Mar 08, 2023 / News

Financial Reporting

Climate and sustainability reporting is coming

You may have heard people taking about, or even glanced at headlines mentioning, sustainability reporting.  That’s because reporting sustainability and climate-related financial information is on its way to Australia. So, it’s worthwhile understanding how we got here and what’s to come.  

At the United Nations Climate Change Conference in November 2021 (COP26) the Chair of the IFRS Foundation Trustees announced the formation of the International Sustainability Standards Board (ISSB). The ISSB’s purpose is to develop a suite of globally comparable sustainability standards – to be known as IFRS Sustainability Disclosure Standards.  Think of it as the sustainability equivalent of international accounting standards.   It will then be up to each jurisdiction to decide whether to apply these international standards. Given that Australia converged with International Financial Reporting Standards (IFRS) in 2005, it’s clear that ISSB standards will be the starting point for any Australian-equivalent standards.

Since then, 2022 has been a hive of activity at the ISSB with the release of two exposure drafts IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (draft IFRS S1) and IFRS S2 Climate-related Disclosures (draft IFRS S2).  Remarkably, the ISSB received more than 1,400 submissions on these two exposure drafts.  By comparison, the International Accounting Standards Board (IASB) rarely receives more than 100 submissions on its accounting exposure drafts. 

Simply put, draft IFRS S1 sets the framework for the measurement and disclosure of information about an entity’s exposure to sustainability-related risks and opportunities, while draft IFRS S2 focusses on the identification, measurement, and disclosure of climate-related financial information.  

At the 2022 United Nations Climate Change Conference (COP27) last November, the ISSB confirmed that it aims to issue final Standards (IFRS S1 and IFRS S2) “as early as possible in 2023”.

In Australia, the Australian Accounting Standards Board (AASB) has indicated a ‘climate first’ approach and has added a project to develop climate-related financial disclosure requirements based on draft IFRS S2 by the end of this year.  

The proposed disclosures contained in draft IFRS S2 is based on the four pillars from the Taskforce for Climate-related Financial Disclosures (TCFD), namely: 

• Governance - The governance processes, controls and procedures the entity uses to monitor and manage climate-related risks and opportunities.
• Strategy - The climate-related risks and opportunities that could enhance, threaten or change the entity’s business model and strategy over the short, medium and long term.
• Risk management - How climate-related risks are identified, assessed, managed and mitigated by the entity.
• Metrics and targets - The metrics and targets used to manage and monitor the entity’s performance, which could include cross-industry as well as industry-specific metrics and government imposed targets.

The AASB has not indicated which entities their reporting standards would apply to other than stating that the initial scope of their project relates to the for-profit sector. 

Meanwhile, in December last year, Treasury issued a consultation paper seeking feedback on:

• Australia aligning with international standards on climate-related disclosures;
• which entities should mandatorily report climate disclosures, and the timetable for implementing such disclosures; 
• whether entities should make those disclosures in its annual financial report or elsewhere; and
• what level of assurance should be required for climate disclosures.

It may be that the AASB will just create the reporting framework and it will be Treasury that decides which entities will be required to report those disclosures.  

Not to be left behind, the International Auditing and Assurance Standards Board (IAASB) is developing a proposed assurance standard on sustainability reporting, which the Australian Auditing and Assurance Standards Board (AUASB) is likely to use as the basis for assurance practitioners here. 

Although there is still some work to do on the extent of climate-relating reporting requirements, what is clear is that the ISSB is working hard to satisfy the calls for a globally consistent climate reporting framework by the middle of this year.  

The development of reporting and assurance frameworks for sustainability and climate disclosures could be the biggest change to the Australian reporting landscape since the introduction of IFRS in 2005.  2023 is expected to be a big year as those projects are developed and rules are established to provide assurance on those disclosures.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.