Navigating the brave new world of climate disclosure

For years, climate and sustainability reporting sat off to the side of the ‘main game’ of financial reporting. But not anymore, as a “step change” in climate risk disclosure heads our way.   

It's not just the sustainability team’s issue anymore. It’s the entire business’ responsibility to be able to disclose against climate risk.

Angela Cummine, Principal, Climate and Sustainability, Deloitte 

Nearly 70% of the ASX200 report against the TCFD framework in 2023, according to the Australian Council of Superannuation Investors.  

However, there is “huge variance” in the quality of that reporting – and that makes it “really difficult” for investors, governments and consumers to make comparisons between companies and to understand the impact their activities have on climate change, says Angela Cummine. 

Angela, a Principal in Deloitte’s Sustainability and Climate Change practice, was part of a powerhouse panel at the AdaptNSW Forum 2023. This panel explored the impact of new international climate disclosure standards on Australian businesses. 

New reporting requirements are an “acronym avalanche” that can be difficult to understand, the panel agreed. But leaders of businesses big and small must begin to grapple with the challenges and opportunities that climate disclosure present. 

Understanding the “acronym avalanche” 

To comprehend how Australia’s corporate landscape will change, we need to look back at several milestones on the climate reporting road, the panel agreed. 

The first milestone was set by the Task Force on Climate-related Financial Disclosure (TFCD). Established in 2015 by the International Financial Stability Board (FSB), the TCFD was tasked with making recommendations on the types of information that companies should disclose so investors, banks and insurance underwriters could appropriately assess and price climate risks.  

The TCFD published these recommendations in 2017, elevating expectations for how companies should operate across four ‘thematic areas’: governance; strategy; risk management; and metrics and targets. 

TCFD was voluntary. But in 2021, following COP26 in Glasgow, the International Financial Reporting Standards (IFRS) Foundation, which is the global organisation responsible for accounting standards, established the International Sustainability Standards Board (ISSB).  

The ISSB was asked to move beyond recommendations and to develop standards for sustainability disclosure. The first two standards, which are known as IFRS S1 and IFRS S2, were published in June 2023 and came into effect on 1 January 2024. Both IFRS S1 and IFRS S2 put climate-related risks at the centre of global financial reporting and integrate the four core recommendations of TCFD. 

The Australian Accounting Standards Board (AASB), which sets Australia’s accounting standards, is now adapting IFRS S1 and IFRS S2 with Australian-specific guidance.  

On 12 January 2024, the Australian Government released a draft of new legislation for climate-related financial disclosure which, once finalised, will require Australia’s largest companies to align their climate reporting to international standards. The new regime is expected to start in 2024 for larger companies; smaller entities will be captured by the new laws in future years. 

The TFCD, and its sister organisation the Taskforce on Nature-related Disclosures, have set the direction of travel for voluntary reporting. With reporting on climate risk soon mandatory, and the TFCD’s job done, it was disbanded in late 2023. 

The IFRS standards are a “step-change”, Angela told the 350-strong AdaptNSW Forum audience. While the TCFD’s voluntary standard included 11 disclosures across its four ‘thematic areas’, Angela said the “Australianised” ISSB standards are “much more granular”. ISSB, for instance, has around “200 disclosure requirements” and a “heavy focus” on quantifying and connecting information. This means, for the first time, climate reporting is linked to financial performance. 

All these reporting standards and frameworks can seem like a minefield to navigate. How should Australian companies – even those not captured under new reporting requirements – proceed? 

The AASB’s draft climate reporting standard is “a great place to focus,” Angela suggested. This provides a “roadmap” for reporting. “It's estimated that about 20,000 entities will ultimately be captured by the requirement to report under that standard.” Consultation on the AASB Draft closed on 1 March, with a final Standard expected to be issued mid-2024 

New pitfalls and potholes on the climate disclosure road 

Panellist Zoe Bush is a senior solicitor in the Environmental Defenders Office, a not-for-profit that works with the law to protect wildlife, culture, community and climate. Zoe, who also teaches sustainable finance litigation at the universities of Sydney and Melbourne, said failure to appropriately disclose climate risk can translate into liability risks. 

Zoe pointed to an example where federal proceedings were commenced against a superannuation fund in 2018 for breaching its “duty of care, skill and due diligence” after failing to properly consider climate risk or disclose those in accordance with the voluntary standards of TCFD. The superfund settled the matter out of court and acknowledged that climate change posed “a material, direct and current risk to the fund,” Zoe said. 

The key takeaway for companies, therefore, is that even those that aren’t captured by the new reporting requirements must take the new standards seriously, Zoe noted. 

Another risk for companies is “greenwashing liability”. There is no standard definition for greenwashing in Australia “but broadly it refers to misrepresenting sustainability impacts or overstating sustainability efforts and ambitions,” Zoe said. 

The Australian Competition and Consumer Commission put corporate Australia on notice in 2023 after its greenwashing “sweep” found 57% of companies made claims that were vague, unqualified, exaggerated or were concerning for their misrepresentations. 

Two ongoing proceedings against energy companies in the federal court are cautionary tales, Zoe noted. The first company is under scrutiny for claiming a credible path to net zero targets despite owning a portfolio of gas projects; the other is accused of not accurately representing the environmental impact of carbon offsets to its customers.  

Carbon offsets are now an area of greenwashing risk, Zoe said. Some sectors of Australia’s economy are genuinely hard to abate, which means either the technology to eliminate emissions does not exist or is not commercially viable. In these cases, “make sure you are disclosing the extent to which you are relying on offsets, the type of offsets and their environmental impact,” Zoe advised. 

The overarching implication is clear: using “vague labels” like ‘clean’ or ‘green’ or ‘sustainable’ are risky. Claims, therefore, should be “backed up by evidence” and be “scientifically sound”. This means “doing your homework”.  

The best way to “bullet proof” targets, goals and statements is to have them independently verified, Zoe added, pointing to the ACCC’s draft guidance on greenwashing as a useful resource. 

Towards “mission zero” 

Australian headquartered property giant Lendlease is one company that will be required to report against the Australian Accounting Boards Standard. 

Lendlease, which has construction, development and investment management arms and a global footprint, has been a leader in sustainability for more than two decades, and has been disclosing its climate impact for many years. 

Lendlease signed up for TCFD since 2019 and voluntarily reports against a range of frameworks and standards, said Head of Sustainability for Australia, Ann Austin. 

Lendlease has set an ambitious “mission zero” commitment which includes net zero for Scope 1 and 2 emissions by 2025 and “absolute zero” across all three scopes and without offsets by 2040. Absolute zero is a “real mountain” and “we don't know all the steps to climb that”, Ann admitted. Lendlease includes supporting industry innovation as a key step in achieving zero embodied carbon emissions as some of the pathway is still work in progress for the industry.. 

So, is climate disclosure a “friend or foe” to companies? Ann thought was “a bit of both”. “When there is disclosure there is attention.” Reporting provides opportunities to upskill teams and accelerate action. Lendlease discovered this when it began disclosing against TCFD, Ann said. By presenting several future climate scenarios, Lendlease's business leaders determined that every scenario, except the Paris Agreement’s 1.5°C, was “pretty horrible”. From that realisation, Lendlease established its mission zero targets. 

Disclosure sends powerful signals to the market that give businesses the confidence to invest in decarbonisation, Ann added. It is “extremely expensive” for steel and cement manufacturers to eliminate emissions, for instance, “and they cannot afford to do it unless they know for certain there's going to be a market there”. 

So, where is the foe? “Disclosure schemes are breeding like rabbits, and every bunny is different,” Ann said. “That means I need lots of bunnies in my team to be able to comply. We are at absolute risk of having so many people disclosing that nobody is decarbonising anymore. And that's something I have to balance in my team every day.” 

Ann also pointed to the monumental challenge of disclosing Scope 3 emissions, which are those across the supply chain and which, in Lendlease’s case, capture more than 25,000 materials suppliers. “So, when somebody says ‘can you disclose your Scope 3?’ it's not our data, it’s theirs – and some of them don't even measure and capture [their emissions] now.” 

When Lendlease started its reporting journey “there had been no bushfires in Australia, there was a lot less awareness, the language wasn’t there, people were still wondering if climate change was real,” Ann reflected. Australia’s “carbon literacy” has grown over the last five years, and that gives companies who haven’t yet started reporting a head start. 

It is a totally different type of disclosure. Financial disclosure is very factual, accurate and backward looking, and you get in trouble if anything is wrong. I hope our disclosure on climate is wrong. I hope it is vastly wrong.

Ann Austin, Head of Sustainability Australia, Lendlease 

Braving new reporting territory 

For most companies in Australia, climate reporting is a brave new world.  

To “look at the long-term prospects of your organisation and disclose the climate risk impacts on your cash flow and your financial prospects” is a “hard and new task,” Angela Cummine admitted. 

The signposts and signals from the Australian Government are clear, and this mandatory regime is likely to come into effect for the 2024/2025 financial year.  

Companies who get on the front foot with climate reporting won’t have much time to rest on their laurels either, the panel agreed. The TNFD standards for nature-related disclosures will follow the same trajectory as the TCFD, “but on fast forward” said Zoe Bush, because “the market is already so sensitive to sustainability matters”.