The Australian government is implementing internationally aligned reporting based on the standards issued by the International Sustainability Standards Board (ISSB). These cover governance, strategy, risk management and metrics and targets. Initial focus is on carbon pollution, also known as greenhouse gas emissions.
With the recent Treasury bill, the disclosure requirements will be rolled out from 2024 to 2028. This will make climate reporting transformation a new operational concern for Commerical Managers, FP&A (Financial Planning and Analysis) teams and a key governance and strategy accountability for CFOs and Boards.
Carbon reporting involves tracking and reporting greenhouse gas emissions produced by your organisation's operations. This data is crucial for understanding the environmental impact of the business and complying with regulations related to emissions. What are carbon pollutants? These are pollutants released into the atmosphere when we burn fossil fuels like coal, oil, and gas. They include carbon dioxide, and other gases like methane and hydrofluorocarbons. These pollutants contribute to climate change and impact everything from extreme weather events, to wet-bulb temperatures and sea-level rises.
From a company perspective, this can pose significant risks including disrupting supply chains, increasing the cost of raw materials, employee wellbeing, and consumer buying habits, along with policy and regulatory risks.
A big change will be aligning with existing Financial Reporting. Financial reporting has been extended with ESG topics such as modern slavery. Now you will need to integrate carbon reporting into your financial reporting processes to provide a holistic view of performance and risks. The reporting will assist investors and others may correctly price or value assets, to allocate capital.
In Australia, you will need to report when your entity meets any two of these minimum thresholds:
‘Controlling corporations’ (as per the National Greenhouse and Energy Reporting Act 2007 or NGER) must also report.
Your entities will need to include the climate-related financial disclosures in your annual report. This will be across the operating and financial review included in the directors’ report. Specific format requirements are yet to be provided by Treasury, but as these are built on earlier global standards such as the Task Force on Climate Related Financial Disclosures (TFCD) (now taken over by the IFRS Foundation), here are example disclosures so you can see how other companies have been reporting.
Demand for skills in this area is outpacing supply and many organisations are not prepared. As a finance or commercial manager, you already play a role in reporting your company's annual financial reports and this will be extended by climate disclosures.
Let's consider the journey ahead. The journey involves adaptation to a changing environment, identifying, measuring, and reducing your carbon pollution, and complying with expanding regulations. Along with disclosing your actual emissions and progress towards reducing them, your annual reporting will need to identify and assess the risks associated with carbon pollution, such as regulatory changes, physical risks from climate change, and reputational risks.
You will need to develop strategies to mitigate these risks and capitalise on opportunities related to sustainability. For forecasts and risk assessments, you will need to disclose the basis of your scenario analysis – including methodology, limitations, and assumptions. To help you, you may consider a combination of external advisory and implementation assistance, new hires, new data management & disclosure tools, and expert training.
Each sector has different drivers and operating models, so you need to identify emissions relevant to you. This includes both direct emissions from sources like company vehicles and machinery (Scope 1 emissions) and indirect emissions from purchased electricity and heating (Scope 2 emissions).
As the Australian reporting framework is based on ISSB standards, it closely aligns with IFRS S2 (climate related disclosures). These include industry-based guidance from Sustainability Accounting Standards Board Standards (SASB). In Australia, Treasury’s assumption is that this will be tailored to align with existing ANZSIC classification already used by the ABS and other commonwealth entities.
You will need to ensure accurate and comprehensive data on carbon pollution is collected from various sources across your organisation. The data can come from internal systems or upstream providers. Examples include energy consumption (e.g. utility bills / AP), transportation (e.g. fleet data), and other relevant activities. Where you don’t have transactional data, you may need to survey staff or suppliers with questionnaires and model assumptions.
Once you collect the data, how do you get started? The methods for measuring carbon pollution range from simple calculations based on fuel consumption to more complex emission inventories. A simple example is to multiply your activity (for example, kilometres driven, or litres of petrol purchased) by relevant emissions factors. These factors are available from Australian (example from National Greenhouse Accounts Factors) and international data sources.
You need to develop a common language for business-wide transmission of climate data. From a data strategy perspective, consider:
Understanding your footprint allows you to set your baseline year. This marks the first year your emissions data is recorded from. It's your benchmark. As you target areas for improvement you can make informed decisions about reducing emissions and monitor your performance over time compared to this baseline.
With your baseline year, you can plan initiatives and projects to mitigate and adapt to climate change. To do this, you will need to model investments required along with the cost implications of carbon pollution (for example based on assumptions on the price of carbon or global scenarios) and how they impact the financial performance. This could include costs related to carbon taxes, emissions trading schemes, and investments in emissions reduction projects.
Along with moving up the reporting maturity curve, as with any strategy implementation, there will be learnings in your organisation on how you translate plans into action. For example:
Once you've started measuring carbon pollution, you must communicate progress effectively. With AI-driven automated scraping of data turning up on websites and in external ratings agencies, it is imperative that you have clarity on publicly available data about your operations.
This includes updates with stakeholders, reporting on your emissions reduction goals, or potentially showcasing your sustainability efforts to employees, customers, and investors (being mindful of greenwashing and the importance of auditable data and methodologies to avoid accidentally overstating your progress). By transparently communicating your progress, you can build trust, inspire others to act, and drive positive change.
The best time to get started is now. The sooner you start, the more experience you gain on getting your disclosures accurate, building internal strengths and new capabilities, getting the right governance in place, and moving up the maturity curve to better plan and deliver on initiatives.
Finance teams must upskill and become sustainability reporting literate to increased climate risk. Carbon reporting may seem daunting at first, but with the right tools and knowledge, you can navigate the journey towards sustainability successfully.
The global average carbon pollution in the atmosphere is currently around 420ppm. That's a lot. By understanding your carbon pollution, identifying relevant sources, measuring your impact, and communicating your progress, you can not only comply with new regulations, improve risk management, and enhance transparency and accountability - and critically to a healthier planet for our families.
