As the world grapples with the adverse and uncertain consequences of climate change, pollution, and biodiversity loss, driven by human activities like burning fossil fuels and deforestation, the stakes for sustainability and corporate responsibility have never been higher. The financial ramifications of failing to act sustainably—ranging from biodiversity loss to carbon emissions—are potentially immense.
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.
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