Aust companies unprepared for mandatory climate disclosure

It’s sustainability crunch time for Australia’s largest companies, which must reveal their emissions performance, sustainability plans and targets from 1 July under new mandatory disclosure laws — and many are finding it difficult to comply.

Many businesses are only now beginning to grasp the scale of what’s required and realising their processes, systems, data and declared emissions reduction targets are not fit for purpose to comply with the Australian Sustainability Reporting Standards.

Two years ago, ASIC Chair Joe Longo flagged these as “the biggest changes to financial reporting and disclosure standards in a generation”. He was right, and this reality is sinking in for many businesses who underestimated the effort involved.

This realisation, and the pressures of public disclosure and enforcement, sees many companies adopting a minimalist approach. Some are pulling back on public emissions reduction targets. Others are re-evaluating their climate strategies as they focus on risks and opportunities over decarbonisation.

Companies that have calendar-year financial reports are now halfway through their first year’s reporting — others will begin their reporting from July 1. The requirements initially apply to public and private companies with more than 500 employees, more than a billion dollars’ worth of assets, or more than $500 million in revenues. Super funds with more than $5 billion in assets under management must also comply.

The standards, which will be progressively rolled out to smaller businesses, require companies to disclose their approach to climate-related risks and opportunities, including management, governance, transition and resilience planning, and greenhouse gas emissions from direct operations as part of an annual climate statement.

In future, they will also require companies to report on the emissions of their suppliers and customers, effectively widening the impact of reporting requirements to almost every business.

Even organisations that considered themselves sustainability leaders are finding it challenging. Compliance requires transformation — of governance, operations, data systems and, most importantly, mindset.

We know this firsthand. Schneider Electric is lauded as one of the world’s most sustainable companies, expert in the required systems and technologies to enable the transition. We’ve got the advantage of a mature global sustainability framework, but localising our reporting to meet Australian standards has been resource-intensive.

Businesses face serious consequences for non-compliance, including potential future multimillion-dollar fines, along with public disclosure impacting their ability to attract finance and investors. Directors also face real liability for disclosures that go beyond mandatory requirements.

Previously, there was considerable flexibility in and little scrutiny of voluntary targets. Now voluntary targets or commentary — even well-intentioned — can expose businesses and directors if not properly substantiated. The risks of being criticised for ‘greenwashing’ will increase substantially.

We are advising many major businesses on these new standards and our advice to companies is clear. For those not yet covered by the standards, start planning and working on your approach and implementing the systems to enable this now. For organisations having to report this year, immediately engage with your auditors and lawyers to confirm your approach. Educate your boards and, most importantly, bring your cross-functional internal teams on the journey.

Mandatory disclosure demands rigour. It requires businesses to mobilise teams across legal, finance, operations, sustainability and IT — many of whom have never worked together before — and task them with producing a verified, auditable view of climate risks and opportunities across the business.

Digitise emissions and risk data processes; a shortfall we are seeing is a lack of adequate systems. Too many businesses are relying on spreadsheets and manual workarounds when they should be investing in robust, digitised platforms for emissions tracking and disclosure preparation. These tools make reporting easier, credible and auditable.

Utilise climate scenario modelling to analyse climate risks for your business, including how those physical risks change under different scenarios, and how to translate that to financial impact.

With effort, most companies can wrestle their Scope 1 and 2 emissions data into shape. Scope 1 emissions are direct from sources owned or controlled by a company, such as onsite fuel use, and Scope 2 emissions are indirect emissions from the generation of purchased energy.

Scope 3 remains a hurdle. These are the indirect emissions in a company’s value chain — from suppliers to customers — and they’re notoriously difficult to collect depending on how mature your suppliers are and how quickly you want to evolve your approach. There’s a grace period: Scope 3 doesn’t need to be disclosed in the first year. But waiting will only compress the timeframe for data collection and validation, leaving little time for the business to become comfortable with what the data means. We recommend acting internally on Scope 3 in year 1 to leave time to build comfort and address weaknesses in the data before disclosure in year 2.

The impact of these standards on companies’ approaches to sustainability and emissions reduction will be profound, and that impact will soon spread across the entire Australian business landscape.

They should not be a rationale for retreating from ambitious targets and commitments. Rather, they should motivate companies to put in place the strategies, technology, processes and mindsets to deliver them.

Climate reporting is not just a compliance obligation; it’s a window into the future resilience of a business. Done poorly, it could be significant liability. Done well, it will be a strategic asset.

*Michael Cox is APAC Director of Schneider Electric’s Sustainability Business division.

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