Mandatory climate reporting update: AASB Australian exposure draft standards

The Australian Accounting Standards Board (AASB) recently published an exposure draft of Australian Sustainability Reporting Standards (ASRS) relating to disclosure of climate-related financial information (Exposure Draft).

The draft legislative framework for mandatory climate reporting is expected to be released for consultation before the end of this year.

In this article, we provide an overview of the Exposure Draft, why it matters and what you can do now to better prepare your organisation for mandatory climate reporting.

What is the Exposure Draft?

The Exposure Draft includes three draft sustainability reporting standards:

1. ASRS 1: General Requirements for Disclosure of Climate-related Financial Information which prescribes how an entity prepares and reports its climate-related financial disclosures that form part of its general purpose financial reporting;
2. ASRS 2: Climate-related Financial Disclosures which sets out disclosure requirements for an entity to provide useful information to primary users of its general-purpose financial report about climate-related risks and opportunities that could reasonably be expected to affect its cash flows, access to finance or cost of capital (and in the case of a not-for-profit, its ability to further its objectives); and
3. ASRS 101: References in Australian Sustainability Reporting Standards which was developed as a service standard that would be updated periodically to list the relevant versions of any non-legislative documents published in Australia and foreign documents that are referenced in the ASRS. It is intended to clarify all external documents referred to in the ASRS have the same authoritative status as the ASRS itself and are required to be applied as specified in the ASRS to achieve compliance with the standards.

How do the ASRS differ from the ISSB standards?

The draft ASRS have been developed using the International Sustainability Standards Board’s (ISSB) two sustainability disclosure standards, released in June, for general sustainability reporting standards (IFRS S1) and for climate (IFRS S2).

ASRS 1

Draft ASRS 1 is based on IFRS S1. The key differences are that it:

• incorporates terminology suitable for not-for-profit entities to support sector neutrality where the IFRS S1 only uses terminology suitable to for-profit entities;
• applies only to the reporting of climate-related financial information as the AASB will focus on addressing climate-related financial disclosures first and consider the approach to broader sustainability reporting matters in Australia at a later time;
• inserts an extra requirement for an entity that determines there are no material climate-related risks and opportunities to disclose this fact and how it came to this conclusion;
• does not include references to the Sustainability Accounting Standards Board (SASB) standards and industry-based guidance accompanying IFRS S2, on the basis that’s not appropriate until the content has been comprehensively internationalised by the ISSB and has undergone the AASB’s own due process;
• inserts an extra requirement for an entity to provide information in a manner that enables users to locate its disclosures prepared in accordance with applicable ASRS; and
• specifies the same reporting period for climate-related financial information as for the related financial statements, and does not address interim reporting to avoid unnecessary confusion.

ASRS 2

Draft ASRS 2 is based on IFRS S2. The key differences are that it:

• removes what it describes as “unnecessary duplication” of content between draft ASRS 1 and ASRS 2. This may cause a potential hiccup for Treasury given it was expecting mandatory climate reporting would be based on IFRS S2 only (according to the June 2023 consultation paper). As much of the content of IFRS S2 has not been included in ASRS 2 on the basis it is already included in ASRS 1, either Treasury will need to base mandatory climate reporting on a combination of ASRS 1 and ASRS 2, or the AASB will need to revisit its approach to the draft ASRS. As flagged above, Treasury is expected to release the draft legislative framework before the end of this year, which may provide some clarity on this issue;
• clarifies that draft ASRS 2 does not apply to other climate-related emissions (except greenhouse gas (GHG) emissions) or replace existing legislation or pronouncements prescribing reporting requirements related to other sustainability-related topics;
• specifies climate resilience assessments should be conducted against a minimum of at least two possible future states, one of which must be consistent with the most ambitious global temperature goal set out in the Climate Change Act 2022 (Cth) to enhance comparability of entities’ climate resilience (consistent with Treasury’s proposal in the June 2023 consultation paper on mandatory climate reporting);
• requires an entity to convert GHGs into a CO2 equivalent value using the global warming potential values from the same IPCC assessment report as that referred to in the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and related regulations and the Paris Agreement;
• aligns with Treasury’s second consultation by specifying that an entity is required to prioritise applying relevant methodologies in the NGER Act as the default methodologies in measuring its GHG emissions before referring to other GHG measurement methods or frameworks, requiring the disclosure of market-based Scope 2 GHG emissions (i.e. based on contractual instruments) in addition to location-based emissions (i.e. based on average emissions intensity of the grid on which energy consumption occurs) and permitting an entity to disclose in the current reporting period Scope 3 GHG emissions measured using data for the immediately preceding reporting period;^[1]
• supports sector neutrality by incorporating terminology suitable for not-for-profit entities;
• requires entities that participate in asset management, commercial banking or insurance activities to consider the applicability of additional disclosures related to financed emissions (rather than requiring them to provide those additional disclosures as IFRS S2 does); and
• does not include IFRS S2’s references to the SASB standards and industry-based guidance accompanying IFRS S2, again on the basis that’s not appropriate until the content has been comprehensively internationalised by the ISSB and has undergone the AASB’s own due process.

Why does it matter?

The release of this Exposure Draft marks an important step towards mandatory climate reporting in Australia, expected to commence from 1 July 2024, which we’ve discussed in more detail elsewhere.

Mandatory climate reporting is expected to cover over 20,000 entities in Australia, with flow-on effects for others in the value chain of those entities. Entities likely to be affected by mandatory climate reporting should review the Exposure Draft and consider whether to participate in the consultation process, which is given until 1 March 2024. The AASB’s preference is that this be done through formal submissions lodged online on the AASB website. However, interested stakeholders who do not have the time to prepare a formal submission also have the option of completing the online survey here. Other feedback can also be sent to the AASB via email or phone call.

The introduction of mandatory climate reporting in Australia aligns with a growing push for this globally. New Zealand recently passed legislation to mandate climate-related disclosures for some large financial market participants. In doing so, they joined a growing list of jurisdictions around the world that have already mandated, or are in the process of mandating, climate reporting.^[2]

Entities that will be covered by multiple different regimes should be reviewing the Exposure Draft to determine the delta with other applicable regimes. Even companies that are not caught by foreign regimes may be affected by them if they have investors or other stakeholders in those jurisdictions.

How to prepare for mandatory climate reporting

In addition to reviewing and participating in the consultation on the Exposure Draft, entities preparing for mandatory climate reporting can:

• review and participate in the consultation on the draft legislative framework for mandatory climate reporting, expected to commence before the end of this year;
• conduct a gap analysis between the Exposure Draft (and/or IFRS S2) and what is currently reported by the entity, to determine what disclosures aren’t currently being made that are likely to be required when mandatory climate reporting commences for the entity;
• develop a work plan based on that gap analysis, for how each of the gaps will be addressed, including how additional data will be collected where necessary;
• consider whether current systems and governance structures need to be updated, including to bring sustainability, legal and finance teams together on mandatory climate reporting;
• ensure accountability structures are in place to support compliance with mandatory climate reporting and accuracy of disclosures (not only in annual / sustainability reports but also across other marketing, website and similar materials in light of regulatory focus on greenwashing); and
• if not already, adopt a robust due diligence and verification process for climate reporting, ensuring statements accurately reflect practices and there are reasonable grounds for forward looking statements, as we’ve written about in more detail elsewhere.