The International Sustainability Standards Board (ISSB) have released the final versions of their climate and sustainability disclosure standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (“IFRS S1”) and IFRS S2 Climate-related Disclosures (“IFRS S2”) (collectively, the “ISSB Standards”). Subsequently, the Australian Government released its second consultation paper focusing on how IFRS2 will be formally adopted here in Australia. The purpose of this article is to summarise:
(a) how IFRS S2 will be adopted in Australia;
(b) who will be required to comply with these climate disclosure standards (and when); and
(c) what entities should be doing now to prepare for compliance.
Purpose of the ISSB Standards
The overarching purpose of the ISSB Standards is to consolidate the array of voluntary climate and sustainability reporting standards and create a global baseline to enable entities to provide information about climate and sustainability related risks and opportunities that are useful for investors and broader stakeholders. These climate and sustainability disclosures will be provided within the entities’ annual report, showing the link between these risks and business activities, financial results and strategies.
Where any climate or sustainability related risks and opportunities have a material impact on the financial position of a business, these will be included within the financial report itself. All other climate and sustainability related risks and opportunities will be included as part of the director’s report. For listed entities, climate disclosures will be required to be included within the operating and financial review section of the directors’ report.
For Australia’s adoption of IFRS2, the Consultation Paper indicates that businesses will be required to report under the following sub-headings:
(a) Materiality:
The existing principle of financial materiality will apply to disclosures. Risks and opportunities over the short, medium and long term are material if omitting, misstating or obscuring it could be reasonably expected to influence decisions that the primary users of the general-purpose financial reports make on the basis of the reports. This will apply to all disclosures except Scope 1 and 2 emissions which must be disclosed irrespective of a materiality assessment.
(b) Governance:
Entities will be required to disclose information about their governance processes, controls and procedures that they use to monitor and manage climate related financial risks and opportunities (i.e., board oversight of monitoring risks and opportunities, policies and procedures, how climate performance metrics are factored into executive remuneration).
(c) Strategy:
Entities will be required to disclose their strategy to identify and address climate related risks and opportunities, current and anticipated risks on the business model, value chain, financial position and climate resilience of existing strategy and business modelling.
(d) Scenario analysis:
Entities will be required to use scenario analysis to outline exposure to climate-related risks. This includes a requirement to model based on two (2) climate future states, one of which must be consistent with the global temperature goal outlined in the Climate Change Act 2022 (Cth) (which codifies Australia’s emissions reduction goals).1
(e) Transition planning and climate related targets.
Disclosure of transition plans, including the use of offsets, emissions reduction targets and mitigation strategies. Specific disclosures are required if offsets are used as part of the transition plan to drive entities towards setting more robust emissions reduction goals rather than relying on offsets.
(f) Risks and opportunities
Entities will be required to disclose information about material climate related risks and opportunities and how they are identified, assessed and managed, including where these risks are concentrated in their supply chains.
(g) Metrics and targets
Reporting on Scope 1, 2 and 3 emissions accompanied by information about how the emissions boundary was calculated (i.e., information about the accounting framework, assumptions made, the methodology and overall approach). Scope 1 and 2 emissions will be required to be reported on in the first year of reporting and Scope 3 emissions from the second year of reporting onwards.
Who will this apply to?
The ISSB Standards are in their final form now and can be used by any entity now on a voluntary basis from 1 January 2024. As part of the implementation into law here in Australia, the ISSB Standards will be mandatory for certain entities. This will be adopted through a “phased-in approach” depending on the size of the relevant entity.
Year of application | Criteria |
2024-2025 | Entities lodging financial reports under the Corporations Act that meet two (2) of the following criteria: · Consolidated revenue: ≥ $500 million · Consolidated gross assets: ≥ $1 billion · ≥ 500 employees |
2026-2027 | Entities lodging financial reports under the Corporations Act that meet two (2) of the following criteria: · Consolidated revenue: ≥ $200 million · Consolidated gross assets: ≥ $500 million · ≥ 250 employees |
2027-2028 | Entities lodging financial reports under the Corporations Act that meet two (2) of the following criteria: · Consolidated revenue: ≥ $50 million · Consolidated gross assets: ≥ $25 million · ≥ 100 employees |
The role of assurance
Audit and assurance will play a key role in enhancing the credibility of climate and sustainability related disclosures. The International Auditing and Assurance Standards Board (IAASB) is currently working on developing an overarching standard for climate and sustainability reporting. The exposure draft is due in July or August 2023 with final approval due in late 2024.
Key takeaways
Disclosing on climate and sustainability related risks is set to become commonplace rather than “best practice”. It is imperative that businesses are undertaking actions to understand the climate and sustainability related risks relevant to their industry and value chains and look at how reporting on this can be built into existing reporting processes. Data will be key in being able to fulfil the disclosure requirements under the ISSB Standards. Accordingly, as a starting point, businesses should:
start to gather data on their Scope 1, 2 and 3 emissions;
prepare an overarching “E” strategy (if one doesn’t currently exist), which includes setting an emissions reduction goal;
evaluate how current governance processes and bodies consider climate and sustainability risks and opportunities; and
identify specific climate and sustainability risks pertaining to the business and how this will affect their business model and value chain.
The ESG Team at Cowell Clarke are experienced in developing ESG strategies, review compliance against the ISSB Standards and assist in measuring your emissions boundary and setting emissions reduction goals. For more information, please contact a member of our ESG team.
1 The global temperature goal is to hold the increase of global average temperature to well below 2 degrees Celsius above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels.
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