Mandatory climate reporting is rapidly becoming a standard requirement globally and in Australia, many companies are required to begin climate-related financial disclosures in early 2025. This shift is driving financial institutions to disclose their emissions and take decisive action in response to the pressing need for climate accountability.
Australian financial institutions are now considering risks, regulations, and potential opportunities in new markets associated with the transition to net-zero. The financial sector has traditionally been seen as slow to change, yet financial institutions are now setting the pace of sustainability progress with ripple effects on other industries. By funding technologies and industries supporting decarbonisation and influencing lending trends and consumer behaviour, the financial sector holds immense power over where capital is directed—and where it will have the biggest impact.
Why disclose emissions?
Australia has the ninth-highest emissions per capita in the world. When compared to its global peers, especially in Europe, Australia is at risk of falling considerably behind in sustainable lending and finance. Analysis conducted by KPMG found that Australian banks are still heavily focused on transition-related risks and risk management as opposed to leveraging opportunities. If Australian financial institutions don’t prioritise decarbonisation efforts and emissions reporting now, they risk missing market opportunities, damaging their reputation, and losing investments, with investors increasingly preferring organisations with sustainability measures in place.
Attracting investment in a competitive landscape
Financial institutions that demonstrate they are considering climate-related risks, changes, and strategic opportunities in their emissions reporting can position themselves as leaders in responsible finance.
A 2023 McKinsey report found that 85% of chief investment officers considered ESG factors important in their investment decisions. Driven by consumer demand and mandated reporting, companies are factoring in ESG considerations when choosing financial partners. Financial institutions with established reporting systems can attract customers looking to streamline their own reporting processes.
Related: How can CFOs of Australian financial institutions quantify the impact of ESG risks & opportunities?
Opening up new markets
Institutions with established measurement, management, and reporting processes are in a great position to consider investments in emerging sustainable technology, utilising green bonds, and securing early market shares in growing industries that support decarbonisation.
Emissions disclosure can help facilitate entry into emerging green markets. Australia will need to attract and invest almost $1.5 trillion by 2030 and $7 trillion by 2050 across high-emitting industries to cut emissions required for the net-zero 2050 goal. Traditionally high-emitting sectors like energy, manufacturing, and agriculture are looking at new technologies to progress towards the net-zero goal. There will be investment opportunities for financial institutions looking to capture early market share and capitalise on the shift towards decarbonisation.
Streamlining reporting and meeting compliance obligations
Proactive emissions disclosure can future-proof institutions against evolving regulatory requirements, pre-empting the need for adjustments and ensuring regulatory compliance for emissions. As the Australian Sustainability Reporting Standards (ASRS S1, ASRS S2, and ASRS 101) become the mandatory domestic reporting standards, financial institutions should consider their emissions reporting efficiencies and processes now to remain prepared.
The Australian Treasury’s 2023 Policy impact analysis considered the costs and benefits of mandatory climate-related financial disclosures. The analysis concluded that mandatory climate risk disclosure regime will lead to better risk management strategies, improve the transparency of decarbonisation efforts, and lead to more efficient allocation of capital when it comes to net-zero goals, with benefits expected to outweigh costs in the medium term.
Multiple studies, including a 2019 UTS report, have shown stakeholders in financial organisations raise general lack of understanding about ESG reporting as the major roadblock in building emissions accounting into standard reporting. Organisations with sufficient resources and continuous education on emissions reporting are better equipped to deal with risks and evolving compliance requirements.
Related: Navigating ESG disclosure and reporting regulations: A primer for CFOs
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Gaining competitive advantage
The shift towards a decarbonised economy is already underway. Financial institutions that set science-based emissions targets at the forefront of their operations can gain a competitive advantage in a crowded market.
Integrating sustainability considerations into investment decisions can help financial institutions gain new business from companies who are looking to prioritise their own ESG initiatives. As an example, many European banks like HSBC and Santander offer interest rate discounts and other incentives to partners that meet their ESG standards.
Consumers also prefer to do business with financial institutions that prioritise ESG factors. With sustainability increasingly valued by consumers and businesses alike, institutions that prioritise emissions disclosure can distinguish themselves as leaders in the move towards net-zero. This differentiation can translate into increased market share and revenue growth.
Improving risk management
A solid emissions disclosure strategy enables financial institutions to identify and mitigate climate-related physical and transition risks effectively and foresee potential pitfalls.
By integrating emissions data into risk assessment frameworks, financial institutions can conduct comprehensive scenario analyses. This allows them to evaluate the financial impacts of different climate scenarios, such as financial losses related to extreme weather events, and incorporate these insights into strategic planning.
It's essential to proactively assess transition risks by closely monitoring regulatory developments related to carbon and emissions taxes, particularly those affecting high-emitting industries. Staying ahead of potential policy changes enables financial institutions to adjust investment strategies accordingly, such as shifting investments towards lower-emission sectors.
Financial institutions should let their emissions data guide them in taking a proactive approach to risk management, ensuring long-term sustainability and climate resilience.
Enhancing brand reputation
Consumers are increasingly aware of climate-related risks and the urgency of decarbonisation, and are voting with their wallets.
With almost 40% of U.S. consumers reporting interest in enrolling in a climate-related financial product, having a transparent disclosure strategy in place can attract conscious consumers looking to make more sustainable financial decisions.
The financial sector has also seen its share of greenwashing. In 2023, ASIC warned Australian super funds about active investment greenwashing. Many Australian super funds have been justifying their investments in fossil fuel companies, like Woodside, by claiming that their role as shareholders allows them to push for fossil fuel companies to lower their emissions, whilst not delivering proof of this and instead increasing their investments.
Transparency and accountability on emissions and climate-related claims will help protect financial institutions from greenwashing claims and reputational damage with increasing regulation and oversight.
How Sustain.Life can help simplify your emissions reporting
Australian financial institutions need to act now to ensure their reporting is up to date when Australian Sustainability Reporting Standards (based on International Financial Reporting Standards, IFRS S1 and IFRS S2) become the mandatory reporting standards in Australia.
Sustain.Life brings your emissions accounting into a single platform and offers you the tools to measure, manage, and report on your emissions. Sustain.Life helps you track your journey towards decarbonisation by giving you the tools to measure your carbon footprint, set science-based targets, prepare for audits and verification, select vetted offsets, and integrate existing suppliers and partner data to a single platform.
Get in touch with Sustain.Life and start your journey towards net-zero today.
Sources
1. The Treasury, “Mandatory climate-related financial disclosures,” https://treasury.gov.au/sites/default/files/2024-01/c2024-466491-policy-state.pdf Accessed on June 5, 2024
2. KPMG, “Banking on the climate transition,” https://assets.kpmg.com/content/dam/kpmg/au/pdf/2023/banking-on-the-climate-transition.pdf Accessed on June 5, 2024
3. McKinsey & Company, “Investors want to hear from companies about the value of sustainability,” https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/investors-want-to-hear-from-companies-about-the-value-of-sustainability# Accessed on June 5, 2024
4. University of Technology Sydney, “Unlocking Australia’s Sustainable Finance Potential,” https://www.uts.edu.au/sites/default/files/2019-06/Unlocking%20Sustainable%20Finance.pdf Accessed on June 5, 2024
5. The Treasury, “Policy impact analysis: climate-related financial disclosures,” https://treasury.gov.au/sites/default/files/2024-01/c2024-466491-pia.pdf Accessed on June 5, 2024
6. McKinsey & Company, “Green growth: Unlocking sustainability opportunities for retail banks,” https://www.mckinsey.com/capabilities/sustainability/our-insights/green-growth-unlocking-sustainability-opportunities-for-retail-banks Accessed on June 5, 2024
7. Australian Financial Review, “ASIC puts super funds on notice about active investment ‘greenwashing’,” https://www.afr.com/policy/tax-and-super/asic-puts-super-funds-on-notice-about-active-investment-greenwashing-20230911-p5e3o0 Accessed on June 5, 2024
