The new law will oblige companies to produce an annual sustainability report to accompany their usual financial reporting. Eventually, sustainability reports will detail climate resilience assessments, scope-one, scope-two and scope-three emissions data, and industry-based metrics disclosures. However, the Australian government is taking a “phased” approach to implementation (see box).

Nicole Yazbek-Martin, Canberra-based head of taxonomy and natural capital at the Australian Sustainable Finance Institute (ASFI), says mandatory climate-related disclosure will help channel more capital into activities consistent with Australia’s emissions reduction goals. She comments: “Australian law already requires directors to disclose material risks, including climate-related risks. But mandatory disclosure will support greater consistency and comparability of disclosures and establish an economy-wide baseline standard.”

Australia’s emissions reduction goals include alignment with the Paris Agreement, which aims to keep global warming to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C above pre-industrial levels. This means achieving net zero CO2 emissions globally by 2050. Global greenhouse gas emissions in 2022 exceeded 53 billion tonnes of CO2 equivalent according to the International Energy Agency – and are tracking upward. Aligning with the Paris Agreement is an enormous task.

Robust accounting should focus corporate Australia on reducing emissions, but the government’s draft legislation includes more than just reporting emissions data. “It is about putting rigour behind reporting across the four components established by the Taskforce on Climate-related Financial Disclosures [TCFD]: governance, strategy, risk management, and metrics and targets,” says Charles Davis, Sydney-based managing director of sustainable finance and ESG at Commonwealth Bank of Australia.

For example, the draft legislation requires companies to look ahead via scenario analyses. Climate-related risk evaluation requires two quantitative scenarios, with at least one of them aligned to 1.5°C warming.

“This requirement contains a lot of implementation challenge,” says Anna Hancock, Melbourne-based executive director at climate change investment and advisory firm, Pollination Group. She adds that companies will have to ensure they are not just connecting with abstract climate models – because they will be under scrutiny.

The government’s draft legislation prescribes that affected companies follow the reporting standards prepared by the Australian Accounting Standards Board (AASB). The national standards are in the process of being finalised. However, the AASB released its exposure draft (ED) SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information in October 2023.

Echoing the core components of the TCFD, AASB’s ED SR1 asks entities to address governance, strategy, risk management, and metrics and targets. According to ED SR1, “climate-related risks” include physical and transition risks.

The AASB’s draft standards are based on those published by the International Sustainability Standards Board (ISSB) in June 2023 – international financial reporting standards (IFRS) sustainability disclosure standards S1 and S2 – which were established to provide a baseline for global sustainability reporting.

The underlying objective of the IFRS standards is for companies to disclose sustainability-related information that will be helpful for those making decisions about the provision of resources to an entity. IFRS S1 and S2 require companies to divulge sustainability-related opportunities or risks that are “reasonably expected”. The IFRS S1 outlines how disclosures should be reported and IFRS S2 details what will be disclosed.

Having national standards in Australia that align with the international baseline is significant for “improving transparency”, Chalmers said in his announcement on 12 January. He added that standards “will help investors and companies make more informed investment decisions and lay the foundation for a stronger, more robust financial system”.

AASB’s ED SR1 consists of three standards: ASRS S1, S2 and ASRS 101. ASRS 101 is a national service for up-to-date, nonlegislative information. It thus does not have an international counterpart to align with. But in the same vein as IFRS S1 and S2, ASRS S1 covers how a company will generate and prepare its documentation, while the kind of information that a company will be required to disclose is detailed in ASRS S2.

Under ASRS S1, mandatory disclosures will only apply to climate-related financial information – rather than all sustainability-related financial information, as in IFRS S1. In ED SR1, AASB explains that other sustainability reporting matters will be considered “at a later time”.

ASRS S2 is set to implement mandatory climate-related disclosures aligned with IFRS S2, with some modifications. Although IFRS S2 follows the TCFD, which was introduced in 2017, sources agree that even very large Australian companies may not be prepared for the 1 July deadline. “There is probably still quite a bit of work for some companies to do,” says Fortlake Asset Management’s deputy chief investment officer and sustainability lecturer at UTS Business School, Kylie-Anne Richards.

Nevertheless, Davis describes mandatory reporting as a “distinct positive”. He says it will help entities to deliver baseline information, define strategy and move forward while giving clarity to what their transition plans look like.

The purpose of uniform reporting standards and the publication of more data is in part to make it easier to compare companies, says Murray Ackman, Sydney-based ESG credit analyst at Pendal. This is particularly relevant for the swathe of businesses that are neither unimpeachably green nor irredeemably brown.

Ackman compares the regime to international humanitarian law. “The regime is not for the angels or the demons – they’re going to do what they do. It’s about everyone else, to ensure they know how they are meant to act. Mandatory reporting means the market will be able to assess this more readily.”

Marayka Ward, director, fixed income strategy at QIC in Brisbane, agrees it should make the buy side’s job easier. She explains: “A lot of investors are looking at companies offshore. Anything that helps with international harmonisation is very useful for investors, for comparing companies and opportunities.”

Mandatory reporting will also help Australian companies that are seeking money from offshore investors, Ward adds.

Although the AASB’s draft proposal for Australia’s reporting standards aligns with ISSB’s IFRS S1 and S2, it also includes several modifications to the international baseline, including changes associated with emissions reporting. Included among the many modifications are the incorporation of methodologies used in Australia for estimating emissions, the definition of greenhouse gas (GHG) emissions to exclude other climate-related emissions that are not GHGs, such as ozone-depleting emissions, and terminology that includes not-for-profit entities, to ensure sector neutrality.

Richards says she would prefer to see a longer consultation period ahead of the introduction of mandatory reporting, particularly in areas where local standards are moving away from global settings. If the point of climate reporting is standardisation and transparency, having a different set of rules in Australia makes it harder if, for instance, an investor has a global mandate.

It may well also not be beneficial for reporting companies if the Australian regime strays far from global norms. As Ward says: “While gathering data is a huge job for companies, I’m not convinced carving out for Australian companies is in their best interest, if they want to attract global investment. Differences in standards makes it more difficult for investors to make comparisons between opportunities in jurisdictions where the data is available and those where it is not, and brings transparency into question. I would be pleased to see Australia align with other global regulations rather than employ local carve outs.”

The goals of a mandatory climate risk reporting regime may be laudable but delivery is likely to be challenging. In the first wave of implementation, material climate risks and opportunities must be reported, along with scope-one emissions – those generated directly by the company – and scope-two emissions, caused indirectly by a company from the source of the energy it purchases and uses.

Implementation of a market-based method to report electricity use from July 2027 – scope-two emissions – will reveal a reporting company’s use of renewable energy certificates. “Companies that aren’t already seriously considering their electricity sources, including where they can invest in renewable energy, could be left behind – because their failure to do so will be very visible,” says Pollination’s Hancock.

Davis, meanwhile, points out that not every industry has an Australia-specific pathway aligned to 1.5°C. This will need to be an area of focus to ensure consistency of reporting.

The information to be reported includes matters of significant uncertainty, adds Sydney-based King & Wood Mallesons partner, Tim Bednall. He cites forward-looking statements concerning the financial impact of climate-related matters on reporting entities as one example.

Nevertheless, Bednall says the resources sector, large banks and insurers appear in general to be well prepared. “They have systems in place and have been reporting on similar matters for some time,” he confirms.

Bednall is less optimistic about the ability of medium-sized companies to meet the deadline for climate-related reporting. “I think there are about 20,000 of these companies in Australia. They will be required to report from 1 July, 2027 and I don’t think they are ready,” he says.

Tracking scope-three emissions involves collecting emissions data in the supply chain – including from a company’s providers and customers. This is likely to be the biggest challenge for reporting companies (see box).

Market users are also keeping a close eye on potential loopholes. For instance, the draft standards include the option not to disclose in areas where data are sufficiently uncertain as to be unreliable. “It will be interesting to see whether reporting companies use the option not to disclose uncertain information or bow to investor or activist pressure to disclose unreliable information,” Bednall says. “There is a conflicting pressure if an entity makes an estimate that turns out to be wrong and is exposed to litigation.”