The AASB (Australian Accounting Standards Board) recently held a briefing on the local implementation of Sustainability topics from the International Sustainability Standards Board.

The topics deal with general sustainability IFRS S1 and climate IFRS S2 reporting, and detail what organisations must disclose. These mandatory standards shift the prominence of sustainability reporting and we’ve highlighted why they’re important, and how this will transform both ESG and traditional financial reporting.

Continuing a closer look at each of the categories, here we consider implications on your Strategy.

• Governance
• Strategy
• Risk Management
• Targets & Metrics

STRATEGY

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What you need to disclose

When reviewing your annual reports, investors and other stakeholders will need to understand your sustainability and climate related strategies. Principally, you need to articulate what could happen and what you will do about it. Your reports should explain:

1. Which sustainability and climate-related risks and opportunities will be affecting your organisation’s bottom line (more on this when we look at Risk)
2. How and where those risks and opportunities will affect your business model and supply chain
3. What effect this will have on your financial performance in the short, medium and long-term
4. How your business plans to respond to those risks and opportunities

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What’s The Point?

Climate change is bringing more unpredictability to the financial world, and investors need to understand your plans. Targets and metrics might describe your efforts on climate change mitigation while strategy might focus on climate adaptation - understanding the effects of climate change and how to respond to them.

Your board, investors and your employees need to know that your finance team is prepared, and that your organisation has flexibility. Here are key items you’ll need when building S1 and S2-worthy strategy:

• Climate literacy - everyone in your governance team and board should have a good understanding of the causes and effects of climate change, and the key places your organisation may be at risk
• Value chain overview - which suppliers or manufacturers are most vulnerable? Which ones can you move closer to home?
• Scenario-building capabilities - you need to know when and where you might have a financial impact, so you build plans for addressing these situations - critically your models will need connect the operational scenarios with your P&L, Balance Sheet and Cash Flow

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It’s all about execution

“We have a strategic plan – it’s called doing things” Herb Kelleher

Strategy, as with any plan, is all about execution. It’s balancing doing the right thing, with doing things right. What will you choose not to do?  For your climate strategies, you should consider:

• Capabilities: do we have capabilities to execute our strategic choices. How can we develop these or buy them-in?
• Capacity: If we have capabilities, what is our capacity? Should we cancel or postpone existing initiatives?
• Timeline: If we are capable and have broad capacity, are our timelines tight. Do we have realistic timelines to deliver on those choices?

“The essence of strategy is choosing what not to do.” Porter

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Bridging the gap

In S1, paragraph 39 states “an entity need not provide quantitative information about the anticipated financial effects of a sustainability-related risk or opportunity if the entity does not have the skills, capabilities or resources to provide that quantitative information”.

For your disclosures, these gaps could include:

• DATA LITERACY - many data sources, lack of granular data, lack of engagement from contributing departments.
• COMPETENCY GAP - time-pressure from manual tasks & limited resources, poor software support, familiarity with sustainability topics
• DISCLOSURE UNCERTAINTY- changing requirements, competing priorities, unclear definition, or understanding of KPIs

There will be a grace period before litigation begins for companies who don’t disclose to acceptable standards, but it’s now time to understand what your skills, capabilities and resources - both in your sustainability/finance and reporting teams and at the board-level. To discuss your capability roadmap to disclosures, speak with the Getting to Zero team.

Next up: the other disclosure components: Risks, Targets & Metrics.

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FAQs for Australian Sustainability Reporting Standards

1. What are the main topics covered by the Australian Sustainability Reporting Standards? The Australian Sustainability Reporting Standards, based on the International Sustainability Standards Board's guidelines, focus on general sustainability reporting (IFRS S1) and climate-related reporting (IFRS S2). These standards outline mandatory disclosures for organisations.

2. How do these standards impact business strategy? The standards necessitate a closer examination of strategy, requiring organisations to disclose their sustainability and climate-related strategies. This includes identifying risks and opportunities, understanding their impact on the business model and financial performance, and outlining response plans.

3. Why is climate literacy important for strategy development? Climate literacy ensures that everyone involved, from governance teams to the board, understands the causes and effects of climate change. This knowledge helps in identifying areas of risk and vulnerability within the organisation's value chain.

4. What are the key considerations for executing climate strategies? Execution of climate strategies involves assessing capabilities and capacity within the organisation, determining realistic timelines for implementation, and making strategic choices aligned with sustainability goals.

5. How can organisations address gaps in sustainability disclosure? Organisations may face challenges such as data literacy, competency gaps, and disclosure uncertainty. Bridging these gaps requires investment in skills, capabilities, and resources within sustainability, finance, and reporting teams.

For assistance in understanding and implementing sustainability reporting standards, contact the Getting to Zero team.

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