In part 3, we outline some of the significant challenges companies face in meeting sustainability reporting obligations, particularly with governance, strategy, metrics, and risk management.

The challenges

Other than the compliance challenges that will come from meeting reporting obligations in respect to the entity’s governance, strategy, metrics and targets and risk management, entities may need to consider and overcome some less obvious challenges including those listed below.

Greenwashing

A big risk with reporting will be “greenwashing”, or engaging in misleading and deceptive conduct, which is actionable under the Australian Consumer Law, Australian Securities and Investments Commission Act and Corporations Law. Companies should be aware, that ASIC has stated that it is prioritising “misleading conduct in relation to sustainable finance including greenwashing” in 2023 and 2024.

The legislation will provide reporting entities and their officers with limited protection for up to 3 years against actions for misleading and deceptive conduct brought by parties other than ASIC in relation to certain statements. This will include forward-looking statements made in the sustainability reports and auditors’ reports.

Data quality

Some of the most challenging parts of the disclosures will include:

• estimating of scope 3 emissions, particularly in large and complex supply chains;
• consistency and accessibility of climate scenarios and decarbonisation pathways across economies, sectors, industries and how they affect individual sectors or firms; and
• access to reliable and comparable sustainability data beyond emissions.

Record retention

Organisations must retain good, accurate records to support the decisions and determinations you make.

Silos

Entities should take a holistic approach to sustainability and decarbonisation, including goal setting, integrating its climate data and records from throughout the organisation into a centralised repository. The approach it takes to sustainability should be consistent across the organisation. The board must oversee and drive sustainability as it does its other business development strategies.

Future sustainability disclosures

While developing procedures to comply with climate disclosures, entities should keep in mind that whereas the current proposed measures, including the financial risks disclosure are directed to climate risks, the intention is that climate disclosures are the first priority for sustainable finance and reforms and platforms will subsequently include other sustainability-related issues. To this end, laws will be drafted to allow for expansion of financial disclosures to expand to nature-related issues.

Four areas to begin with

Reporting entities should start preparing now instead of waiting for the Bill to be enacted and the Sustainability Standards to be finalised. How burdensome the reporting process will be will largely depend on how far along the sustainability path the company is, and the resources and knowledge available to it.

Tackling the following questions will help you get ahead of reporting requirements:

1. Understand the law’s scope and applicability

Understand your company’s climate-related reporting obligations. What are differences between the Sustainability Standards and any current disclosures it makes?

Stay informed about upcoming regulations and plan for incremental implementation of new measures.

To reduce the risk of greenwashing, ensure accurate and truthful reporting and implement robust internal review processes.

2. Conduct a readiness assessment

Review your company’s current governance structures in respect to responsibilities and accountabilities around climate change as well as the skills, capabilities and resources available, including those needed to conduct climate-related scenario analyses. Where are the gaps?

3. Conduct a risk assessment

Conduct a risk assessment to understand your company’s exposure and vulnerability to climate-related risks and opportunities that could reasonably be expected to affect the company’s prospects and how it will respond to mitigate/adapt to/manage climate risks.

Determine your company’s strategy and the resilience of its business model to the direct and indirect effects of climate change.

Adopt widely accepted climate scenarios and regularly update scenarios based on latest research and data. Align with industry standards where possible.

What are the reasonable impacts likely to be of these climate influences on the company’s:

• performance and financial performance for the current reporting period, and the short, medium and long term?
• its strategy, financial planning and decision-making?

4. Data management and targets

Consider appropriate climate-related targets. How will your company measure and monitor and its progress in achieving its climate-related strategic goals and any externally driven targets its legally required to meet?

Can you collaborate with suppliers to obtain accurate data for estimating scope 3 emission?

Is the use of standardised methods of estimation appropriate for your organisation?

Can you leverage technology for data collection and analysis?

Does the company retain and manage all the necessary data for disclosures in a single centralized repository?

To address the risk of silos, foster cross-departmental collaboration and integrate climate data into all business processes.

Establish clear and measurable climate-related targets and monitor and report progress regularly.

The bottom line

The impending mandatory sustainability reporting requirements mark a pivotal shift in how Australian corporations must address their environmental responsibilities. As the global community intensifies its focus on combating climate change, pollution, and biodiversity loss, Australian companies must prepare for the stringent climate disclosure mandates being legislated.

The path to compliance may be challenging, but the rewards of safeguarding both the planet and long-term business viability are immense.

We are here to help you manage climate risk

By acting now, you can turn these challenges into opportunities, positioning your company as a leader in sustainability and corporate responsibility. Don’t wait for the legislation to take effect—begin your journey towards a more sustainable and resilient future today.

Together, let’s build a more sustainable tomorrow.

Contact us to embark on a journey towards authentic environmental stewardship and responsible business practices.

In part 2, we now take a detailed look into the new mandatory sustainability reporting laws as these new laws mean new risks and challenges.

The law

Following a period of consultation, which resulted in some amendments to the proposed climate reporting requirements, on 27 March 2024 the Treasurer introduced the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (“Bill”) into Parliament.

Schedule 4 of the Bill proposes a new mandatory climate risk reporting framework for large Australian companies. The Schedule will amend the Corporations Act to include an obligation for certain companies to prepare annual sustainability reports.

The aim of the new legislation is to provide better comparability in data reported by large Australian companies to enable investors to make the right investment decisions to benefit from investment in a net zero transformation and to manage climate change challenges.

The Standards

To accompany the new legislation accounting standards are being developed by the Australian Accounting Standards Board (“AASB”) which will describe in more detail the required content of the disclosures. These are being guided by the International Sustainability Standards Board’s IFRS S1 and IFRS S2 Sustainability Standards to ensure global consistency in reporting, but with some differences to better suit the Australian corporate and reporting environment. Draft ES SR1 Australian Sustainability Reporting Standards-Disclosure of Climate-related Financial Information contains three draft Australian Sustainability Reporting Standards (“ASRS”) (“the Sustainability Standards) and is currently available for review.

One big difference between the proposed ASRS 1 and IFRS S1 is that the Australian Sustainability Standard only refers to climate change disclosures, whereas IFRS S1 encompasses sustainability disclosures more broadly.

To align with the Australian Government’s direction to address climate-related financial disclosures first, the AASB is developing climate-related financial disclosure requirements that can, at least initially, be applied independently of any broader sustainability reporting framework. This approach would permit additional time to consider the development of reporting requirements for other sustainability-related matters in Australia over time.

What will need to be reported?

The Bill along with the draft Sustainability Standards give us guidance on what the basic contents of the annual sustainability report will likely need to include. These are:

• a climate statement in relation to the reporting company for the financial year, including any notes specified by the Sustainability Standards. Required notes will likely include notes on the preparation of climate statements, the statement contents, or other matters concerning environmental sustainability;
• any statements or other specific inclusions prescribed by regulations relating to the statements including those relating to financial matters concerning environmental sustainability; and
• a directors’ declaration that the substantive provisions in the report comply with the Corporations Act and the Sustainability Standards. The Bill proposes a 3-year transition period, where directors need only declare that the company has taken reasonable steps to ensure that the substantive provisions of the report comply.

If a reporting company determines that it has no material climate related risks or opportunities, it will need to disclose that fact in its general-purpose financial reports and explain how it reached this determination.

Climate-related Disclosures

The disclosures must fairly present the entity’s risks and opportunities. The climate statements and notes, when read together, must disclose:

• any material climate-related financial risks and opportunities that could reasonably be expected to affect an entity’s prospects;
• the climate metrics and targets proscribed by the Standards for disclosure including scope 1, scope2 and scope 3 emissions;
• information about governance, strategy, risk management in relation to the risks, opportunities, metrics and targets.

The core content of climate-related financial disclosures will need to contain information from the 4 pillars identified in the TCFD Framework, being governance, strategy, risk management, and metrics and targets.

Audit requirements

The annual sustainability reports will need to be audited in accordance with new assurance standards being developed by The Australian Auditing and Assurance Standards Board (AUASB) and to be phased in from 1 January 2025.

Who will need to report?

Three classes of entities will be required under the new legislation to prepare sustainability reports:

1. Large companies that are required to prepare and lodge annual reports under Chapter 2M of the Corporations Act
2. Asset owners (e.g. superannuation companies and registered schemes) with more than $5 billion funds under management
3. Any size entity subject to both the annual reporting requirements under the Corporations Act and emissions reporting obligations under the National Greenhouse and Energy Reporting Act 2007.

Although small and medium businesses, below the relevant size thresholds, charities and not-for-profits will be exempt under Bill from reporting, some of these may, be asked by reporting entities in their value chain to disclose similar information to assist the reporting entity to prepare meaningful and accurate disclosures, particularly, in respect to their scope 3 emissions reporting.

When do the reporting obligations begin?

The reporting entities will be classified into 1 of 3 groups with a phased starting period as shown in the table below:

Overcoming the challenges

Other than the compliance challenges that will come from meeting reporting obligations in respect to the entity’s governance, strategy, metrics and targets and risk management, entities will need to consider and overcome some other less obvious challenges.

In part 3, we will delve deeper into some of the challenges and look at strategies to overcome them.

The bottom line

The impending mandatory sustainability reporting requirements mark a pivotal shift in how Australian corporations must address their environmental responsibilities. As the global community intensifies its focus on combating climate change, pollution, and biodiversity loss, Australian companies must prepare for the stringent climate disclosure mandates being legislated.

The path to compliance may be challenging, but the rewards of safeguarding both the planet and long-term business viability are immense.

We are here to help you manage climate risk

By acting now, you can turn these challenges into opportunities, positioning your company as a leader in sustainability and corporate responsibility. Don’t wait for the legislation to take effect—begin your journey towards a more sustainable and resilient future today.

Together, let’s build a more sustainable tomorrow.

Contact us to embark on a journey towards authentic environmental stewardship and responsible business practices.

Governments worldwide, including Australia, are beginning to respond by setting decarbonisation targets and with legislative measures demanding mandatory disclosures of sustainability and/or climate change risks. New legislation currently being debated in Parliament will see some Australian companies soon facing significant regulatory changes.

Corporations and their directors must recognise and proactively mitigate climate change and other sustainability risks through adopting sustainable practices and strategies including decarbonising their businesses, understanding and managing their supply chains, and robust stakeholder engagement.

As the expectations on corporate governance intensify, businesses must prepare now not only to protect their financial interests but also contribute to a more resilient and sustainable future for their companies and our planet.

In a special series of articles, InConsult will explore the changing climate change and sustainability reporting landscape In Australia.

Australia’s climate change journey

Australia’s journey in climate change action has been marked by significant milestones and policy shifts. The current urgency to take meaningful action to decarbonise our economy, mitigate the risks and adapt to the hazards, comes despite the initial climate change steps dating back to the late 1980s and early 1990s. The early actions followed the first meeting of an international working group of climate experts, the International Panel on Climate Change (the IPCC) in 1988. Since then, there have been 6 IPCC reports issued and 28 international climate meetings (COP)s to determine global climate responses.

We find ourselves still floundering over how to tackle this immense issue because of a lack of consistent and science-based responses by successive governments. Over the years Australian governments have, among other things commissioned reports, established greenhouse gas plans, climate strategies, advisory panels, environmental statutory bodies and agencies, emission reduction schemes and issued numerous discussion papers on emissions trading schemes. Successive governments have disbanding many of their predecessors’ actions to adopt a different strategy, leaving businesses with uncertainty and all of us in the position where action is becoming more urgent and will need to be more extreme if we are to avoid irreversible climate breakdowns.

Legislated climate change disclosure changes are imminent

Australia’s sustainability and climate change expectations have risen dramatically in recent years, reflecting a global shift towards greater environmental accountability and sustainability. This change is driven by growing awareness of the severe impacts of climate change, including more frequent and intense bushfires, droughts, and flooding. Public opinion has increasingly demanded action, compelling both government and private sectors to respond more robustly.

Governments, including the Australian Government, have made commitments to reaching net zero emissions and are developing strategies to achieve these goals. In many jurisdictions these strategies include legislating for mandatory meaningful and consistent disclosures of companies’ material sustainability and climate change risks.

As part of the Commonwealth Government’s strategy to tackle climate change it is amending treasury laws with a new Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (the Bill) and evolving Sustainability Standards. The objective is to ensure better disclosures and reporting of sustainability and climate change measures by particular classes of entities.

This legislation will see a significant legislative shift, which if passed in its current form will mandate annual sustainability disclosure reports from large companies. Accompanying the legislation, will be a set of new Sustainability Reporting Standards. These Standards will align with International Standards and mark a new era of comprehensive climate risk reporting in Australia, reinforcing the country’s commitment to combating climate change and promoting sustainability.

Although the initial disclosure requirements are for climate change risks and opportunities, the intention is that in the future companies will be required to report on other sustainability risks and opportunities.
Australia’s multifaceted strategy not only aims to mitigate climate risks but also positions Australia as a more proactive participant in the global effort to combat climate change, ensuring long-term economic and environmental resilience.

Although the Australian legislation is not yet in effect, in a later paper we will identify some of the challenges that disclosing companies may need to anticipate and the preparations they should begin working on now.

Growing climate change expectations

Corporate responsibility is under the spotlight, with stakeholders—including consumers, investors, and regulators—placing increasing emphasis on sustainable practices.

Alongside the unprecedented environmental challenges that the world is beginning to experience, comes increasing expectations for companies to act as responsible corporate citizens and earn their social licence to operate. Companies and their directors are facing growing scrutiny over, and liability for, their practices particularly concerning their contribution to climate change.

Consumers, investors, lenders, governments and regulators are placing a growing emphasis on the need for companies to accept responsibility for their contribution to the sustainability and environmental problems in the world.

Directors in the spotlight

In Australia, it is well recognised that the directors’ duties to act in the best interests of the company require them to integrate sustainability and climate change considerations into corporate decision-making and governance when these issues are material to the financial interests of investors and of the financial position and performance of the company.

With the passing of the Bill, directors will be mandated to ensure their companies comply with rigorous sustainability reporting standards. This legislation will integrate climate risk into the core of corporate governance, aligning climate disclosures with global frameworks like the Taskforce on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB).

Directors must oversee the preparation of annual sustainability reports, with detailed disclosures on climate-related financial risks. These reports will need to cover scope 1, scope 2, and scope 3 emissions, alongside comprehensive information about governance structures, strategies, risk management processes, and relevant metrics and targets. Directors will be responsible for ensuring that these disclosures are accurate, verifiable, and provide a fair representation of the company’s climate-related risks and opportunities.

Directors must consider the long-term impacts of climate change on the company’s financial performance and strategic direction. This will involve conducting thorough risk assessments, setting and monitoring climate-related targets, and ensuring robust data management practices. Directors will also be tasked with driving a consistent approach to sustainability across the organisation, fostering a culture of environmental responsibility.

The challenges

A significant challenge for directors is to prevent greenwashing, where misleading claims about sustainability can lead to regulatory and reputational damage. The Australian Securities and Investments Commission (ASIC) has underscored the importance of genuine and transparent reporting. Directors must ensure that the company’s sustainability claims are backed by solid evidence and align with regulatory expectations. Further, ASIC has prioritised tackling greenwashing, ensuring that companies’ sustainability claims are genuine and verifiable.

In essence, directors play a pivotal role in steering their companies towards sustainable practices. By embracing their responsibilities for climate and sustainability disclosures, they not only ensure compliance with emerging regulations but also contribute to a more resilient and sustainable future for their organizations and society at large.

It is well recognised that the directors’ duties to act in the best interests of the company require them to integrate sustainability and climate change considerations into corporate decision-making and governance when these issues are material to the financial interests of investors and of the financial position and performance of the company.

Reporting climate-related financial risks

Even without the new legislation, reporting on climate-related financial risks in Australia is becoming an essential aspect of corporate governance and sustainability strategies. The increasing awareness of climate change impacts, coupled with regulatory pressures, has led to significant developments in how companies disclose these risks.

The Taskforce on Climate Financial Disclosures (“TCFD”) first published its reporting recommendations, establishing a global framework for disclosing climate risks in 2017 and since then many jurisdictions have made the reporting of TCFD-aligned disclosures mandatory, and hundreds of sustainability standards have been written.

The International Sustainability Standards Board (“ISSB”) is developing a series of sustainability standards to assist entities in making globally consistent climate and sustainability disclosures. To date, over 20 jurisdictions, representing nearly 55% of the global GDP (excluding the USA) have taken steps to introduce ISSB standards, or use these as a base for developing their own, into their legal or regulatory frameworks.

For example, the EU’s Corporate Sustainability Reporting Directive (“CSRD”) applies to companies with significant business in Europe, regardless of where they are based. The CSRD is broad in its application as well as the depth of its disclosure requirements over a range of ESG issues. In the United States, the Securities and Exchange Commission (“SEC”) passed its climate-risk disclosure rule in March. This is not as extensive as other jurisdictions as there is no requirement to measure and report on scope 3 emissions

Until now, Australia has limited mandatory climate financial disclosure requirements. Large energy generators and users have  been required to report their greenhouse gas emissions under the National Greenhouse Emissions Reporting Act (“NGER Act”). The NGER Act requires large emitters to report their greenhouse gas emissions annually by providing a framework for measuring, reporting, and verifying emissions to ensure accuracy and consistency. Liable companies must disclose scope 1 (direct), scope 2 (indirect from energy consumption), and increasingly scope 3 (other indirect) emissions.

Financial and corporate regulators including APRA, ASIC and the ASX have published guidelines for the recommended disclosure of material climate-related financial risks under existing obligations to disclose material risks.

Although many entities in Australia consider climate-related financial risks in their businesses and voluntarily publish sustainability or environmental reports, and/or report under frameworks such as the NGER, most of them are not reporting in accordance with the full TCFD requirements.

To make reporting more consistent, transparent and meaningful for users, the Bill will make climate-related financial disclosures mandatory for certain entities and sets out the reporting requirements.

The introduction of standardised, internationally-aligned requirements for mandatory disclosure of climate-related financial risks and opportunities in Australia for large businesses is part of the government’s “Powering Australia” policy.

New laws, new risks

The implementation of these reporting obligations marks a transformative step in Australia’s approach to climate risk management. By adopting robust reporting practices, Australian companies can not only comply with regulatory requirements but also drive sustainability, attract responsible investment, and contribute to global efforts to combat climate change.

New laws mean new risks and challenges. In part 2, we take a detailed look into the new mandatory sustainability reporting laws.

The bottom line

The impending mandatory sustainability reporting requirements mark a pivotal shift in how Australian corporations must address their environmental responsibilities. As the global community intensifies its focus on combating climate change, pollution, and biodiversity loss, Australian companies must prepare for the stringent climate disclosure mandates being legislated.

The path to compliance may be challenging, but the rewards of safeguarding both the planet and long-term business viability are immense.

We are here to help you manage climate risk

By acting now, you can turn these challenges into opportunities, positioning your company as a leader in sustainability and corporate responsibility. Don’t wait for the legislation to take effect—begin your journey towards a more sustainable and resilient future today.

Together, let’s build a more sustainable tomorrow.

Contact us to embark on a journey towards authentic environmental stewardship and responsible business practices.

The ACCC’s guidance follows concerns raised by a recent greenwashing internet sweep, revealing that 57% of reviewed businesses made potentially misleading environmental claims. The ACCC reiterated its commitment to enforcement and outlined its process, emphasizing action against representations about future environmental claims lacking reasonable grounds or intention.

What is greenwashing?

Greenwashing is the deceptive practice where a company falsely portrays its business or products as environmentally friendly. This marketing strategy involves companies claiming environmental consciousness without substantial efforts to reduce their environmental impact. Even well-intentioned companies can engage in greenwashing, contributing to widespread scepticism among global consumers regarding sustainability claims.

Essentially, greenwashing involves a company allocating more resources to marketing their eco-friendly image than genuinely addressing their environmental footprint, ultimately serving as a misleading ploy to attract environmentally conscious consumers.

As it can be seen from the above, most examples of greenwashing involve embellishing the product or service’s environmental benefits.

A Premium for Sustainable Brands

Why is greenwashing risk increasing? Marketers are increasingly driven to imbue their brands with a sense of environmental responsibility, and for good reason. According to a comprehensive report conducted by GreenPrint, a notable 64% of consumers from the Gen X demographic express a willingness to pay a premium for products associated with sustainable brands. This inclination toward sustainable choices becomes even more pronounced among millennials, with an impressive 75% of individuals within this demographic indicating a readiness to spend more on products aligned with environmentally conscious brands.

The findings underscore a significant shift in consumer preferences, where ethical considerations and sustainability play pivotal roles in purchasing decisions. As the market continues to evolve, businesses that embrace and communicate their commitment to sustainability are likely to resonate more strongly with consumers, especially those belonging to younger age groups. This not only highlights the growing importance of environmental consciousness in brand perception but also presents a clear opportunity for businesses to align their values with those of their environmentally aware consumer base.

Key Principles of the ACCC’s Greenwashing Guidance

The guidance explains the obligations under the Australian Consumer Law which businesses must comply with when making environmental and sustainability claims. It sets out what the ACCC considers to be misleading conduct and good practice when making such claims, to help businesses provide clear, accurate and trustworthy information to consumers about the environmental performance of their business.

The ACCC’s guidance encompasses eight key principles for businesses engaging in environmental claims:

1. Make accurate and truthful claims.
2. Have evidence to support your claims.
3. Avoid hiding or omitting important information.
4. Clearly explain any conditions or qualifications on claims.
5. Refrain from making broad and unqualified claims.
6. Utilize clear and easy-to-understand language.
7. Ensure visual elements do not convey a misleading impression.
8. Be direct and open about your sustainability transition.

The guidance sets the stage for transparent and meaningful communication, ensuring that legitimate sustainability efforts receive due recognition while mitigating the risks associated with greenwashing.

Emission and Offset Claims

Looking ahead, the ACCC announced plans to release further guidance in early 2024, focusing on emission and offset claims, along with the use of trust marks. The aim is to help businesses and consumers navigate the complexities of environmental claims, fostering transparency and accountability.

Governance Institute’s Response

In response to increasing regulatory action, the Governance Institute of Australia also launched a guide titled “Greenwashing: a governance perspective.” The guide positions greenwashing as a governance issue, emphasizing the importance of robust governance structures to mitigate reputational, legal, and financial risks.

The Governance Institute highlights various greenwashing risks, including selective disclosure, meaningless targets, virtue signalling, baseless claims, hidden trade-offs, and the ‘green-halo’ effect. The guide emphasizes the nuanced distinction between genuine reporting and greenwashing.

Following the United Nation’s Lead

Since the inception of the Paris Agreement in 2015, an increasing number of companies committed to achieving net-zero greenhouse gas emissions. This involved reaching a point where any remaining emissions are offset by actions such as forest conservation or ocean absorption. However, many of these claims relied on dubious strategies, including emissions offsetting and “insetting,” rather than genuine emission reductions. Consequently, the transparency and integrity of such commitments are alarmingly low, posing a risk to the urgent need for effective climate action.

Responding to the surge in greenwashing associated with net-zero pledges, the Secretary-General has established a High-Level Expert Group. This group has been assigned the crucial task of developing more robust and transparent standards for net-zero emissions commitments across companies, financial institutions, cities, and regions, expediting their implementation.

Minimising Greenwashing Risk

While greenwashing may be deliberate, it can also be done inadvertently.  To avoid greenwashing, consider implementing the following strategies:

• Clear and Specific Claims: Ensure transparency by specifying units of measurement in your sustainability claims, making them easily understandable (e.g., “20% recycled plastic” rather than vague statements).
• Provide Verifiable Data: Support your sustainability claims with accurate and current data, prominently available on your website and other communication channels. Verify all data to enhance credibility.
• Integrate Sustainability into Operations: Incorporate sustainability into your business model by adopting eco-friendly practices in manufacturing and waste disposal. Align your operations with your environmental marketing claims.
• Honesty about Sustainability Practices: Clearly communicate your brand’s sustainability practices and future plans to consumers. Be transparent about your goals and targets, building trust and accountability.
• Avoid Misleading Advertising: Ensure that advertisements and packaging accurately represent your products’ eco-friendliness. Refrain from using nature-related imagery if your brand or products do not align with environmentally friendly practices.

We are here to help you

As businesses increasingly recognize the importance of sustainability, the risk of greenwashing becomes a critical concern, adherence to the ACCC’s principles and robust governance structures becomes paramount.

To safeguard your company’s reputation and foster genuine environmental responsibility, consider partnering with InConsult. Our expert consultants can guide you through the complexities of sustainable practices, ensuring that your environmental claims align with measurable actions.  We have a range of greenwashing audit and compliance services that help reduce greenwashing risk.  We can:

• Evaluate your marketing materials and communications to identify potential greenwashing risks.
• Ensure alignment with local and international regulations related to environmental claims.
• Confirm the accuracy and reliability of data supporting your sustainability claims.
• Assess the methodology used for measuring and reporting environmental impact.
• Evaluate the effectiveness of existing governance structures related to sustainability.
• Review and enhance your policies to ensure transparency and accountability.
• Develop training sessions for internal teams on greenwashing awareness and compliance.
• Provide detailed reports on the findings of the greenwashing audit.

By taking proactive steps to integrate sustainability into your business model and leveraging the expertise of our firm, you not only mitigate the risk of greenwashing but also contribute to a more sustainable and transparent future.

Together, let’s build a greener and more sustainable tomorrow.

Contact us to embark on a journey towards authentic environmental stewardship and responsible business practices.

Today, consumers’ purchasing and investment decisions are frequently made with environmental, sustainability and ethical considerations in mind. For this reason, companies can benefit by distinguishing themselves in their markets by adopting strong environmental, social and governance (“ESG”) actions. They rely on their ESG credentials in marketing and in some cases have regulatory obligations to, or choose to, disclose and report environmental and ethical aspects of their business, eg their greenhouse gas emissions.

Regulators, in particular the Australian Competition and Consumer Commission (ACCC) and Australian Securities and Investments Commission (ASIC) in Australia, are concerned that because of the importance placed on environmental, sustainable and ethical credentials of products and companies by consumers companies may exaggerate these benefits (“greenwashing”).

For this reason, ACCC and ASIC are prioritising their focus on companies making environmental and other ESG claims about their products or their operations.

What is Greenwashing?

Greenwashing describes misleading conduct that relates to an environmental, sustainable and/or ethical quality of a product, such as over representing the extent to which products or company operations support or do not damage the environment, are sustainable or produced ethically.  An intention to mislead is irrelevant.

Greenwashing erodes trust.  Misleading conduct can be in representations made in a number of ways including on or in:

• product information
• statements
• company reports
• product names
• company or business names
• labels
• packaging
• advertising and promotional material
• disclosures
• communications

Misleading representations can be:

• words
• pictures
• silence

Companies, however, are not facing new regulations when it comes to prohibitions on greenwashing.  Companies and their directors should be familiar with:

The Australian Consumer Law:

• (s18) prohibits conduct that is misleading or deceptive as well as conduct that may mislead or deceive consumers,
• (s29) prohibits the making of specific false and misleading representations including that goods or services have a particular quality, history, performance characteristic or benefit.

The Corporations Act (s1041E, 1041G, 1041H) and the Australian Securities and Investments Commission Act ( s12DA, 12DB):

• prohibit making false or misleading statements and engaging in dishonest, misleading or deceptive conduct in relation to financial products or services.

Examples of Greenwashing

So what does greenwashing look like? Here are some examples of greenwashing that range from outright lies to creative ways to tell lies.

• 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
• Before IKEA was connected to illegal logging in Ukraine in June 2020, the furniture company was regarded as a shining example of a large firm being sustainable.
• According to a report released in 2021 by the Rainforest Action Network, major banks such as JP Morgan, Citibank and Bank of America, Wells Fargo, Barclays, Bank of China, HSBC, Goldman Sachs, and Deutsche Bank are still lending massive sums to industries that contribute the most to global warming, such as fossil fuels and deforestation, despite boasting that they are the leaders of the green transition.
• Windex, the glass cleaner by SC Johnson claimed its bottles were made from 100% “ocean plastic”. But in fact, the plastic used to make the bottles was never in the ocean. It was pulled from plastic banks in Indonesia, the Philippines, and Haiti. This type of plastic is known as ocean-bound plastic because it would have otherwise ended up in the ocean.
• Ryanair boldly proclaimed to the British people in early 2020 that it was Europe’s “lowest emissions airline.” The allegation was made up, and the commercials were swiftly prohibited by the Advertising Standards Agency.
• On its website, an issuer makes it clear that it is dedicated to achieving nett zero carbon emissions across all of its investment holdings. However, investors aren’t given any details on how or when it plans to reach this goal.

What Actions are the Regulators Taking to Stop Greenwashing?

The ACCC’s enforcement and compliance policies for 2022-2023 include prioritising the pursuit of businesses that make misleading statements about the environmental and/or sustainable qualities of their goods or services and businesses making misleading claims about the carbon neutrality of their production processes.

ASIC is part of the International Organisation of Securities Commissions Sustainable Finance Task Force which is looking more closely at greenwashing of financial products, including developing a consistent taxonomy to define climate friendly and sustainable financial products and activities.

ASIC is reviewing the practices of managed and superannuation funds making claims that the investment products they offer are as ESG focussed as they claim them to be.

Also, ASIC may be more lenient on companies breaching the Corporations Law and ASIC Act than the ACCC when it comes to financial institutions and any over-representations by them of their environmental, sustainable and ethical practices and investments, focusing, at least initially, on education rather than compliance enforcement.

ASIC conducted a similar review of climate risk disclosures of large, listed companies which showed that the standard of climate-related disclosures has improved over the past few years, however they found that many companies’ disclosures appeared to have a marketing focus, which rings alarm bells.

What Should Businesses do to Reduce the Risk?

Any company, or business with good governance and compliance processes in place should not be too concerned about greenwashing risk.

Companies should make sure that their reports, promotional materials, product statements, labels and representations made in other materials do not create a false or misleading impression for consumers. This is assessed by considering all the circumstances around the representation, such as the nature of the product or services, the consumers’ purchasing decision-making process consumers, the audience, how and where the representation is made.

True/accurate

Representations must be accurate and capable of being substantiated. They need to be made on reasonable grounds, be scientifically sound, and/or evidence based. Claims should not overstate the level of acceptance in the relevant scientific community. Provide easy access to relevant information for consumers.

Concise/clear/unambiguous

Representations must be easy for consumers to understand. They should be free from jargon and vague or confusing terminology that can be misinterpreted. This requires a consideration of the audience and the breadth of knowledge and education they may have. Be specific and clear what aspect of the products, services, packaging or operations a representation relates to.

Specific

Claims should be specific, not general, unqualified statements. Clarify any terminology that doesn’t have a certain or well understood meaning. Information must be consistent across all media and materials.

Disclaimers or qualifications

All caveats, disclaimers or qualifications must be prominent and relate to the original claim but should not be relied on to correct a misleading headline claim.

Real benefit

Only make a claim when there is a genuine benefit or advantage. Do not overstate the benefit. Explain the significance of the benefit claimed.

Predictions of future events need to be based on reasonable grounds. How you can make the statement and achieve the targets/ benefits claimed. This is particularly relevant to company reports and statements including net zero goals. There needs to be an actual plan to get to the represented goals.

Investment strategies

Claims made in respect to investment products should disclose the policy, considerations and methodology adopted to achieve the stated environmental or sustainability outcomes or investment decisions. Explain investment screening processes and criteria.

Targets

Targets should be based on reasonable grounds and describe how and when the target will be met, how progress is measured, and any assumptions relied on in setting the target.

Metrics

Where environmental or sustainability metrics are used, their sources, the underlying data and calculation methodologies and limitations need to be specified.

6 Things to Avoid Greenwashing

Once a company identifies the need to address climate risk, overcoming the internal obstacles should be the focus of those driving climate risk change in the company. The following 6 steps will start you off and overcome these obstacles.

1. Include Australian Consumer Law (ACL) and ASIC compliance training for relevant staff.
2. Develop a marketing and reporting checklist and sign off procedure.
3. Appoint a person responsible for overseeing ACL and ASIC compliance.
4. Keep up to date with regulatory developments around disclosures as these are being updated internationally eg the proposed IFRS disclosures standard ( which follows the TCFD framework).
5. Understand what standards to use when assessing product or services or the company operations as environmentally or socially responsible.
6. Make disclosures in accordance with the reporting framework set out in the Recommendations of the Taskforce on Climate-related Financial Risks (TCFD) for disclosing climate related financial risks and the Taskforce on Nature-related Financial Disclosures  (TFND) for disclosing nature related risks of the company.

We Help You Reduce the Risks

Regulators are now holding organisations accountable for misleading ESG claims.  Therefore, organisations making ESG related disclosures need to implement periodic process-reviews of ESG related processes.

Some of these reviews can be performed by your organisation’s internal audit, risk management or compliance functions, but the reviews will also require specialist expertise (subject matter experts) in environmental and social sciences for more robust fact-checking and reviews of methodologies. This is where we can help.  We can:

• Deliver tailored ESG training to help upskill the Board, management, staff and supply chain.
• Review the robustness of your ESG framework, methodologies and templates.
• Assess your ESG compliance to regulatory requirements.
• Review ESG monitoring metrics and adequacy of reports to stakeholders.

Take steps to reduce the risk of greenwashing and contact us to discuss your needs.

Earlier this year, APRA conducted a survey of APRA-regulated entities to gather information on how they are aligning their climate risk practices with CPG 229.
The survey was voluntary and was aimed at gaining insight into how well medium to large APRA-regulated institutions had formally implemented and documented CPG 229 practices. APRA concluded that the “responses showed good alignment but that there is room for improvement.”

APRA Survey Results

APRA published the results of the Climate risk self-assessment survey in an Information Paper in August 2022. A summary of the findings can be found on its website. The key observations that they noted were:

• four out of five boards oversee climate risk on a regular basis, while just under two-thirds of institutions (63 per cent) have incorporated climate risk into their strategic planning process;
• almost 40 per cent of institutions said climate-related events could have a material or moderate impact on their direct operations;
• nearly three-quarters of institutions (73 per cent) said they had one or more climate-related targets in place, however 23 per cent of institutions do not have any metrics to measure and monitor climate risks; and
• over two-thirds of institutions (68 per cent) said they have publicly disclosed their approach to measuring and managing climate risks, with 90 per cent of those aligning their disclosure to the Taskforce for Climate-related Financial Disclosures (TCFD) framework.

Obstacles to Climate Risk

A second, unrelated report was also recently published; Net Zero: Obstacles and Catalysts for Business Climate Action by ERM and EDF+Business with the results of survey and interviews they conducted to help identify the obstacles faced by companies pursuing their climate goals and some catalysts that may help overcome these obstacles.

This study may provide some insights into the difficulties that the APRA-regulated institutions are facing and account for the shortfall in meeting the expectations of APRA’s CPG 229.

The study tried to look into the reasons why many businesses are falling short in their actions to meet net zero goals. They found a number of internal and external obstacles that are hindering companies’ in reaching their goals.

The three most frequently mentioned internal obstacles were:

• Not knowing how to develop and deliver a climate strategy connecting climate goals with business objectives to drive progress.
• Integration of climate action into core business functions of the organisation to enable them to contribute to climate action.
• Knowing how to measure and manage emissions associated with complex value chains (Scope 3 emissions).

In addition, the three most frequently mentioned external obstacles were:

• Insufficient government support for climate action.
• Suitable technological solutions are unavailable.
• Uncertainty around identifying the appropriate climate-related data modelling tools and guidance to develop climate action plans.

Both these surveys show that companies are trying to take meaningful action to manage climate risks and keep global temperature rise to below 1.5° but need help to do so.

The world is falling behind on the goal to cap temperature rises to 1.5° and limit climate related risks. Finding solutions and implementing climate strategies should be a priority, with or without government support.

Overcoming the Climate Risk Obstacles

The surveyed companies were asked what strategies they believed could be used to overcome the internal obstacles they identified. The top responses were:

• Having a budget that fully supported climate action.
• Senior executive engagement and buy-in.
• Tying performance incentives linked to climate action.
• Developing better internal leadership and upscaling climate knowledge and expertise.

To overcome the external obstacles they identified the need for:

• Improving supporting government policies and regulations.
• Better understanding of widely available climate-related technologies and knowledge of how to utilise those available.
• Investor requirements, financing availability, green bonds etc.
• Government subsidies and incentives.

Starting point

Once a company identifies the need to address climate risk, overcoming the internal obstacles should be the focus of those driving climate risk change in the company. The following 5 steps will start you off and overcome these obstacles.

1. Provide targeted training to the board and C-Suite executives on climate risks, opportunities and how to develop a climate action plan to reduce emissions and manage the risks.
2. Develop goals and the climate strategy with input from,  and participation of, all areas of the business.
3. Set climate goals and publicise them so that everyone knows what they are aiming for. This should be to reduce all greenhouse gas emissions as soon as possible but by 2050 at the latest. Set a target to reduce current emissions by 2030 by, say, at least 50%. (This can be modified if you need to when signing up with a Race to Zero partner or when you have a better understanding of the organisation’s energy use and emissions.)
4. Ensure the board and management support the process including with the provision of sufficient financial and non-financial resources.  Keep them informed of progress.
5. Conduct an energy audit to identify the company’s  baseline energy use.  Remember, you can’t manage what you don’t measure.

1. • Where does the organisation use energy?
   • What type of energy is used? Eg electricity, gas, petrol, diesel
   • Estimate or quantify how much of each type of energy is used
   • Map the supply chains of goods purchased
   • How are products and services distributed?
   • Conduct a scanning exercise to identify if any Scope 3 emissions are material.

Let us help you get to net zero

This can feel confusing and overwhelming. We can help with climate risk management planning, including developing a net zero emissions goals.

Whatever your position, making a start as soon as possible is better than waiting to get it perfect or waiting until you have researched the alternatives. There are a number of initial steps to take while searching for the best fit, the right people and a starting point.

How far do you want to go to minimise the impact of climate change on your business and achieve net zero for future generations? Be more resilient and contact us to discuss your needs

Sustainability reporting is not simply writing down a list of required information and describing activities, even if an organisation is following better practice guidelines such as ISO 14001: 2015 Environmental Management System Research Reporting.

Sustainability reporting, requires investigating, analysing, understanding, and potentially, rethinking an organization’s functioning, management, strategy and vision, identifying and taking into account its broad impacts on stakeholders and on the environment, and the intended and untended changes it generates.  It requires the disclosure and communication of environmental, social, and governance (ESG) goals to key stakeholders —as well as a company’s progress towards them.

Besides the important impact on the environment, the value of sustainability reporting is that it ensures organisations consider their impacts on sustainability issues, and enables them to be transparent about the risks and opportunities they face.  There are many other significant benefits to adopting sustainability practices and sustainability reporting:

• Reducing operating costs in the long run
• Improving competitive advantage
• Reducing the social, environmental and financial risks
• Improving innovation as organisations seek opportunities to excel in key areas
• Enhancing access to financial capital and at lower cost
• Enhancing reputation through greater transparency
• Improving regulatory compliance
• Enhancing brand value

Environmental and Sustainability Reporting

To manage an organisation’s risks of, and to, the environment, it should have a 360° understanding the full impacts of its operations on the environment and other sustainability criteria, and the financial risks to the organisation from environmental challenges. Understanding and acting to manage these risks provides many positive benefits and opportunities.

It is becoming more common for companies to report their environmental and/or sustainability information in their annual and/or financial reports. A growing number of organisations also publish a stand-alone sustainability report.

Although there are no legal requirements in Australia for sustainability reporting per se, corporations are required to report financial and non-financial information relevant to the environment and sustainability to comply, for example, with Australian Accounting Standards Board (“AASB”), Corporations Act, and various ASX requirements. It is becoming good corporate practice to do so, as evidenced by the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations.

Attributes of Good Reporting

To be of benefit to users relying on these reports, reports should:

• Be credible, consistent, widely adopted and accessible.
• Give an accurate picture of the sustainability performance of the business.
• Be consistent and comparable between years and between reporting organisations.

Terminology and metrics should be consistent, transparent, appropriate to inform the relevant user and based on verifiable data and metrics. With large numbers of organisations consistently reporting their sustainability performance the end users of the reports are better able to compare sustainability performance and make sound decisions.

Unfortunately there are a number of frameworks being proposed, and in Australia, there is no uniform policy or guidelines to support government or non-government agencies.

By comparison, New Zealand has enacted the Environmental Reporting Act 2015 and has developed a Carbon Neutral Government Programme requiring the public sector to set credible gross emissions targets and plans and report against them and has made climate-related disclosures mandatory for publicly listed companies and large financial institutions.

Extrinsic Sustainability Reporting Challenges

Organisations can face a number of extrinsic and intrinsic challenges to environmental and sustainability reporting.  Extrinsic challenges, for example, can arise from:

• The number of reporting standards and frameworks available
• The variety of purposes of the reports and audience requirements
• Presenting inaccurate or misleading data (“greenwashing”)

One of the difficulties organisations experience in reporting their performance and risks is the lack of standardisation of reporting frameworks. Many frameworks are being developed by organisations including Global Reporting Initiative (“GRI”), Taskforce in Climate-Related Financial Disclosures (“TCFD”), Taskforce on Nature-Related Disclosures (“TNFD”). The GRI framework is frequently used by corporations in their sustainability reporting, although in Australia the percentage of organisations using the GRI framework falls behind the global rate. Additionally, organisations can be guided by ISO 14001: 2015 Environmental Management System Reporting to provide guidance on environmental reporting.

The growth in the number of standards and frameworks being developed and adopted make it difficult to develop a process to gather meaningful data and report it in an effective way, thereby undermining the comparability of reports and their value to users. Poor use of metrics and transparent data can lead to greenwashing and lack of credibility of the company and its reports.

Intrinsic Sustainability Reporting Challenges

Intrinsic challenges can arise from:

• A lack of commitment from organisational leaders and managers to environment and sustainability arising from their limited understanding of the issues, the risks and opportunities to the organisation
• Poor integration of sustainability and environmental issues into organisational strategies
• The large amount of data that organisations collect
• The variety of internal and external reports written for different audiences and by different authors
• Uncertainty around the best metrics to use to suit the purposes of the report
• Inconsistent terminology
• Compliance costs

The number of standards and frameworks available along with range of metrics, data, terminology and reporting criteria can also cause uncertainty for report preparers as to what approach is most appropriate. The uncertainty caused by the various reporting standards and frameworks can add to the costs of preparing meaningful reports.

Furthermore, organisations often struggle to report across all the elements of sustainability and to understand the breadth of sustainability disclosure topics, concentrating on issues directly related to key popular policies, such as renewable energy, forgetting about social aspects such as risks of modern slavery.

How We Can Help

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.

How far do you want to take your environmental and sustainability reporting your business? Be an environmental worrier, be more resilient and contact us to discuss your needs.

The consequences of the high atmospheric levels of greenhouse gases, particularly carbon dioxide (CO2) will continue because greenhouse gases persist in the atmosphere for a long time. For example, according to NASA,  CO2 remains in the atmosphere for between 300 to 1,000 years. Therefore, as humans change the atmosphere by emitting CO2, those changes will endure.

However, this is the reason why we need to be taking immediate and drastic action to reduce emissions and begin to remove CO2 from the atmosphere.

The link between greenhouse emissions and risk

The UN Climate Change Conference in Glasgow (COP26) has highlighted the risks of climate change for many organisations and institutions, with the COVID-19 pandemic exemplifying some of the systemic and indirect consequences that a climate crisis may provoke. For example, the global supply chain disruptions that are impacting many industries and businesses.

2021 has seen an international push for commitments from all players to keep the rise in the global temperatures to no more than 1.5° C above pre industrial temperatures. This is in accordance with the science and recommendations of the Intergovernmental Panel on Climate Change (IPCC) that above this level we will see irreversible and catastrophic changes to the Earth’s climate and living conditions.

Climate change financial risks are often categorised into physical, transition and legal/ liability risks as seen in the following examples.

Physical risk

Unabated greenhouse gas emissions are the driver for physical climate risks. According to the Intergovernmental Panel on Climate Change (IPCC), the science leaves us in no doubt that if the global community do not rapidly reduce the amount of carbon dioxide and other greenhouse gases in the atmosphere, and ensure that emissions are net zero by 2050 we will not avoid worsening the catastrophic consequences of global temperature rise. Organisations can play a significant role in this, whether by reducing, what may for some, be significant emissions, and/or by taking roles as leaders and influencers.

In addition to the physical impacts of climate change that we are all experiencing and witnessing, climate change poses well recognised risks to organisations with financial and reputational consequences.

Transition risk

Transition risks arise from how society, governments and individual organisations respond to climate change and adjust to a zero carbon economy. Read our Climate Risk Guide for Directors to find out more.

Legal / liability risk

Legal and liability risks can arise from litigation and regulatory enforcement by third parties to an organisation’s failure to act.  There is a growing movement to mandate a range of climate action strategies into law and regulations creating a potential minefield for companies, directors and shareholders.

Consumers, investors, employees and regulators are placing more importance on what companies are doing with respect to addressing climate change and reducing their emissions.

Reducing emissions

Consequently, many countries, states, cities and organisations are committing to science-based targets to reduce their greenhouse gas emissions and are setting short, intermediate and long term goals in an attempt to stop and even reverse some of the impacts of climate change. Many are signing up to the COP 26 goal of reducing emissions to net zero by 2050 and setting ambitious interim targets for 2030. This requires the development of policies and legislation to achieve these targets.

For example, over 120 countries, 733 cities, 31 regions, 3,067 businesses, 173 investors and 622 higher education institutions have signed up to the United Nations’ Race to Zero campaign. The NSW Government has set a goals of net zero emissions by 2050 and a 35% reduction in emissions by 2030 compared to 2005 emission. The City of Sydney has developed a strategy to reach net zero emissions by 2035 after boasting of being the first Australian local government to be carbon neutral in running its operations.

Getting started to net zero

Organisations can struggle with knowing what to do to reduce their emissions and in developing a plan reach net zero. At its most simple, what is required is to measure, eliminate and offset the residual carbon emissions.

Measuring

Measuring emissions is important to identify where energy and emission intensity is the greatest and help to develop a strategy to reduce and remove them.
Organisations’ emissions are categorised, depending on their source, into Scope 1, Scope 2 and Scope 3 emissions.

• Scope 1 emissions are the direct emissions from operations, owned or operated assets.
• Scope 2 are the indirect emissions from purchased energy.
• Scope 3 are all the other emissions from everything else (suppliers, distributors, product use, etc.) and for many organisations can account for over 70% of total lifecycle emissions in their value chain.

Many Australian large emitters and energy users are already required to report their Scope 1 and scope 2 emissions under the National Greenhouse Gas and Energy Reporting scheme (NGER).
Measuring Scope 1 and 2 emissions is not hard, but calculating the Scope 3 emissions can be more difficult. If these are a significant proportion of your organisation’s emissions, they should be measured and managed in the transition to net zero.

Eliminating

Eliminating as many emissions from fossil fuels as possible by stopping an activity e.g. traveling to in -person meetings, working more efficiently e.g. reducing printing, devices left on when not used, excess lighting, updating technology to more energy efficient technology eg petrol or diesel cars to electric vehicles, reducing waste and acquiring energy from renewable sources.
Practices that reduce energy use, should also reduce operating costs, at least in the long run.

Offsetting

Offsetting the residual emissions that cannot be eliminated can be achieved with certified and reputable offset schemes that store the equivalent emissions can be useful in the transition phase.

Making a Pledge

All organisations are encouraged to set a goal, make a plan and reduce their emissions to net zero by 2050 if not sooner. Targets should cover all greenhouse gas emissions including Scope 3 where these are material to total emissions and where data availability allows them to be measured sufficiently.

However, if they want to be counted and recognised as part of the global movement, the “gold plated” approach where emissions are quantified and science-based targets are set, and the results published and counted there is The United Nations Race to Zero Campaign. This is aimed at businesses, cities, regions and investors in what the UN refers to as “the largest ever alliance committed to achieving net zero emissions by 2050 at the latest.” The Race to Zero is an umbrella campaign—driven by science—that aggregates commitments to become net zero, absolute zero, or climate positive from a range of leading networks and initiatives across the climate action community. The Race to Zero Lexicon provides useful explanations and examples of most of the terms being used around reducing anthropogenic climate change and the often confusing and nuanced differences between them.

Organisations are invited to join one of the UN’s partner net zero initiatives or networks. These partners set their own criteria tailored to different participants and help their members set plans to reach their targets. The UN’s Race to Zero partners are listed here.

The minimum criteria that members of Race to Zero need to commit to start on their Race to Zero journey are:

Starting point

The following 5 steps will start you off while formulating a more definite plan and process to quantify and manage the emissions.

1. Set a goal so that everyone knows what they are aiming for. This should be to reduce all greenhouse gas emissions as soon as possible but by 2050 at the latest. Set a target to reduce current emissions by 2030 by, say, at least 50%. (This can be modified if you need to when signing up with a Race to Zero partner or when you have a better understanding of the organisation’s energy use and emissions.)

2. Appoint climate champions throughout the organisation with the passion to help reach these goals.

3. Ensure the board and management support the process.

5. Conduct an energy audit to identify the baseline.  Remember, you can’t manage what you don’t measure.

a. Where does the organisation use energy?
b. What type of energy is used? Eg electricity, gas, petrol, diesel
c. Estimate or quantify how much of each type of energy is used
d. Map the supply chains of goods purchased
e. How are products and services distributed?
f. Conduct a scanning exercise to identify if any Scope 3 emissions are material.

5. Reduce the use

a. Identify where operational procedures, technology and habits can be changed to reduce energy use.
b. Acquire energy from renewable sources.

Let us help you get to net zero

This can feel confusing and overwhelming. We can help with planning and implementation of your project to net zero.

Whatever your position, making a start as soon as possible is better than waiting to get it perfect or waiting until you have researched the alternatives. There are a number of initial steps to take while searching for the best fit, the right people and a starting point.

How far do you want to go to minimise the impact of climate change on your business and achieve net zero for future generations? Be more resilient and contact us to discuss your needs.

Importantly, CPG 229 does not impose any additional obligations on institutions in relation to climate risks. APRA has drafted the guide for the purpose of assisting APRA-regulated institutions to comply with the existing risk management and governance requirements in Prudential Standards CPS 220 Risk Management (CPS 220), SPS 220 Risk Management (SPS 220), CPS 510 Governance (CPS 510), SPS 510 Governance (SPS 510). It also provides suggestions that APRA considers are prudent practices in managing to climate change financial risks.

CPG 229’s governance, risk management, scenario analysis and reporting guidance reflects the widely accepted climate-risk disclosure framework developed by the Taskforce on Climate Financial Disclosures (TCFD ) for guiding institutions in the consideration and management of climate risk.

Whilst CPG 229 is only a guideline, APRA considers that prudent institutions should consider the opportunities and the financial risks of climate change in business and strategic decision-making. Institutions, particularly those in financial, banking and insurance should be looking at this in the context of international movement towards mandating climate risk disclosures and Australian legal expectations around how directors discharge their duties when it comes to climate change risks.

The international context

Around the world regulators and governments are taking strong action to address the growing threats of climate change including setting emissions targets and making climate risk disclosures mandatory for some entities. The TCFD disclosure framework has gained global recognition and support as the foundational framework for climate risk reporting with many jurisdictions moving to make TCFD-aligned disclosures mandatory. Amongst Australia’s trading partners taking such action are the United Kingdom, New Zealand and Hong Kong.

The New Zealand government is working towards making climate-related disclosures mandatory through introducing an amendment to the Financial Markets Conduct Act 2013 to Parliament. If approved, from 2022 FMC-reporting institutions will need to start making climate-related disclosures.

The UK Treasury has published a strategy towards mandatory climate-related disclosures which will also be aligned to the TCFD recommendations for disclosures (A Roadmap towards mandatory climate related disclosures. November 2020). This proposal for mandatory disclosures quickly follows the expectation set out by the UK in 2019 in the Government’s Green Finance Strategy for listed issuers and large asset owners to make voluntary disclosures. A cross UK Government and regulator Taskforce (the UK Taskforce) determined that the urgency of the climate threat means that a voluntary approach may be insufficient.

Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group (Steering Group) has developed a Strategic Plan setting out 6 key focus areas for strengthening Hong Kong’s financial system to support a more sustainable future. Among other things, the plan includes making TCFD- aligned climate-related disclosures mandatory across relevant sectors no later than 2025.

The Australian legal context

Australian barristers Noel Hutley SC and Sebastian Hartford Davis have recently written a second supplementary memorandum of opinion to their original 2016 legal opinion on climate change and directors’ duties. They conclude that, whereas in 2016 their opinion was based around what directors could and should be doing, in 2019 they observed an exponentially rising risk of liability for directors and now, with the growing regulatory, investor and community pressure, they found the focus was on how directors are discharging their duty.

Hutley and Hartford Davis are of the opinion that, it is no longer safe to assume that directors adequately discharge their duties simply by considering and disclosing climate-related trends and risks. In relevant sectors, directors of listed companies must also take reasonable steps to see that positive action is being taken to identify and manage risks, to design and implement strategies, to select and use appropriate standards, to make accurate assessments and disclosures, and to deliver on their company’s public commitments and targets.

They also found a risk that if companies and directors make inaccurate climate-related statements and disclosures, including flawed climate scenario analysis and making “net zero” commitments that are misleading or made without a reasonable basis, they will breach a number of Acts including the Corporations Act 2001, ASIC Act 2001 and Australian Consumer Law. To avoid falling foul of these laws, a company and its directors, must have a genuine intention, on reasonable grounds, to follow through with reasonable strategic efforts and commitment of to fulfil the intent implied by announced targets.

What is the purpose of CPG 229?

CP229 was drafted to assist APRA-regulated institutions to develop processes to:

1. Understand the risks and opportunities of climate change and the transition to a low carbon economy;
2. Ensure investment, lending and underwriting decisions are well-informed; and
3. Implement proportionate governance, risk management, scenario analysis and disclosure practices in line with the TCFD recommendations.

APRA acknowledges that while climate risks can be managed within broader risk management frameworks, because the financial risks associated with climate change can differ from other financial risks a different management strategy may need to be developed to deal with climate risks.

The particularities of climate risks and risk management can include:

1. The uncertainty of future events, systemic, globally disperse and long-term nature of climate risks make the identification and quantification of risks and understanding the potential impacts on the business difficult.
2. Changes which may be irreversible and difficult to mitigate.
3. The uncertainty of future events making it necessary to monitor the risks through regularly upgraded qualitative and quantitative metrics.
4. The use of scenario analysis to inform the understanding of potential long term risks and opportunities. The unprecedented nature of climate change, means that historical data and backward-looking risk assessment methods are unlikely to adequately anticipate future impacts and as new data is collected, future impacts are revised.
5. The importance of reporting relevant information to the board and senior management to enable fully informed decision-making and response strategies, and where needed, in making external disclosures of material risks.

What should APRA- regulated institutions be doing to meet CPG 229 recommendations for best practice?

GOVERNANCE

With board oversight, climate change risks should have sufficient standing in the institution and an institution-wide consistent strategic response.

There is a strong emphasis on the Board’s ultimate responsibility and the importance of the directors seeking to understand and regularly assess the financial risks arising from climate change that affect the institution now and in the future. The Board will need to be able to provide evidence that it has appropriate oversight of material risks.

This means having appropriate board training, regular reporting as risks, metrics and data evolve, ensuring processes for monitoring the exercise of climate change risk management functions delegated to senior managers.

CLIMATE CHANGE RISK MANAGEMENT

APRA-regulated institutions are guided to take a strategic and risk-based approach to managing climate change risk and there is an emphasis on the need for the Board to understand the interaction between climate risks and their business activities, and the compounding effect climate risks may have on an institution’s other risks.

Although the precise form and extent to which climate risks will materialise cannot be predicted, financial risks certainly will materialise as a result of climate change. The magnitude of the financial impacts of these risks can be managed and mitigated, and opportunities from the transition to a low-carbon economy taken, through understanding the potential risks.

Polices & Procedures

Include steps for considering and management of climate risks in written policies and procedures developed under the institution’s normal risk management framework.

Risk Identification

APRA notes that it is prudent to seek to understand climate risks and how they may affect the business model, including being able to identify material climate risks and assess the potential impact on the institution.

It is recommended institutions conduct scenario analyses, with both a short- and long-term time horizon and record how you determined the materiality of climate risk within each of the risk categories identified in CPS 220 and SPS 220.

An Internal Capital Adequacy Assessment Process (ICAAP) is considered to be an appropriate framework to consider and record the material impact on capital adequacy of climate risks for those institutions required to complete an ICAAP. An institution that is not required to complete an ICAAP may also benefit from adopting a similarly formal approach to recording material exposures and how the assessment of those exposures is considered.

Risk Monitoring

APRA noted that the better practice in monitoring climate risks is to include both a qualitative and quantitative approach using metrics that are appropriate to the institution’s circumstances to gain understanding of the potential current and future impacts of climate risks on its customers, counterparties, and institutions to which the institution has an exposure.

Regularly update climate risk data and metrics. Consider triggers to initiate a review of strategy or engagement with customers and counterparties. Monitor the impacts that climate risks may have on outsourcing arrangements, service providers, supply chains and business continuity planning.

Risk Management

Where climate risks are identified as material to the include them in risk mitigation and exposure plans. Regularly review and assess the effectiveness of those plans.

APRA expects institutions to work with customers, counterparties and organisations that face higher climate risks, to help improve the risk profile of those institutions. If the risks cannot be removed they should look at other ways to mitigate any third party risks imposed on the APRA -regulated institution.

Consider financial assistance to the stakeholder and if risks remain, limiting exposure to the entity or sector or discontinuing the relationship.

Climate Change Risk Reporting

The Board and senior management need relevant, up to date information to make informed decisions. The extent and frequency of reporting will depend on nature and magnitude of risk exposure.

Develop and implement procedures to routinely provide relevant information on material climate risk exposures, including monitoring and mitigation actions to the Board and senior management.

SCENARIO ANALYSIS

Institutions should use scenario analysis and stress testing capabilities to inform their risk identification in both the short and long term. They can either develop expertise in-house or use third party services. APRA recognises that this is a developing and complex area.

For an APRA-regulated institution required to complete an ICAAP, APRA considers a narrative-driven process to be a useful approach to considering climate risk scenario analysis and stress testing to assess potential risk exposures and available capital resources.

Maintain appropriate documentation of the process and results of climate risk scenario analysis and stress testing. Report material risks to the Board and senior management. Use the outcomes of the scenario analysis of stress testing to inform business planning and strategy development.

CLIMATE CHANGE DISCLOSURE

The demand for reliable and timely climate risk disclosure will increase over time, and for institutions with international activities there is a need to be prepared to comply with mandatory climate risk disclosures in other jurisdictions.

The TCFD framework is becoming the standard format for disclosure of climate change risks for consistency in Australia and other jurisdictions.

Next steps

What actions should the Board or Senior Officer Outside Australia (for a local Branch) be taking?

1. Include climate risk on the agenda at the Board and sub-committee levels including appropriate training for Board members;
2. Set clear roles and responsibilities for senior management in the management of climate risks, and hold them accountable for fulfilling these responsibilities;
3. Regularly re-assess the short and long term climate change risks and ensure these are considered in approving the institution’s strategies and business plans; and
4. Ensure that the institution’s risk appetite framework incorporates the risk exposure limits and thresholds for the financial risks that the institution is willing to bear from climate change, particularly in respect to climate risks considered to be material.

What actions should Senior Management be taking?

1. Assess and manage climate risk exposures using and adapting the existing risk management framework, including developing and implementing appropriate policies;
2. Review the effectiveness of the framework, policies, tools and metrics on a regular basis and revise as needed;
3. Make timely recommendations to the Board on the institutional objectives, plans, strategic options and policies as they relate to climate risks that are assessed to be material, including development and use of relevant tools, models and metrics to monitor exposures to climate risks; and
4. Ensure adequate resources, skills and expertise are allocated to the management of climate risks, including through training, development of senior staff and use of qualified advisers.

In developing the above strategies to satisfy CPG 229, the Board and Senior Management need to be able to demonstrate that they had reasonable grounds for making future representations, including of climate risk and mitigation effects, in setting emissions reduction targets and making net zero claims.

To avoid the risk of litigation for misrepresentation, directors and senior management should:

1. Integrate decarbonisation targets into the institution’s operational strategy, rather than relying on outside contingencies and the supply chain decarbonising their operations.
2. Record the drivers and assumptions that underpin the decarbonisation strategy, paying particular attention to reliance on carbon offset schemes.
3. Test the assumptions and document the decision-making process.
4. Detail which type of emissions are included in carbon reductions commitments and zero emissions claims.
5. Promptly disclose information that makes reaching the claimed target unfulfilled or untenable.

How we can help you on your climate change journey

We are here to help in a number of ways as your organisation starts, or continues, its climate change risk journey. This can include:

• Climate-risk awareness and TCFD compliance training.
• Facilitating workshops and financial climate change impact assessments to identify and understand the threats that climate change pose to your organisation.
• Perform scenario analyses of the threats identified looking at different possible scenarios over the short, medium and long term over a particular asset, activity or area.
• Provide a roadmap to enhance the organisation’s climate change risk management strategy.
• Conduct reviews to ensure regulatory disclosures are robust and relevant.

How far do you want to go to minimise the impact of climate change on your business? Be more resilient and contact us to discuss your needs.

As a company director, you have a duty of care and diligence under section 180 of the Corporations Act 2001 and under the common law. Organisations are increasingly focusing on the impact of climate change and environmental issues on current and future corporate performance. The Board, CEO and leaders have started to realise that climate risks and opportunities are not abstract concepts, but are essential for creating a sustainable business model that delivers long-term value.

This guide aims to help directors understand their climate risk responsibilities, ask questions and take steps in the right direction. The guide includes:

• a valuable checklist that directors can use to evaluate their climate risk posture.
• a summary of the legal and regulatory climate reporting and disclosure requirements.
• typical climate risk assessment challenges that are often experienced.

What’s inside the Climate Risk Guide

• The Consequences for Breaching Directors’ Duties.
• The Regulatory Landscape and Climate Change.
• Recognising and Managing Climate Risks and Opportunities.
• Disclosing Climate Related Risks.
• Beware the Challenges Ahead.
• The Board’s Climate Risk Checklist

Download today

Our Climate Risk Guide is complimentary, download your copy.

How we can help you manage climate risk

We are here to help you on your climate change risk journey. Our services include:

• Climate-risk awareness and TCFD compliance training.
• Facilitating workshops and financial climate change impact assessments to identify and understand the threats that climate change pose to your organisation.
• Perform scenario analyses of the threats identified looking at different possible scenarios over the short, medium and long term over a particular asset, activity or area.
• Provide a roadmap to enhance the organisation’s climate change risk management strategy.
• Conduct reviews to ensure regulatory disclosures are robust and relevant.

How far do you want to go to minimise the impact of climate change on your business? Be more resilient and contact us to discuss your needs.