On 23 October 2023, the Australian Accounting Standards Board released the draft Australian Sustainability Reporting Standards (“ASR Standards”) which are the Australian adoption of the ISSB Standards released on 26 June 2023. The ISSB Standards were released to create a global baseline for climate and sustainability reporting. We prepared a blog on the ISSB Standards which can be accessed here.
The purpose of this blog post is to outline the key aspects of the ASR Standards, including what has been confirmed or amended since the consultation paper released by the Australian government on 27 June 2023 (“Consultation Paper”).
Focus on climate
As indicated in the Consultation Paper, the ASR Standards focus on disclosures relating to climate change, not broader sustainability related disclosures as contemplated in IFRS S1 (the first standard under the ISSB Standards). We expect that broader sustainability disclosures will follow, with requirements to report on broader sustainability risks and opportunities which may include those relating to biodiversity and nature.
Form of standards
The ASR Standards have been proposed in three (3) separate standards which will form a separate suite of standards to the AASB Standards (i.e., the ASR Standards will not embedded within the AASB Standards):
2.1 ASRS 1 - General Requirements for Disclosure of Climate-related Financial Information – this is similar to IFRS S1 but focuses instead on climate rather than broader sustainability disclosures.
2.2 ASRS 2 – Climate-related financial disclosures (similar to IFRS S2),
2.3 ASRS 101 – References (a service standard to list relevant versions of non-legislative documents published in Australia and any other documents referenced in the ASRS Standards).
Mandatory compliance
3.1 Revenue thresholds
The ASR Standards have confirmed that organisations will be required to comply with the ASR Standards through a phased in approach based on meeting the following compliance thresholds as outlined in the Consultation Paper:
Year of application
Criteria
FY25
Entities required to report under Chapter 2M of the Corporations Act that fulfill two (2) of the following criteria:
Consolidated revenue: ≥ $500 million
Consolidated gross assets: ≥ $1 billion
≥ 500 employees
AND
entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold.
FY26
Entities required to report under Chapter 2M of the Corporations Act that fulfill two (2) of the following criteria:
Consolidated revenue: ≥ $200 million
Consolidated gross assets: ≥ $500 million
≥ 250 employees
AND
entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold.
FY27
Entities required to report under Chapter 2M of the Corporations Act that fulfil two (2) of the following criteria:
Consolidated revenue: ≥ $50 million
Consolidated gross assets: ≥ $25 million
≥ 100 employees
AND
entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act.
3.2 Application to not-for-profits
The ASR Standards have confirmed that the ASR Standards will apply to not-for-profit entities (based on the not-for-profit entity meeting the compliance thresholds above). In the Consultation Paper, an issue was raised around whether these standards should apply to not-for-profits due to the significant financial and resourcing demands resulting from these mandatory disclosures. The AASB has taken the approach that the standards will apply to not-for-profits but has adjusted the standard for the information required in the disclosures.
Accordingly, not-for-profits will have to disclose material information about their climate related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, access to finance or cost of capital, and its ability to further its objectives, over the short, medium or long term.
The extent to which a not-profit entity must disclose its climate related risks and opportunities has been limited compared to the requirements imposed on a for-profit entity. For example, the ASR Standards state that “a not-for-profit entity need not undertake an exhaustive search for information to identify climate risks and opportunities” and shall use reasonable and supportable information that is available without “undue cost or effort”.
Inclusion in financial report
As indicated by the Consultation Paper, the ASR Standards confirmed that climate disclosures will be made in the annual report and that an index table outlining where each disclosure requirement is met will need to be included in the financial report to direct users to the relevant sections.
Core content of disclosures
Broadly, organisations will be required to report on the following disclosures. These disclosure headings match those found in the Taskforce for Climate Related Financial Disclosure Standards (the main voluntary climate disclosure standard used by organisations) and the Taskforce for Nature Related Financial Disclosure Standards:
5.1 Governance – processes, controls and procedures used to monitor and manage climate related risks and opportunities.
• Governance bodies or individuals responsible for oversight over climate related risks and opportunities, including how responsibilities over these risks and opportunities are delegated, and how these bodies / individuals take into account climate related risks and opportunities when overseeing the overall business strategy.
• Management’s role in governance processes, controls and procedures used to monitor, manage and oversee climate related risks and opportunities.
5.2 Strategy: approach used to manage climate related risks and opportunities.
• The relevant climate related risks and opportunities that could reasonably be expected to affect the entity’s prospects.
• Current and anticipated effects of those climate related risks and opportunities on the business model and value chain.
• Effects of climate related risks and opportunities on strategy and decision making.
• Effects of climate related risks and opportunities on financial performance, financial position and cash flow, anticipated effects on the same over the short, medium and long term and how this is factored into financial planning.
• Resilience of entity’s strategy to these climate related risks. This requires assessment against at least two future climate states (for example, in a world with 1.5 degrees of global warming above pre-industrial levels). This is explained further in paragraph 7 below.
5.3 Risk management – processes used to identify, assess, prioritise and monitor climate related risks and opportunities. This includes the parameters used to assess these risks, how the entity uses the nature, likelihood and magnitude of these risks and how these risks are prioritised within broader risk management processes.
5.4 Metrics and targets – performance in relation to climate related risks and opportunities, including progress towards any targets set and assessment against climate related metrics. For example, if an organisation has set a net zero target certified by the Science Based Targets Initiative (SBTi), they will be required to report against this progress in their annual report.
Furthermore, the ASR Standards require disclosures relating to climate related transition and physical risks, including the amount and percentage of business activities or assets that are vulnerable to these risks, how climate related considerations are factored into executive remuneration and how much capital is being deployed to addressing these climate related risks and opportunities.
Materiality of climate risks and opportunities
The disclosure of climate risks and opportunities uses a materiality test, which was indicated in the Consultation Paper. This materiality test aligns with the existing materiality test in the AASB standards. Information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of financial reports make on the basis of those reports. This is an entity specific aspect of relevance based on the nature and magnitude of the information to the relevant entity.
If an organisation deems that it does not have material climate related risks and opportunities, it will need to disclose that fact and explain how it came to that conclusion.
Climate resilience
Organisations will need to disclose climate resilience assessments against at least two possible future climate states. In the Consultation Paper, it did not specify which future climate states an organisation must assess against. The AASB has specified that one of the future climate states must be 1.5 degrees of global warming above pre-industrial levels (i.e., the most ambitious goal under the Climate Change Act 2022 and the Paris Agreement). The other future climate state must be within 1.5 - 2 degrees above pre-industrial levels of global warming.
GHG Emissions
The ASR Standards requires organisations to disclose their absolute gross greenhouse gas emissions expressed as metric tonnes of CO2 equivalents and separated into Scope 1, Scope 2 and Scope 3 Emissions:
Scope 1 – direct emissions that an organisation owns or controls directly.
For example, facility production and company owned vehicles.
Scope 2 - indirect emissions associated with an organisation’s operations.
For example, purchased electricity.
Under the ASR Standards, from the first reporting period, all reporting entities must disclose its scope 2 emissions and climate related risks and opportunities to such using a location-based approach (i.e., relying on state, territory or region-based data relating to the electricity sourced by the organisation).
There is also a three-year phase in for the requirement to report on scope 2 emissions and climate-related risks and opportunities using a market-based approach. A market-based approach uses greenhouse emissions information directly from the suppliers that electricity is purchased from which may differ from the local data available.
Scope 3 - are all other indirect emissions in an organisations value chain. This includes upstream emissions such as supply chain emissions, business travel and waste and downstream emissions such as freight and the use of sold products.
There is a one-year relief period for reporting on scope 3 emissions in recognition of how difficult it is to be able to accurately quantify these supply chain and value chain greenhouse gas emissions. Furthermore, in reporting on scope 3 emissions in its second year of reporting onwards, an organisation can use prior year data where reasonable and supportable data related to the current reporting period is unavailable.
The draft ASR Standards have confirmed that mandatory climate disclosures are imminent and will apply to organisations irrespective of whether they are for-profit or not-for-profit. Our key message is: if you will fall within one of the compliance thresholds, start preparing now as measuring your greenhouse gas emissions and preparing for these disclosures will take significant time and resources.
At Cowell Clarke, we are experts in assisting organisations with compliance with environmental reporting obligations, measuring their greenhouse gas emissions, setting net zero goals and preparing ESG strategies. We have also developed a digital solution called the “GHG Emission Tracking Portal” which assists our clients in measuring their greenhouse gas emissions, keeping track of their progress to net zero goals and preparing fully auditable data reports for use in Sustainability and ESG Reports. For more information about how the ASR Standards may affect your organisation, or how we can assist you more broadly with your ESG strategy, please reach out to Emma Peters or Alexandra Kenny.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.