The Department of the Treasury building in Canberra

Analysts and chief investments officers are going to have a bit to worry about in the space of reporting regulation as the Albanese Government cranks up its legislative sausage machine on climate reporting issues.

A proposed regime is currently out for public comment until 9 February and is ultimately meant to provide people evaluating prospective investments for their portfolios a greater awareness of where entities are at with their climate change obligations. 

Investors are mentioned upfront as being one of the unquantifiable beneficiaries of companies paying a truckload to transition to new reporting rules, because good quality reporting is meant to attract investment and reduce the cost of capital for entities that are more transparent than others. 

“To allocate capital efficiently, financial markets must integrate climate risks into capital allocation decisions,” the Treasury policy impact analysis on climate-based reporting said.

“Investors rely on information published in annual reports and financial statements to understand risks and opportunities and, in doing so, determine how to allocate their capital.

“Conveying climate risks and opportunities to users of general-purpose financial reports and other stakeholders thus improves market-based evaluations of the reporting entity, improving the efficiency of capital flows.” 

The policy analysis from Treasury points to the fact that climate-related financial disclosures, with the awareness they provide of an entity’s perception of the cost of its climate impacts, are as essential to determining whether an entity is investment-worthy as that funny little thing called a profit or loss.

This means that consistency and comparability between reports of entities, and between entities within specific sectors, becomes a thing that matters, as it has with financial reporting, and consistent reporting relied on by stakeholders is in part driven by having rules in place. 

Common ground

Reporting requirements that entities are going to be required to meet are generated by a body in London called the International Sustainability Standards Board, and Australia has committed to adopt the standards that are issued by that body. 

Treasury’s explanatory documentation on the proposed regime makes clear that the London-based sausage machine’s end product is the basis on which domestic climate disclosures will be regulated. 

This is no different from investment analysts’ or CIOs’ perspectives on the change people experienced with international accounting standards issued by another London-based body called the International Accounting Standards Board. 

The subject matter, however, is different, and the government’s proposed law reflects this because entities in which you have an interest may start reporting things on climate matters in a more uniform fashion. 

Some of the reporting of companies you monitor may change as a result of a firming up of reporting obligations and it is expected that, over time, you should trust the information from these entities more. 

Uniform guidance on which companies base their disclosures is only one consideration. An entity could disclose what it believes complies with the rules, but without audit or regulatory activity there is nothing that provides the user of the climate-related data with confidence that somebody other than the company reckons it is complying with standards that tell it how a story should be told. 

It leads firstly to a discussion about auditing and assuring climate-related information. The federal government is assuming that the auditor of financial statements is the natural party to sign off on the climate-related disclosures. 

This means that analysts and CIOs may benefit from scrutinising the make-up of the skill set of the engagement teams accounting firms put up to ensure they have the appropriate skillsand knowledge to deal with the engagement if that opportunity becomes available when the appointme nt of auditors is being considered. 

Super funds and other organisations with an interest in environmental disclosures of listed or other enterprises can and should ask questions about how ready firms are to, firstly, engage with this work and, secondly, what skill set they have available to deal with it. 

Asking the practices those questions becomes a way of ensuring the firms are properly tooled up to do the work required of them, and they are also necessary questions given the amount of money to professional services firms to conduct financial statement audits. Why would you not want to know who may be responsible for the work that is going to be delivered? 

The people matter

Another question needing reflection here is the role of regulation. Just because climate-related disclosures have been prepared and audited does not in itself mean that they meet the standard expected by the corporate regulator. 

The quality of what you as a user of climate-related financial disclosures receive from companies in which you invest is ultimately the result of the skills of the preparers of the initial material, the skill set and the vigilance of the auditors kicking the tyres, and, of course, the regulators that need to enforce the rules to ensure people are producing meaningful material and not simply engaging in greenwashing (or faking it). 

The introduction of mandatory sustainability reporting for significant entities also raises another important question that the government needs to keep in mind when it comes to people who use information in order to determine whether to invest or withdraw funds from particular enterprises. 

Treasurer Jim Chalmers and Assistant Treasurer Stephen Jones have flagged that they want to move the existing financial reporting and auditing standard setters into one entity, along with the Financial Reporting Council. 

Users of financial information, such as CIOs and analysts in super funds, need to respond to proposals on the merger of these bodies when they are finally released because they need to be represented at a standard-setting table themselves, and not just by proxy by chief financial officers who have some involvement in preparing investor information packs for briefings. 

Collapsing three bodies into one brings into question representation issues. The current composition of the Australian Accounting Standards Board has been bulked up by the FRC with sustainability gurus from the major accounting firms, and the same is true for the auditing standards board. 

The AASB currently has only one person, Xero’s investment relations head Toby Langley, who can be identified as having the experience and background as a financial statement user, given his background in equities research as well as investor relations. 

It will be important that analysts, CIOs and people holding similar roles emphasise the importance of the interests of actual users of financial statements when the government’s proposed model is eventually exposed to the community beyond the thought bubble in a media release issued last year. 

Governments have a bad habit of screwing up renovation of standard-setting structures in Australia, and prominent advocacy for continuing representation of users of financial statements – not just preparers, advisers, and auditors – is vital. 

One comment on “Climate reporting changes a worry for CIOs and analysts”
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    Jason Warlond

    Interesting article. When firms see ESG reporting as a regulatory reporting requirement, they will gear up for the annual event. There may also be the potential to divest holdings of controversial stocks near reporting time to bolster ESG numbers such as carbon intensities. But imagine an environment / capability where a Fund issues its ESG numbers on a daily basis, along with its Fund Price. Whilst ESG metrics aren’t collected daily for every investment, the make up of the fund does vary daily. These metrics can be calculated daily. These could also include % holdings (direct and indirect) of ESG classifications such as Controversial Weapons, Fossil Fuels or Human Rights policies. These CAN be quantified now with the right data and solutions.

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