ISSB sustainability standards to spark ‘far-reaching reforms’

The International Sustainability Standards Board (ISSB) has now issued its inaugural standards IFRS S1 and IFRS S2 aimed at improving trust and confidence in company disclosures about sustainability.

The new international sustainability standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2 Climate-related Disclosures, provide all businesses with a consistent framework to demonstrate how they govern and manage sustainability-related and climate-related risks and opportunities, according to RSM Australia.

While the new international standards, which are due to take effect from January 2024, are voluntary, they provide a global baseline that countries around the world will use to develop their own mandatory disclosure.

“This increased transparency means that business stakeholders, such as investors and customers, will have an opportunity to now also compare business performance on climate, which will inevitably move sustainability up the board and management agenda,” said RSM Australia national leader resources, mining, energy and sustainability Jacob Elkhishin.

The ISSB standards are designed to ensure that companies provide sustainability-related information alongside financial statements in the same reporting package. They have been developed to be used in conjunction with any accounting requirements.

The Business Council for Sustainable Development Australia (BCSD Australia) said the standards mark the first major steps in creating alignment between differing sustainability disclosure regimes and helping meet investor information needs on sustainability-related risks and opportunities

“The new comprehensive reporting standards will be transformative for Australian business and capital markets in reporting on their ambition, action and accountability in their ESG data,” said BCSD chief executive Andrew Petersen.

The IFRS S1 and IFRS S2 disclosure standards will provide Australian businesses with clarity on how to report on their environmental, social and governance issues and allow them to do so in a clear and comparable manner, according to Mr Petersen.

“By adopting the ISSB’s standards, companies will be better equipped to meet the growing expectations of investors, regulators, and the public at large,” he said.

Larger companies ahead on climate-relates disclosure reporting

Mr Elkhishin said larger publicly-listed companies typically already reported climate-related risks voluntarily in Australia, giving them a headstart on what would be the most far-reaching reforms to corporate non-financial reporting ever introduced.

“Companies not already reporting on sustainable performance, risks and opportunities, may face challenges with data, processes, and systems and find themselves on the back foot which could cost them access to funding and also customers,’’ he said.

The standards are expected to cause greater disruption among small to medium businesses, however.

“It depends on what sorts of transitions provisions are put in place with the implementation,” said Mr Elkhishin.

Treasury releases consultation on adopting international requirements

Following the release of the ISSB standards, Treasury has today released consultation on implementing internationally-aligned requirements for disclosing climate-related financial risks.

The government has proposed a three-phased approach starting with a relatively limited group of very large entities that expands over two years to apply to progressively smaller entities.

The proposed requirements would be phased-in over three years, with full application of the mandatory reporting for all groups of reporting entities from the 2027–28 reporting year onwards.

“Allowing smaller entities more lead time before they are subject to the mandatory requirements enables them to build the capability and skills required to meet their obligations,” the consultation paper stated.

Progressively expanding coverage over time is also intended to mitigate the risk of shortages in the service areas of audit and assurance.

“[This allows] sufficient time for the market to attract and grow the resourcing, capacity and expertise that will be needed to meet this increased demand,” the consultation paper stated.

Further detail about what information would need to be disclosed under the proposed requirements will be set out in forthcoming Australian climate-related financial disclosure standards.

Government proposals for climate-related financial disclosure

Under one of the proposals in the consultation paper, reporting entities would be required to use qualitative scenario analysis to inform their disclosures and then move to quantitative scenario analysis.

Reporting entities would be required to disclose information to help users understand the basis of scenario analysis undertaken by the reporting entity for the purpose of disclosures, including methodology, limitations and critical assumptions.

In the transition period, entities would be required to undertake qualitative scenario analysis at a minimum, with the level of sophistication of this scenario analysis proportionate to the experience of reporting entities, their exposure to climate-related risk and the availability of supporting information.

By the end of the transitional period reporting entities would be required to undertake some form of quantitative scenario analysis. However, entities will be encouraged to undertake quantitative scenario analysis before this time, while modified liabilities settings apply.

It is proposed that companies will be afforded protection from false or misleading representation claims from private litigants in relation to forward looking statements for the first three years.

The paper also proposed a requirement for reporting entities to disclose climate resilience assessments against at least two possible future states, one of which must be consistent with the global temperature goal set out in the Climate Change Act 2022.

Entities would need to consider the transition risks associated with achievement of the global temperature goal set out in the Climate Change Act 2022, which is to contribute to “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels”.

Entities would also report against at least one other scenario that reflects different climate future.

“This aims to help investors understand resilience of the reporting entity’s business strategy in a scenario where the world is decarbonising at a different speed. This could include a scenario reflecting the government’s commitment to reduce emissions by 43 per cent by 2030 and to net zero by 2050,” the consultation paper stated.

In terms of greenhouse gas emissions, the consultation paper has proposed that scope 1 and 2 emissions for the reporting period would be required to be disclosed.

Where a reporting entity is disclosing Australian-based emissions, these would need to be calculated consistent with methods set out in the NGER Scheme legislation.

Disclosure of material scope 3 emissions would be required for all reporting entities from their second reporting year onwards, under the proposals in the consultation paper.

“Scope 3 emissions disclosures made could be in relation to any one-year period that ended up to 12 months prior to the current reporting period,” it said.

Australian reform on sustainability report stagnating

Mr Elkhishin said momentum on local reforms to climate-related financial disclosures had “slowed to a snail’s pace” in recent months.

“Currently Australia has no legislative power to formulate or enforce corporate sustainability reporting in Australia,’’ he said.

“Four months after legislation was introduced into Federal Parliament to empower the Australian Accounting Standards Board to develop Australia’s sustainability standards, the Auditing and Assurance Standards Board to maintain relevant assurance standards, and the Financial Reporting Council to provide strategic oversight and governance, the amendments are still before the Senate.”

While Treasury has now released further consultation on implementing an internationally aligned reporting regime in Australia, there is still no exposure draft legislation at this stage.

“Without new legislation, Australia cannot develop, issue or enforce corporate sustainability disclosures, which will put some Australian companies that don’t already prepare a sustainability report, at a disadvantage to better prepared and advanced countries,” said Mr Elkhishin.