board?
• Are the underlying assumptions in the analysis reasonable and supported by evidence?
• Does internal audit verify the accuracy and completeness of ESG reporting processes, external disclosure and data?

There is no right or wrong here, but your answer should be appropriate to your organisation, industry and stakeholder expectations.

Remember, climate change financial risks are often categorised into physical, transition and legal/ liability risks and they all must be managed.

Next steps

What does this agreed way forward mean to your business? What does sustainability look like at your organisation? How far do you want to go to minimise the impact of climate change on your business?

Whatever your climate resilience posture, making a start as soon as possible is better than waiting to get it perfect or waiting until you have researched all the alternatives.

There are four ways that we can help you with your environmental and sustainability reporting:

1. Interpreting applicable standards and frameworks and advising you on their benefits and application.
2. Environmental/sustainability performance reporting obligation compliance.
3. Understanding the best metrics and data to record and report.
4. Generating your reports.

Be more resilient and contact us if you would like help with developing sustainability strategies, climate change risk assessments and testing, sustainability education and reporting.