Five fundamentals: preparing for mandatory climate reporting

As Australia enters a new era of mandatory climate-related reporting, businesses nationwide are grappling with the practical implications of this sweeping regulatory shake-up.

The bigger picture is becoming clearer with the release of draft legislation from Treasury earlier this year. And while there are a few areas left to establish, such as specifying the pathway towards reasonable assurance of climate disclosures which will be determined by the Auditing and Assurance Standards Board, the new legislation will likely be in place by 30 June 2024. This means disclosure requirements will begin applying for very large companies for financial years beginning on or after 1 July 2024.

The overarching goal of the mandate is clear: to drive businesses to disclose financial impacts arising from climate change risks and opportunities.

Such requirements create better understanding of climate risks and opportunities to inform broader business strategies, risk management and target setting. Compliance goes beyond legislation, allowing businesses to build resilience in the face of emerging environmental considerations.

The realignment is a significant shift and will necessitate a comprehensive response from affected companies. Integration across governance, strategy, risk management and metrics and targets will be key to disclosures that provide information to assess the entity’s performance in relation to its climate-related risks and opportunities.

As these reporting requirements apply to businesses ranging from very large corporations to small businesses with just 100 employees, a substantial proportion of Australia’s business community must act immediately to satisfy impending legislation. Businesses that meet two of three criteria (100 employees, consolidated revenue of $50 million, consolidated total assets of $25 million) or smaller entities that are NGER Act reporters would be required to make these disclosures.

I offer five crucial steps businesses can undertake in preparation today to ensure compliance tomorrow:

1. Map the gaps

The first port of call is to acknowledge and pinpoint the areas where your business may fall short of the impending requirements. The key is to identify not just the disclosure gaps, but also the implementation and enablement gaps. Implementation focuses on the changes required in how the business integrates climate risk and opportunities into decision-making and enterprise risk management, with sufficient oversight and determination of current and anticipated financial impact. Common enablement gaps may include data governance, recruitment, upskilling and processes. Once those gaps have been identified, efforts to fill them can be concentrated on the areas of greatest need.

2. Start with governance

Establishing robust governance is critical, with multiple dimensions to consider. Governance of climate-related risks and opportunities must be established to demonstrate sufficient oversight. However, governance of reporting is also a consideration, and the channel for oversight of risk and oversight of reporting is not always the same.

The audit committee is increasing reporting governance, whilst oversight of climate risks and opportunities is likely to remain in sustainability or risk committee mandates. Governance should also be considered at the management level and faces the same complexity with CSOs, CFOs and CROs all sharing some responsibility.

3. Capability across borders

Companies should identify key personnel responsible for the implementation and maintenance of these new reporting standards from the outset. Key roles and responsibilities must be mapped across business functions with strong centralised leadership and oversight. The use of an RACI system is a salient way to determine who does what.

Significant expertise will need to be developed or recruited. However, if a business lacks these skills, they should consider consulting external help, especially in the early stages.

4. Financial impact logic model

Climate change risks and opportunities will have financial impacts, and entities will need to undertake challenging work to understand this complex intersection with their financial statements. Determining your organisation’s financial logic model to translate from climate risks and opportunities through to current and anticipated financial effects is a key step. Input and connectivity with climate and finance teams is critical.

5. Integrate with business functions

Comprehending the legislation’s broader business implications will help position companies to better provide necessary disclosures when the requirements take effect. Dig deep into how these changes will affect your business and align your strategic operations accordingly.

These reporting requirements cannot operate in isolation, nor are they merely a box-ticking exercise. Reporting should drive a better understanding of climate-related risks and opportunities that are integral to enduring business and environmental sustainability.

By embedding climate risk into overall decision-making processes, companies can not only ensure compliance with new legislation but also consolidate business resilience in the face of potential environmental challenges.

In summary

Such seismic shifts in legislation provide a wake-up call for businesses of all sizes, but also offer an opportunity. Companies that adequately prepare, adapt and embrace the change will ultimately be better prepared to thrive in the advancing sustainable business arena. There’s no time to waste — the time to prepare for the future is now.

*Meg Fricke is a Partner with EY’s Climate Change and Sustainability Services team, leading sustainability and climate change advisory and assurance services. Before joining EY, she worked as an economic consultant across the energy and utilities industry with private sector and government clients. Meg has a Masters of Environment, Bachelor of Commerce (Economics and Finance) and Bachelor of Agricultural Science. Over 13 years of experience, with three years working in the US and Canada, have created a focus on the development of sustainability strategy and integrated reporting, sustainability risk assessment, and detailed assessments of environments, health, safety and community impacts.