In a joint submission to the International Sustainability Standards Board (ISSB), 20 prominent Australian business and finance bodies have supported a proposed sustainability reporting regime with a global baseline. Only last week, Australia’s Climate Change Bill (Bill) had its third reading in the House of Representatives and should pass the Senate. Whereas the Bill is silent on reporting climate-related financial risk, it is all but inevitable that Australia will follow the rest of the world and introduce a mandatory climate-related financial disclosure regime for Australian financial institutions.

In reaching an unprecedented consensus, the group of Australia’s most influential business and finance peak bodies expressed the need for a “globally consistent, comparable, reliable, and verifiable corporate reporting system to provide all stakeholders with a clear and accurate picture of an organisation’s ability to create sustainable value over time.” Emphasis was also placed on the importance of coordination and collaboration between financial accounting standard setting and sustainability disclosure initiatives.

Current Australian reporting regime

Although Australian companies currently have no obligation to disclose climate-related risks to company shareholders or investors, many Australian companies already provide voluntary sustainability reporting. With the growing appetite among investors for Australian companies to disclose climate-related risks, it is inevitable that Australia will follow other jurisdictions like New Zealand, which has already implemented a mandatory disclosure regime, the EU, UK, and US, along with a number of Australia’s other trading partners, who are poised to introduce similar regimes in the next few months and early next year.

What to expect

The endorsement of the ISSB draft sustainability reporting standards by 20 of Australia’s peak finance and business bodies has increased the momentum for change. As yet, it is unclear when and how these rules will be implemented. However, Treasurer Jim Chalmers has stated that the goal is to create usable, credible and comparable disclosure rules to enable investors to make better-informed decisions.

Once introduced, a mandatory climate-related financial disclosure regime can be transformative for those in the financial sector and users of these financial services. Jurisdictions that already have or are in the process of introducing such a regime have seen an immediate impact with decision makers considering how capital can be allocated towards activities that are consistent with a transition to a low-emissions, climate-resilient future.

Organisations that are required to report will quickly appreciate that this is quite different to the voluntary sustainability reporting with which they are familiar. Meeting the requirements of climate accounting standards, like those proposed by the ISSB, can be a complex exercise so reporting organisations need to consider early on whether and how they are identifying and managing their climate-related financial risk.

Financial institutions, the key entities that will be required to report, are seen as having a responsibility in funding the transition to a low-carbon economy. The expectation is that they will help mitigate some of the climate impacts by reallocating and decarbonising their portfolios. Primary users will be looking at these organisations’ financial sensitivities to climate-related risks and expecting them to have sound climate governance structures and functions that encourage and enable accountability, an understanding of what is material, and an integration of climate change into their decision-making.

As the policy is being developed, it is important for those entities that will potentially be required to report to consider the risks and enormous opportunities that decarbonisation presents, and how this can benefit their clients and customers. The potential reporting entities should be thinking now about how they can ensure these interests are considered.

Holding Redlich has collaborated with New Zealand climate change advisory firm, Te Whakahaere, to provide you with this update.