Moving towards mandatory climate reporting – the story so far…

Australia is following many other jurisdictions in progressing the introduction of ISSB-aligned mandatory sustainability disclosure standards, with a focus initially on climate-related disclosure. 

An initial round of consultation (read Moving closer to introducing internationally-aligned climate reporting requirements in Australia: Initial consultation launched) on the proposed approach to developing the new standards closed in February 2023.  A second round of consultation seeking feedback on a number of proposals around implementation with a focus on which entities will be required to report and when closed in July 2023 (read: Introduction of mandatory climate reporting in Australia: Second round of consultation launched).  

The specific content of the new disclosure requirements will be set out through new Australian Sustainability Reporting Standards (ASRS), currently under development by the Australian Accounting Standards Board (AASB).  

AASB draft standards released

On 23 October 2023, the AASB released three draft Australian Sustainability Reporting Standards (ASRS) for consultation based on IFRS S1 and IFRS S2:

• Draft ASRS 1 General Requirements for Disclosure of Climate-related Financial Information (based on IFRS S1)
• Draft ASRS 2 Climate-related Financial Disclosures (based on IFRS S2)
• Draft ASRS 101 References in Australian Sustainability Reporting Standards (a proposed 'service standard' which lists the relevant versions of any non-legislative documents published in Australia and foreign documents that are referenced in the ASRS standards).    

What will entities be required to report?

Consistent with the approach foreshadowed in Treasury's second round consultation paper, in-scope entities (required to report under the Corporations Act 2001 (Cth)) are proposed to be required to disclose information about: their climate-risk governance arrangements; qualitative scenario analysis; climate resilience assessments against two possible future states, transition plans, climate-related targets, identification and management of climate-related risks and opportunities, and greenhouse gas (GHG) emissions (with reporting of Scope 3 emissions and marked-based Scope 2 emissions to be phased in over time).  

The draft ASRS standards are not proposed to be identical to the ISSB standards

Though based on IFRS S1 and IFRS S2, the draft ASRS standards have been modified in a number of respects to reflect Australian conditions and in line with the government's stated policy approach (as set out in the second round consultation paper).  

Some of the key differences between the IFRS standards and the draft ASRS standards include the following.  

Limiting the scope of proposed disclosure to climate change only 

In line with the government's policy of addressing climate-related financial disclosures first, the AASB is proposing to explicitly limit the scope of disclosure requirements to climate-related financial disclosures only (rather than sustainability related financial disclosures more broadly).

In line with this approach, all references to 'sustainability' related disclosures in draft ASRS 1 have been replaced with 'climate'.  

Draft ASRS 2 is also proposed to be explicitly limited to climate-related risks and opportunities related to climate change and 'does not apply to other climate-related emissions (eg ozone depleting emissions) that are not greenhouse gas (GHG) emissions'.

The AASB's intent is that the draft standards 

'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'.  

No requirement for entities to consider the applicability of the SASB standards 

The proposed ASRS standards omit all references to the Sustainability Accounting Standards Board (SASB) standards.  

[Note: For context, the SASB Standards are industry-specific standards (setting out industry-specific disclosure topics and metrics) which, as of August 2023, are being maintained/administered by the ISSB.  Under IFRS S1 and IFRS S 2 companies will need to consider the SASB standards to identify their sustainability related risks/opportunities (IFRS S1) and when making industry-specific disclosures (under IFRS S2)]

Instead it's proposed that if an entity proposes to make industry-based disclosures, the entity should:

'consider the applicability of well-established and understood metrics associated with particular business models, activities or other common features that characterise participation in the same industry, as classified in ANZSIC'  ie Australian and New Zealand Standard Industrial Classification (ANZSIC) issued by the Australian Bureau of Statistics.

This is because the AASB considers that it would not be appropriate include references to SASB Standards, or to publish the industry-based guidance accompanying IFRS S2, 'until the content has been comprehensively internationalised by the ISSB and has undergone the AASB’s own due process'.  

Disclosure required where entities assess their climate risks are not material 

The AASB also proposes that if an entity determines that there are no material climate-related risks/opportunities that could reasonably be expected to affect its prospects, the entity would need to disclose this and explain the basis for this assessment.

There is no corresponding requirement in IFRS S1.  

Scenario analysis

IFRS S2 does not prescribe the number of scenarios an entity is required to assess. 

Under the draft ASRS standards, it's proposed that entities would be required to disclose their climate resilience assessments against a minimum of two possible future states one of which would need to be consistent with the goal of limited global temperature increase 1.5°C above pre-industrial levels.  

The AASB does not propose to specify the upper-temperature scenario that an entity must use in its climate-related scenario analysis because 'scenarios used in assessing physical risk would depend on the entity’s facts and circumstances, including the nature and location of its operations'.

The ASSB considers that:

'Specifying the minimum number of scenarios and the lower-temperature scenario to assess against is expected to enhance comparability of entities’ climate resilience, particularly on transition risk'.  

Greenhouse Gas (GHG) Disclosures

Converting greenhouse gases into a CO2 equivalent value

IFRS S2 requires entities to convert greenhouse gases into a CO2 equivalent value using global warming potential (GWP) values based on a 100-year time horizon from the latest Intergovernmental Panel on Climate Change (IPCC) assessment available at the reporting date.  This means that if an entity is preparing climate-related financial disclosures for the period beginning 1 July 2024, under IFRS S2 the entity would be required to convert greenhouse gases using the GWP values in the IPCC 6th assessment report (AR6).

However, in the Australian context, entities reporting under the National Greenhouse and Energy Reporting Act 2007 (Cth) and related regulations (the NGER Scheme legislation) would be required to use the GWP values in the IPCC 5th assessment report (AR5).

To address this issue (and lessen the reporting burden for Australian entities), it's proposed that Australian entities would be required to convert greenhouse gases using GWP values in line with the reporting requirements under the NGER Scheme legislation.  

Scope 3 emissions reporting relief

It's proposed that:

• entities would be permitted to disclose Scope 3 emissions in the current reporting period using data for the immediately preceding reporting period, 'if reasonable and supportable data related to the current reporting period is unavailable'.  
• entities would also not be required to categorise the sources of Scope 3 emissions in accordance with the 15 categories in the GHG Protocol Standards (as required under IFRS S2).  Rather, the AASB proposes to include the Scope 3 GHG emission categories in IFRS S2 as examples of categories entities could consider when disclosing the sources of its Scope 3 GHG emissions.  This is because the:

'15 categories of Scope 3 GHG emissions are not referenced by IPCC guidelines or the Paris Agreement. The AASB is unsure whether requiring categorisation of the sources of Scope 3 GHG emissions under the 15 categories would achieve international alignment if entities in other jurisdictions are able to disclose different categories'.  

Use of non-Kyoto carbon credits

To ensure that non-Kyoto Australian Carbon Credit Units (ACCUs) could be recognised as carbon credits (in the context of draft ASRS 2) it's proposed that the definition of carbon credit in draft ASRS 2 would make clear that ACCUs meet the definition.  

Financed emissions

Under IFRS S2 certain entities (eg asset managers, commercial banks, insurers) are required to provide additional disclosures taken from the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011) relating to their financed emissions

However, the AASB considers that 

'entities that apply methodologies set out in NGER Scheme legislation to measure their Scope 1 and Scope 2 GHG emissions may not have the information necessary for those disaggregated disclosures'.

In light of this, it is proposed that Australian entities would only need to consider the applicability of these additional disclosures.  

No reference to 'interim reporting'

To avoid unnecessary confusion, the draft ASRS standards omit all references to interim reporting requirements included in IFRS S1.

Remuneration disclosure

It's proposed that entities would be required to disclose both: a) a description of whether and how climate-related considerations are factored into executive remuneration; and b) the percentage of executive management remuneration recognised in the current period that is linked to climate-related considerations.

For reporting purposes, 'executive' and 'executive management' are proposed to have the same meaning as 'key management personnel' and 'remuneration' is proposed to have the same meaning as 'compensation' as defined in AASB 124 Related Party Disclosures.  

Not for profit entities

Charities registered with the Australian Charities and Not-for-Profits Commission (ACNC) (that are not required to disclose under Part 2M of the Corporations Act 2001 (Cth)) do not appear to be captured under the government's proposed approach – though those that are not registered with the ACNC and are required to disclose under Chapter 2M may be in scope.

However, the draft ASRS standards do envision that not-for-profit entities would need to: 

'disclose material information about…[their] climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, access to finance or cost of capital, and its ability to further its objectives, over the short, medium or long term'. 

This is proposed to include information about their: 

• Governance arrangements  
• Certain disclosure requirements on the entity’s strategy and risk management such as: a) qualitative information on the current effects of climate-related risks and opportunities on the entity’s business model, and strategy and decision making; and b) qualitative information on the entity’s overall risk profile and risk management processes to identify, assess, prioritise and monitor climate-related risks and opportunities. 

The draft standards propose to make explicit that not-for-profit entities would not need to:

'undertake an exhaustive search for information to identify climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects, but would be required to use all reasonable and supportable information available to the entity at the reporting date without undue cost or effort in preparing material climate-related financial information required by [draft] ASRS 1 and [draft] ASRS2'.

Do super funds face particular challenges in complying with the proposed ASRS requirements?

The AASB is also seeking feedback on whether there are circumstances 'specific to superannuation entities that would cause challenges for superannuation entities to comply with the proposed requirements' under draft ASRS 1 and draft ASRS 2. 

Next steps

• Consultation is open until 1 March 2024.  The AASB plans to run a series of outreach events in early 2024, as well as having an online survey and accepting written submissions on the draft standards.
• Following consultation, the AASB will consider feedback on the proposed draft standards and determine whether the proposals should be implemented (with or without further changes).  Depending on the feedback received, the AASB may conduct further consultation on another Exposure Draft or a 'Fatal-Flaw Review Draft'. 
• It's envisioned that the draft ASRS standards once finalised, will apply to annual reporting periods beginning on or after 1 July 2024 (for certain entities – Group 1 entities as set out in Treasury's second consultation paper at Table 2, p8) with first disclosures forming part of the Annual Reports from August 2025 onwards.
• However this timing is contingent on the passage of the necessary legislation to establish the mandatory climate disclosure regime (including empowering the AASB to issue the ASRS standards).  As yet this legislation has not yet been consulted on or introduced into Parliament.  

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