On 22 August 2024, the mandatory climate reporting bill was passed by the Senate, and we expect it to become law in Australia in early September. But what will mandatory climate reporting mean for companies that have set or are considering setting explicit emissions targets? Around two hundred companies in New Zealand are making their first mandatory climate-related disclosures this year. We have previously unpacked some lessons learnt from New Zealand's experience, having lodged their first climate statements earlier in 2024. But what about Air New Zealand's recent walk back from its emissions target?
Unexpected consequences of mandatory climate reporting?
Air New Zealand is taking a step back from its previous emissions target, raising the question of whether it might be one of the first strategic (unintended) consequences to come from mandatory climate reporting. It may be a coincidence and unrelated to the new requirements outlined in Schedule 4 to the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024, but Air New Zealand announced in late July 2024 that it was walking away from its ambitious explicit emissions targets, citing the uncertainty and disruption caused by the COVID-19 pandemic:
"Air New Zealand is removing its 2030 science-based carbon intensity reduction target and will withdraw from the Science Based Targets initiative".
The airline had previously committed to reducing its net emissions by 50% by 2050, and to offsetting the emissions from its domestic flights. It has since announced: "In recent months, and more so in the last few weeks, it has also become apparent that potential delays to our fleet renewal plan pose an additional risk to the target's achievability. It is possible the airline may need to retain its existing fleet for longer than planned due to global manufacturing and supply chain issues that could potentially slow the introduction of newer, more fuel-efficient aircraft into the fleet. As such and given so many levers needed to meet the target are outside our control, the decision has been made to retract the 2030 target and withdraw from the SBTi network immediately."
Disclosure of emissions targets
Mandatory climate reporting in Australia will necessitate the annual disclosure of any targets that exist (including the underlying metrics and assumptions) as part of a company's climate plan. Obviously any public commitment on an emissions target must be underpinned by proper processes and diligence, but we expect many, if not all organisations facing mandatory reporting will make a renewed and potentially more thorough examination of their activities through a disclosure risk lens. That is because the mandatory reporting standard will require granular detail to be disclosed about the nature and scope of any emissions target. Examples of the detailed requirements include the period over which the target applies and the time from which progress is measured, whether there are interim targets, if all emission scopes are included, whether there is reliance on offsets to meet the target (including the type of offset to be used and which third-party scheme will certify the offsets), as well as a description of the approach to setting, monitoring progress and reviewing targets.
Importantly, company directors will for the first time be required to sign a Directors’ Declaration confirming that their emissions target disclosures comply with the accounting standard and the Corporations Act. For the first three years of mandatory reporting, directors will be able to qualify their declaration that they have taken 'reasonable steps' to ensure compliance. Of course, disclosures made about targets will also be subject to misleading or deceptive conduct laws. An emissions target is likely a statement made in relation to a future matter, so it must be made on reasonable grounds or it will be taken to be misleading.
Avoiding emissions target walk backs
Mandatory climate-related disclosure requirements should not suppress the pursuit of ambitious targets. Yet, without a thoughtful approach and regulatory backing, the unintended consequence of mandatory reporting may be a reduction in ambition.
The timing of Air New Zealand's walk back has triggered concerns that the additional analysis and scrutiny required by mandatory reporting could lead to other companies doing the same, in effect leading to a reduction in corporate emissions ambition. The old adage "what gets measured, gets done," might not hold true in this context. This paradox could be attributed to the fear of reputational or legal risks associated with setting lofty targets and failing to meet them, or the disclosure of negative or contentious information. However, this (perverse) outcome is not inevitable.
To ensure reporting leads to the desired improvements for the planet, both companies and regulators must take proactive steps. Companies need to set their targets thoughtfully, considering that while many stakeholders advocate for increased ambition, the preference for risk mitigation may result later in walking back previous commitments. Achieving the right balance is crucial. To this end, two key developments are essential:
- Firstly, as demands increase, management of sustainability should evolve from a niche responsibility of a dedicated team to an integral part of company-wide strategic planning. We have seen sustainability teams increasingly being incorporated into the CFO's domain, with mixed results. Ideally, these teams should adopt a strategic approach to ESG goals, viewing reporting as a means to convey their vision and value proposition, not merely a compliance task. Companies that integrate ESG principles into their regular business planning and operations are better positioned than those still aligning the perspectives of sustainability teams with core business objectives. Conversely, we have also observed sustainability teams folding into areas focussed on reporting, where the objective shifts to "what can we say" not "what can we do?"
- Secondly, effective communication is fundamental. While proposed mandatory disclosure rules do not enforce target achievement, they will require an evaluation of progress based on well-founded assumptions. Setting and then missing ambitious targets is not inherently non-compliant if there has been transparent disclosure of the uncertainties, dependencies, assumptions and sensitivities to potential challenges. Companies must engage in a more strategic, company-wide exercise to assess ESG objectives, delineating a detailed path with a clear focus on core business implications.
Regulators also play a critical role in avoiding the perverse outcome of emission ambition suppression. They must be cognisant of the potential for a 'backlash' and work sensibly to permit high ambition levels without compromising the integrity and robustness of reporting. Collaborating with companies that set ambitious yet reasonable targets, focusing on the underpinning assumptions rather than the targets themselves, can be beneficial. Permitting conditional targets or scenario-based outcomes can drive the change that was intended at the outset.
At MinterEllison, we understand the importance of an integrated approach that balances ambitious ESG strategy development with legal compliance. Reach out at any time to discuss your business' approach to ESG.
