Key insights from first mandatory sustainability reporting

Mandatory sustainability reporting has now come into force. Mallesons’ latest report, ‘Mandatory Sustainability Reporting in Practice’, breaks down key insights from Australia’s first wave of mandatory sustainability reports.

“We have seen a strong consensus in the format and nature of mandatory sustainability reports in the first reports published under the new regime, including an unsurprising focus on risks over opportunities. Where companies differ is when judgment comes into play,” said Emma Newnham, Special Counsel at Mallesons.

“Sustainability reporting is no longer sitting at the edge of governance. Directors and their teams are now expected to actively understand how material climate risks and opportunities affect strategy, cash flows and access to capital — and be satisfied that their company’s disclosures genuinely hold together.”

Key findings of the report

‘Climate literacy’ a risk for company directors

Even with temporary liability protections in place, directors are ultimately responsible for their company’s sustainability reporting. Practically, this means that climate literacy is vital — as are clear information flows and confidence in the systems, controls and assurance supporting approval of the report and the directors’ declaration.

The report found that:

• 83% of companies now include a dedicated climate, ESG or sustainability metric in their board skills matrices.
• 65% provide directors with dedicated climate-specific education or training, typically through targeted briefings, workshops or external short courses.
• 52% of boards or board committees receive ESG-related updates on a quarterly basis (most commonly through board committee reporting), with a further 17% receiving updates biannually.
• 61% of companies expressly link executive remuneration to climate or sustainability outcomes.
   

Trends from the first mandatory sustainability reports

Early reports published under the mandatory sustainability reporting regime have been broadly aligned, especially on governance and risk identification, but diverged where companies need to exercise judgment.

The report’s key takeaways included that:

• Companies disclosed on average three material climate-related risks, and one material climate-related opportunity.
• Nearly half of companies did not explain how material risks were identified.
• Most companies (83%) provided a mixture of qualitative and quantitative disclosures about the current and anticipated financial effects of material climate-related risks and opportunities on their financial position, financial performance and cash flows.
• 87% disclosed financial effects of identified material risks and opportunities on an individual basis (ie, risk-by-risk and opportunity-by-opportunity), with the remaining 13% disclosing cumulatively.
   

The nature of disclosures

The mandatory regime has implications for how and what companies choose to disclose as a whole, not just what is required.

“Many companies have reported on sustainability for years, well before it became mandatory, and many continue to include voluntary disclosures,” Newnham said. “ASIC has warned that voluntary disclosures are often repetitive, obscure, lacking detail and unlinked to targets, actions and strategy, although it has acknowledged they may be necessary to meet the needs of users and can be disclosed within mandatory sustainability reports. How voluntary information is framed can have important implications for the application of modified liability settings, as well as directors’ declarations.”

How companies chose to report:

• 87% of companies included climate reporting within their annual report, while the remaining 13% prepared a standalone sustainability report lodged alongside their annual report.
• While 78% of companies included their basis of preparation and methodology within the sustainability report, others relied on cross-referencing to external documents.
• 26% of companies included their climate transition plan, while 35% of companies published climate transition plans separately. 39% of companies had no climate transition plans.
   

For the full report, visit the website.

Image credit: iStock.com/Khanchit Khirisutchalual