While sustainability reporting is not yet mandatory for organisations in Australia, there are a growing number of regulators that require sustainability-related risks to be considered for reporting. Find out more.
Broad-based ESG or sustainability reporting is not yet a mandatory requirement for organisations in Australia. However, Australia’s regulators are getting itchy feet! The Australian Securities and Investment Commission (ASIC), the Australian Prudential Regulation Authority (APRA), and the Australian Securities Exchange (ASX) now either recommend or require organisations consider several sustainability-related risks for reporting. So depending on your industry, company size, or structure, there may be aspects of sustainability reporting that are, in fact, required by your organisation. We take a look at some areas you should be aware of.
ASIC’s focus areas for year-end financial reporting
ASIC recently released its focus areas for 30 June 2022 reporting. It lists several areas it is encouraging preparers of year-end reports to consider. Of particular note, in line with sustainability reporting, is the disclosure of future prospects to be included in the financial report or Operating and Financial Review (OFR). An OFR complements the financial report, telling the story of how the business is impacted by various factors, like COVID-19 for example. The OFR should explain the underlying drivers and the position of the financial report.
Disclosure of future prospects
The relevant report should include both risk management strategies and future prospects. Any forward-looking information needs to have a reasonable basis, and if those circumstances change, the market should be updated.
ASIC has recommended that organisations consider the impact of climate risk on financial statements and even called out the need to consider environmental, social and governance (ESG) risks. ESG incorporates a whole range of factors like supply chain, data security, human capital, community engagement, modern slavery, as well as climate-related risks. Of course, all organisations are different, so the risk or issue with the highest potential for impact will differ from one organisation to the next. Future prospects can be presented through the financial report or the OFR, noting that ASIC’s guidance states, “All significant factors should be included and given appropriate prominence”.
While ASIC hasn’t mandated ‘TCFD reporting’, it has suggested that directors consider disclosing information that could fall under the recommendations in the Task Force on Climate-related Financial Disclosures (TCFD).
We recently wrote that several regulators are focusing on greenwashing practices, including ASIC.
Since then, ASIC has released findings of its review of products within the superannuation and wealth management industries. It recommends the financial services industry (and we can all heed this warning to help us avoid greenwashing):
- Use clear labels
- Define the sustainability terminology used, and
- Explain how these considerations have been factored into the strategy.
Of course, the risks of greenwashing should be considered at an enterprise level - not just in financial reporting. ASIC’s new information sheet provides more guidance for avoiding greenwashing.
Personal liability for directors
The Centre for Policy Development (CPD) has worked with the Future Business Council to develop a legal opinion on the requirement for directors to satisfy their duty of care under the Corporations Act when it comes to the risks of climate change. The concluding legal opinion found that “company directors who ignore or mismanage climate-related risks could be held personally liable for breaching their legal duties under the Corporations Act.”. This further increases the importance for directors to appropriately consider climate-related risks, and be transparent in their reporting.
TCFD recommendations for organisations in Australia
As established recommendations, the TCFDs are leading the pack for disclosure of climate-related financial risks. In fact, many other organisations have been referring to the TCFDs as a basis for establishing their standards, for example those being developed by the International Sustainability Standards Board (ISSB). So, by complying with the TCFDs, you’re likely to align with other standards– in particular, the ISSB’s IFRS S2.
In April this year, the Australian Accounting Standards Board (AASB) issued an exposure draft relating to the standards released by the ISSB. While comments have only recently closed on this draft, the AASB guidance at this point is likely to also be grounded in the TCFD recommendations.
Along with AASB and ASIC, several other boards and regulators have been recommending that the organisations that fall into their jurisdiction refer to the TCFDs to guide their climate-related disclosures. These include:
- APRA – through their recent Prudential Practice Guide, CPG229 Climate Change Financial Risks (Nov 2021).
- ASX – through their Corporate Governance Principles and Recommendations publication (Feb 2019).
Think local, look global
In Australia, the push for greater focus and transparency on climate change and sustainability to date has largely been driven by market forces, including savvy investors and the access they provide to capital, the demands of the markets, and pressures from employees challenging their organisation (or the ones they’re looking to join) for change.
Several jurisdictions like the United States and Europe are further advanced in sustainability regulations. In Australia, the opportunity lies with organisations to look to the global markets, understand international frameworks and regulations, and take early steps to activate their sustainability journey.
Contact our sustainability team
Get in touch with the sustainability team at BDO if you’d like help to understand your regulatory requirements or how you can activate your sustainability journey.