The clock is ticking, and time is running out for legislators and standard setters to push through the necessary rules to ensure that the Albanese Government’s policy objective of getting mandatory climate-related financial disclosure happening by 1 January 2025 is met.
Proposed amendments to the Corporations Act and associated legislation that set out the reporting regime for affected companies are parked in neutral in the Senate and standard setters on the Australian Accounting Standards Board are hoping to push necessary guidance out through their sausage machine by the end of August.
This is, at the very least, raising concerns among associations within the financial services sector, as well as politicians in Canberra, that a regime that will increase compliance costs is going to provide preparers and users of climate risk information with an unneeded headache.
The fact neither set of rules is published in a final form contributes to uncertainty in the marketplace regardless of the fact that there have been documents in the public domain that give companies, their internal compliance gurus, investor relations people, and their boards a fair appraisal of what the final product might look like.
Those who watch companies closely to determine whether the stock is a buy, hold or sell on the basis of an entity’s overall declaration of the risks it faces can at least take some comfort from the fact that the documents on which the new rules are based have been out for some time.
KPMG partner Julia Bilyanska tells Investment Magazine that these documents can be used by entities in their planning.
Even without guidance
Bilyanska says that key tasks can be undertaken by companies that are behind in planning even without the guidance being finalised. These include establishing multidisciplinary teams to ensure that management in an entity knows what information is required; how much work is needed to generate it; and how that information will need to be communicated to boards of directors and investor relations personnel, institutional investors, shareholders more generally, and, of course, the media that needs to translate this material for a larger, often unsophisticated audience.
Each cohort mentioned above will need information tailored to suit their demands. Internal stakeholders such as directors will require more detail to understand how the new reporting methods impact the way an entity looks to outsiders.
Directors will also need to understand how much the new regime is going to cost the entity in order for it to attract the inflow from the rivers of investment gold because they provide more detail on risks associated with climate.
Consider the costs outlined in the policy impact analysis document released by the Treasury when the draft of the legislation was released for comment.
Treasury anticipates $1 million to $1.3 million in initial transition costs per year per entity required to comply with the new regime, and that the policy has “a number of benefits that are difficult to quantify, including reducing the cost of capital for these entities”.
Costs after initial transition are expected, according to Treasury, to stabilise over time and go from the $1 million to $1.3 million, to $500,000 to $700,000 per firm.
These costs and the absence of benefits from raising capital in the case of private companies have been raised by a range of accounting firms such as Nexia, and also representative bodies such as the Governance Institute of Australia.
Shadow Treasurer Angus Taylor tells Investment Magazine the coalition is also concerned about the compliance costs falling on small to medium businesses that may be caught by the regime.
“As drafted, this legislation has world-leading compliance costs and will have particularly onerous impact for small and medium businesses who are essential to a strong economy,” Taylor says.
Impenetrable jargon
External stakeholders will need assistance to decode the data that gets presented to them because, frankly, the areas of finance and sustainability are cloaked in what will, to non-experts, be alienating, impenetrable jargon only capable of being understood by technocrats.
How safe is it dealing with drafts on the run?
Reliance on draft documents setting out the new regime that was previously exposed for public comment is risky because those documents can be changed on the run by politicians on the floor of parliament.
Negotiations such as these occur in a pressured environment and mistakes can make their way into law even if the people involved in making those amendments on the floor of parliament are well-meaning.
Bodies such as the Association of Superannuation Funds of Australia are backing the new regime as a part of encouraging investment in environmentally friendly entities, but they do hold concerns about legislation being rushed through parliament.
“Any new corporate regulation has potentially far-reaching consequences for the Australian economy,” Mary Delahunty, ASFA’s chief executive officer, tells Investment Magazine.
“If legislation is rushed and legislators get it wrong, it will disincentivise green investment and disrupt the transition to net zero.”
Delahunty’s concerns about the impact of rushed legislation creating problems for the transition to green investment come at a time when another part of the financial services sector – the tax agent cohort – is having to deal with the result of a law that was passed in parliament rather quickly without proper consultation.
Tax agents now have more stringent requirements to report what they believe to be significant breaches of the code of professional conduct embedded in law as well as a new determination that has the accounting world up in arms after the government negotiated with the Australian Greens and not professionals.
Treasury recently told the Senate that no external consultation is undertaken if legislation is going through the parliamentary meat grinder.
In other words, there are no guarantees that the law on climate reporting will remain in the form as exposed for public comment to stakeholders that need to do the work.
The delays in the passage of legislation and the finalisation of the accounting standard, and the recent precedent of new rules being added without industry consultation in other policy areas add strength to the argument that the climate reporting regime ought to be delayed further so the companies and those that invest in them have certainty.
