Climate Related Disclosures to be Compulsory for Australian Companies

climate related disclosures to be compulsory for australian companies

The United Nations Climate Change Conference (COP 28) closed in Dubai recently with an agreement that calls for the beginning of the end of fossil fuels via “deep, rapid and sustained reductions in greenhouse gas emissions”. The agreement also called for a broad range of global actions, including:

  • tripling global renewable energy production by 2030

  • action on elimination of subsidies for fossil fuel energy; and

  • reduction of emissions from road transportation.

The achievement of all of these goals is essential for the health of the planet. But what do they mean for your business? Is the transition to cleaner energy a threat or an opportunity? Will decarbonisation and the fight against climate change make it easier or harder for your business to operate and obtain funding? What strategies has your business implemented to not only survive, but prosper during this period of transition?

The answer to these questions will need to be articulated and disclosed in your annual financial report in coming years.

The value of a business is a function of its future maintainable earnings. The level of perceived risk and volatility relating to those future maintainable earnings determines the price at which an investor would be prepared to buy the business. That is, the value of the business.

However, traditional annual reports, company financial statements and ASX continuous disclosure requirements have not provided investors with a lot of help in understanding what those future earnings might look like and are they really maintainable.

They certainly have not provided insights into climate-related threats to the underlying business model or how climate change and new regulations aimed at fighting climate change may impact future earnings, access to capital or even financial viability.

This gap in Australia’s corporate reporting landscape is about to close. The Federal Government is adopting a suite of new, globally consistent climate and sustainability related reporting standards. In the near future, Australian companies will be required to disclose in their annual report:

  • climate-related business risks and opportunities;

  • climate-related metrics and targets;

  • governance processes applied to monitoring, measurement and management of climate-related risk and opportunities;

  • expected impacts of climate related matters on the business’ future prospects, including access to funding and future cash flows.

These requirements will initially apply to the largest Australian companies, commencing in the financial year ending 30 June 2025. They will apply to smaller companies on a staggered basis over the years ending 30 June 2027 and 2028.

Companies that are required to prepare financial reports under the Corporations Law will be required to include these disclosures where they exceed at least two of the following size indicators:

  • consolidated revenue of $50 million

  • consolidated assets of $25 million

  • 100 employees

The Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information is moving fast and will drive a raft of changes to corporate reporting.

The journey towards globally consistent climate-related reporting requirements started with the establishment of the International Sustainability Standards Board in the UK and the release of Sustainability Disclosure Standards:

  • IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information

  • IFRS S2 Climate-related Disclosures

The Australian Accounting Standards Board is following suit and has released Exposure Draft SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information (EDSR 1), for comment in October 2023.

EDSR 1 is intended to drive consistent and comparable disclosure of climate-related information in annual reports. Such disclosures to date have been largely voluntary and often inconsistent.  It requires companies to disclose material information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s future prospects, including cash flows, access to finance or cost of capital over the short, medium or long term.

Although there is some time before these disclosure standards are mandatory, most ASX listed companies already provide voluntary climate-related information in their annual reporting. Additionally, some organisations are requesting climate-related disclosures from tenderers as part of procurement processes for goods and services.

These trends are driving the agenda for implementing climate-related reporting systems. This will require a structured approach, including stakeholder and employee education, planning, impact assessments, data measurement and recording processes and determining the extent and nature of external reporting.

LNP Audit and Assurance is advising clients on the impact and application of the new requirements and assisting with stakeholder awareness and impact assessments.

If you are interested in knowing more please get in touch with David Sinclair or Tony Rose.

David Sinclair