A shift to new sustainability disclosure requirements is on the way, forcing organisations to invest time into understanding the connections between climate, social factors and financial risk and opportunity.
The International Sustainability Standards Board (ISSB) disclosure requirements will require new collaboration between finance and sustainability teams. However, climate is only part of the new remit, with broader environmental- and social-related disclosure requirements to follow.
For the first time, non-financial information will be elevated to an equal footing with financial information, revealing the impact of climate risk on enterprise value. The new reporting standards will enable investors to more accurately price, stress-test and therefore manage climate risks and opportunities across their portfolios.
Adoption in Australia is expected to commence after 1 January, 2024 in a phased-in approach. Between now and then, the ISSB is expected to drip-feed further topic-based reporting standards around human rights, human capital and biodiversity. There is industry agreeance that the timeframes don’t allow much time for catch-up.
Super fund Rest has been actively encouraging its investment managers and investee companies to report against the recommendations of the Task Force on Climate-related Financial Disclosures for some time.
The transition period will enable areas of the market that are less mature to scale up reporting capabilities, which will be crucial, Rest’s head of responsible investment and sustainability, Leilani Weier says.
“We are already focused on being open and transparent in our own reporting by providing members with relevant sustainability-related disclosures through the annual Sustainability, Responsible Investment and Climate Change Supplement to the fund annual report,” Weier says.
“This includes measuring, monitoring and reporting climate-related progress and actions in line with the TCFD.”
A significant shift
But it won’t be smooth sailing for all. The change to sustainability reporting standards represent one of the most significant shifts in reporting in over 100 years, says EY Climate Change and Sustainability Services Partner, Meg Fricke.
Elevating sustainability data to the quality required for financial reporting in the short time frame between now and adoption will be a massive challenge.
Fricke says she senses a mild sense of panic in the business community about the scale and timeframe for the change, but says it represents an underlying opportunity for business.
This is a process, and companies won’t get everything right the first go, she says.
“Companies need to respond to this challenge by using transparency to manage risk and tell the full story rather than peeling back from transparency over fear of being called out for greenwashing. This will ultimately result in a missed opportunity,” Fricke says.
“Companies will need months to establish, bed down and fine-tune new systems and processes which may require whole-of-enterprise changes. Companies need to start thinking and planning for broader disclosures now.”
The mandate to disclose the financial impact of climate change and decarbonisation risks and opportunities will require sustainability data being robust enough to handle internal and external audit, within much shorter timeframes, Fricke says.
“It pushes businesses to frame financial performance and business value in a way it never has before. Deepening the connections between non-financial and financial information should lead to more nuanced and sophisticated financial reporting.
“In this sense, the historical changes about to be made to business and accounting may be the most important of our lifetimes. In doing so, companies are able to understand risk and opportunity more clearly, and make better business decisions about the future of the business and its impact on climate, the environment and society,” Fricke says.
Galvanising consumer confidence
However, the benefits to an uplift in transparency and reporting of climate data should give consumers improved confidence that super funds are able to respond to the risks and opportunities of climate change, HESTA general manager responsible investment, Kim Farrant says.
The new disclosures represent significant work to implement, but many companies have already made good progress on reporting climate-related information, she says.
And a well managed transition reduces the likelihood of economic volatility, reduces the risk of stranded assets and provides opportunity to maximise value and outcomes from investment in the new energy economy, Farrant says.
“Companies will benefit from the certainty and consistency of an Australian disclosure framework that aligns with investor expectations for reporting of climate-related information and they should work to adopt the standards as soon as possible,” she says.
Morningstar’s ESG strategist Erica Hall also hopes that the shift to more transparent data and detailed reporting will galvanise consumer confidence as concerns around greenwashing mount.
“The lack of reporting standardisation has been an ongoing challenge locally, particularly when trying to make relative comparisons between organisations in relation to their sustainability attributes and preparedness for net zero transition,” she says.
A reporting change will potentially require organisations to collect new data and make modifications to existing reporting systems, Hall points out.
In recognition of the body of work a company needs to undertake, ISSB and Australian regulators have flagged a likely phased approach to allow organisations enough time to get their house in order.
But she urged organisations not to delay in getting on with preparing for the change. “Apart from identifying new data collection and integration into systems, they also need to make a call on what issues are material for their business across various stakeholders.
“Whilst delivering to these new reporting requirements may cause short term pain, in the long run it should overall be a positive development. It will allow organisations to be globally competitive, investors to make informed decisions and with increased transparency, engender trust,” Hall says.