In 2024, the Australian Treasury has already released the draft for climate-related financial disclosures. These are connected with the International Financial Reporting Standards’ ISSB general sustainability related (S1) and climate related (S2) reporting.
In Australia, the new disclosure requirements focus on S2 and cover reporting entities, reporting frameworks, liability enforcement, and transition. The 2024 draft includes review provisions and assurance requirements. Australia is one of many jurisdictions adopting these around the world. You can learn why they’re important, how they will change how organisations report on ESG.
There are four categories within the standards. Here we consider Targets & Metrics.
With other categories there’s overlap between S1 and S2. This is less so with Targets & Metrics. What you need to disclose for S1 and S2 are different, especially the metrics, so we consider them separately here.
For S1 - General sustainability disclosures, what you need to disclose revolves around the metrics you’ve chosen, and what your process for choosing those metrics is. You’ll need metrics for each risk or opportunity that you’ve highlighted in your strategy section.
So how do choose a metric? A good place to start with SASB: the Sustainability Accounting Standards Board provides metrics for 77 industries. SASB is under the International Sustainability Standards Board, overseen by IFRS.
Depending on the metric, you’ve then got more work to do. If it’s a metric from a recognised IFRS reporting standard, you can just name that standard. But if you choose a metric from a non-IFRS entity, you’ll need to disclose:
What's important with any business KPI, is consistency. Organisations that cherry-pick what to disclose based on what looks good, risk being accused of greenwashing.
One risk is that organisations only measure what is easily accessible, rather than what is most material. This may be a pragmatic starting point, because if you have systems and processes in place and trust the numbers, they can get you making progress earlier. However, you should start with the big picture first, the what, and only then move onto the how - which can include a rollout plan.
If you only measure what is convenient, consider, the adage 'what gets measured, gets managed'. This is similar to 'the essence of strategy is choosing what not to do'. In other words, carefully think about what behaviours you are incentivising as KPIs send the message on what you think is important - with the implicit implication of what is less important.
S2 - Climate-related disclosures differ, as many more metrics are well defined here. Disclosures relate mainly to greenhouse gas (GHG) emissions. We recommend that at least one member of your team goes through this section themselves, but here’s an overview on what you need to disclose.
Then we come to the targets (such as your net zero transition plan). When you set your targets for each metric, you’ll need to disclose the following.
The idea behind targets and metrics disclosures is similar to that of risks and opportunities. Stakeholders reading your annual reports need to be confident you’re not pulling numbers out of a smokestack - that everything has been carefully considered, and each metric and target is backed up by credible data. With laws around greenwashing being tightened, this is important to get right.
Just as reporting other IFRS topics, you need specialist accounting - now is a good time to hire or train a carbon accountant. A solid knowledge of Scopes 1, 2 and 3 is an absolute must here. Mistakes at the start cause more reporting woes later, as each year you’ll need to report any course-corrections (including methodology errors) or other changes
you make.
With any financial or non-financial measure there are two perspectives - the external (disclosure) view and the internal (operational, management) view. While ISSB is prompting your to externally report annually - to keep on track you need to be monitoring goals more frequently. For example, reporting in your monthly management pack, through departmental KPIs, or linking goals to variable remuneration that align behaviours with outcomes.
To achieve this at scale you need to consider data, systems and processes to ensure the numbers are robust, trusted and go beyond the ‘what’ to help you understand the ‘why’. (‘why are we off target?’, with these scenarios, what is the cost and benefit?’). This is a crucial gap in many newly-minted sustainability teams - they may little prior experience with robust planning and reporting (compared to for example, a typical FP&A team) and they may not have knowledge of how Carbon Reporting, Business Intelligence, and Enterprise Performance Management platforms can automate and streamline their processes and instead rely on risky, complex spreadsheets and manual processes.
Gaps can include:
These gaps mean sustainability team members risk spending their time collating and preparing numbers instead of adding value through their expertise, analysis and advising departments on how they can improve.
To endure, sustainability must be embedded in the organisation. Sustainability team members might report to a Chief Sustainability Officer, but they must be outward-focussed - similar to a Finance or HR-business partner, working day to day with operational and management teams on delivering impact.
To get started on the right path so your team focus on what matters, speak with the Getting to Zero team today.
1. What is the current status of climate-related financial disclosures in Australia? Australia is in the process of drafting legislation for climate-related financial disclosures, with the Australian Treasury releasing a draft in 2024. This legislation is closely connected with the International Financial Reporting Standards (IFRS) S1 and S2, focusing on sustainability and climate-related reporting.
2. What are the key categories within the disclosure standards? The disclosure standards encompass Governance, Strategy, Risk Management, and Targets & Metrics. These categories outline what organisations need to disclose regarding their sustainability and climate-related initiatives.
3. What information is required for Targets & Metrics disclosure under S1? For S1, organisations need to disclose chosen metrics and the process for selecting them. This includes metrics for identified risks or opportunities, ensuring consistency and credibility in reporting.
4. What are the key disclosures under S2 for climate-related reporting? S2 requires disclosures primarily related to greenhouse gas emissions (GHG). This includes current emissions data, measurement methods, changes in reporting, and carbon pricing initiatives.
5. Why is it essential to bridge the gap between external disclosure and internal management perspectives? Bridging this gap ensures alignment between external reporting and internal management goals. It involves monitoring goals more frequently, enhancing data literacy and competency, and addressing uncertainty in disclosures. Building this capacity ensures sustainability teams can focus on value-added tasks and support organisational goals effectively.
For further guidance on climate-related financial disclosures and building organisational capacity, contact the Getting to Zero team today.
