The case for progressive climate risk disclosure come 2025

Climate risk disclosure will provide business performance metrics that these key stakeholders will use to measure an organisation’s risk profile against its competitors and will be prioritised in line with other mandatory and discretionary financial disclosure information.

Our view is the benefits of transparency will become more apparent as progressive companies publicise their reporting efforts once the clock starts ticking on 1 January, and likely prompt a wave of voluntary reporting uplift by those companies not immediately captured by the initial mandatory requirements.

What we know so far

In 2023, the Australian government released draft legislation for a new mandatory climate-risk reporting framework in Australia. The proposed framework is closely aligned with international standards, and those in Europe and the US, initially targeting the ‘largest’ (threshold) reporting entities, with others progressively phased in over three years to 2027.

The associated Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 was passed in Parliament in September 2024. In October 2024, the Australian government finalised its mandatory climate-risk reporting package by releasing the Australian Sustainability Reporting Standards (AASB S2), which take effect for company reporting periods beginning on or after January 1, 2025.

In terms of information to be disclosed, companies need to report their greenhouse gas emissions across Scope 1 (direct), Scope 2 (indirect), and increasingly, Scope 3 (value-chain) emissions. Companies also need to demonstrate progress toward achieving their climate-related organisational commitments, their strategy and transition plans, identify ‘material’ climate-related risks and opportunities, and disclose metrics and targets used to attest they are on track to meeting organisational decarbonisation goals.

Opportunities and challenges for Australian companies

Given these mandatory requirements represent a significant shift from the status quo, the corporate readiness spectrum extends from ‘basic’ levels of education and awareness with steep learning curves, to ‘highly sophisticated’ industry sector leaders seeking competitive advantage and differentiation.

Many more organisations not covered by the initial disclosure round will also begin to report voluntarily ahead of their phased introduction. This is particularly true for businesses playing a ‘material’ role in the integrated value-chains of larger reporting entities’ (Scope 3) carbon risk profile.

The opportunity to better prepare, competitively differentiate themselves and attract sophisticated investors and corporate customers, while simultaneously learning from larger reporting entities should not be overlooked.

No matter their size, organisations need to be engaging now with the new legislation, and we encourage them to start early; understand what they need to do, prepare relevant data materials, and be proactive with their research, business preparations, and assurance requirements.

Data reporting at ‘investment grade’ levels will ultimately be required for inclusion in company financial and director’s reports. Board sign-off and internal and external assurance requirements will necessitate a full ‘look through’ to underlying systems and data at reasonable assurance levels, the same level of rigour as for financial reporting.

To achieve this in the most transparent, efficient and cost-effective way, companies will likely need a unified suite of interoperable, multi-layered data and reporting solutions with adjustable levels of serviceability and high levels of customisation. Many companies are moving quickly to automate their approach, moving away from manual (Excel-driven) labour-intensive reporting approaches.

The use of technology and SaaS-based reporting platforms and SOC-certified data systems all integrated through APIs, will be highly favoured by market leaders drawing upon their finance, sustainability, legal, risk and compliance functions to drive the enterprise-wide reporting effort.

The biggest challenge will be the mindset shift required to move beyond, ‘How do we measure the carbon footprint,’ to ‘How are we managing material climate risks and opportunities, and all associated factors and liabilities.’

The onus on organisations to deliver transparent, credible, and auditable environmental claims also extends to the role of carbon offsets and renewable energy certificates, used in delivering an organisation’s strategy, commitments and targets.

The associated infrastructure for trading (exchanges) and retirement (registries) of these compliance and voluntary market instruments will play an integral part, in attesting to the robustness of a reporting entity’s approach and progress being made. Where commitments include carbon offsetting and renewable energy purchases, these instruments, including carbon credits, Australian carbon credit units, and international renewable energy certificates will also need to be audited and validated.

From what we’ve seen, no matter where an organisation sits, all legislation globally points towards greater disclosure of a company’s use of carbon offsets and renewable energy as a key part of meeting its climate commitments.

Additional challenges for multinationals

In June 2023, the International Sustainability Standards Board (ISSB) announced a set of global standards IFRS S1 and IFRS S2, forming the global baseline for many countries’ adoption of mandatory sustainability and climate-related reporting. These standards are a direct result of consultation with a multitude of organisations and voluntary frameworks including the UNFCCC, GRI, PRI, TCFD, and SASB, to name a few. To date, they have influenced reporting standards in the US, EU, UK, New Zealand, Japan, Singapore, Brazil, Hong Kong, and Australia, among others.

However, as differing jurisdictions adopt these standards, we’ve also seen variations emerge, each with local and regional nuances. In Europe, we have the Corporate Sustainability Reporting Directive (CSRD). In the US, we have seen the SEC attempt to implement sweeping rules for public companies, with individual states, including California, also adopting their own state-based regulations at quite specific and granular levels.

In perhaps the clearest indication of future direction, the International Organisation of Securities Commissions (IOSCO) in July 2023 endorsed IFRS S1 and S2, calling on its 130 members, to regulate more than 95 per cent of global financial markets to adopt the IFRS standards in their jurisdictions.

Stock exchanges worldwide are playing a growing role commensurate with their position in the investment and capital markets. Many exchanges are already issuing formal guidance for listed companies around climate risk and developing reporting solutions for issuer companies.

Where a company’s commitments span a global operating footprint, the added complexity of navigating a complex maze of multi-jurisdictional requirements and nuances is leading many to call in service data and reporting solutions, as well as unifying their corporate functions and resources across regions to help drive the process.

Navigating complex standards

All of this creates a daunting level of complexity that can be difficult to navigate without external help, particularly if an organisation operates across multiple jurisdictions. However, the service layer associated with this evolution is growing quickly, with legal, accounting, and consulting firms providing services to assist covered entities in developing their emissions measurement, management, and reporting capabilities.

This upskilling is also significantly supported by technology developments – not only for carbon accounting and strategic planning, but more importantly as it relates to unified global infrastructure platforms. This infrastructure is vital in producing standardised reports and metrics that can transcend jurisdictions and provide a comparable view of a company’s energy transition progress regardless of location.

The ongoing evolution of this infrastructure and the availability of centralised reporting platforms for verified carbon and REC data related to climate risk presents an opportunity for forward-thinking companies to engage confidently and enthusiastically with the new standards.

Organisations should embrace and engage Australia’s new climate disclosure laws with open arms. The most successful and resilient companies will see this new reporting regime not as a burdensome compliance-driven exercise but as an opportunity to demonstrate how they are building sustained long-term value for their stakeholders, enhancing their competitive advantage, and gaining access to new capital streams through markets and corporate value chains.

Ben Stuart, CCO at Xpansiv