People are becoming increasingly more sceptical about the effectiveness of ESG frameworks. This has led to a movement that demands more specific and measurable sustainability goals that are critical drivers of business success.
At a minimum, it’s mandatory for most large financial institutions to complete climate disclosures under ‘stream 1’ of the Commonwealth Climate Disclosure Policy. This expectation goes beyond mere obligations, though. Many companies, particularly those in the finance sector, now find themselves increasingly under the scrutiny of stakeholders demanding transparency and accountability—with a PwC global survey finding that 50% of investors are willing to divest from companies that don’t take sufficient action.
As a result, many chief financial officers are tasked with navigating the intricate web of evolving ESG disclosure and reporting regulations. As the custodians of financial integrity within their organisations, CFOs hold considerable influence over how their organisations engage with ESG issues. It’s also about balancing risk, as climate change poses a very real risk for company performance that CFOs need to take into consideration. However, with regulatory frameworks constantly evolving and expectations from stakeholders mounting, the path can feel far from straightforward.
The growing importance of ESG considerations
ESG factors encompass a spectrum of issues, ranging from climate change and resource management to social equity and corporate governance. These days, they’re no longer confined to the realm of corporate social responsibility reports. Likewise, they don’t solely exist on the to-do lists of ESG managers. They manifest in just about every facet of business operations in the finance industry—influencing investment decisions, customer preferences, and the day-to-day.
The significance of ESG considerations can’t be overstated. Beyond the environmental and social imperatives, integrating ESG factors into financial decision-making is increasingly recognised as a key driver of long-term value creation and risk mitigation. From assessing climate-related risks to evaluating the social impact of investments, CFOs need to take action and acknowledge that financial performance and ESG performance are inextricably linked. And, understand that greater transparency when it comes to disclosure in the finance sector produces a higher ESG rating for financial institutions.
Understanding the regulatory environment in Australia
In Australia, the regulatory framework governing ESG disclosures and reporting requirements is multifaceted. This is because it reflects the diverse array of standards and guidelines established by both national and international bodies.
ISSB Standards
Leading global efforts to standardise sustainability reporting is the International Sustainability Standards Board (ISSB). This independent standard-setting body has recently developed a comprehensive set of global sustainability reporting standards aimed at enhancing the consistency, comparability, and reliability of ESG disclosures.
ISSB’s Sustainability Standards are the latest, and soon to be, most important frameworks planned in the sustainability reporting space, released in June 2023 with mandated reporting beginning in mid-2024.
The ISSB standards are made up of two parts: IFRS S1 and IFRS S2, short for International Financial Reporting Standards, Sustainability 1 and 2.
The standards cover similar topics, with some key differences. S1 focuses on climate-related disclosures, while S2 addresses broader sustainability-related disclosures, including scope 1, 2, and 3 emissions. For the financial sector, these standards seek to align financial reporting with sustainability reporting, providing investors with a more holistic view of a company's performance.
Australian Sustainability Reporting Standards (ASRS)
On 23 October 2023, the Australian Accounting Standards Board released the draft Australian Sustainability Reporting Standards. These standards are the Australian adoption of the ISSB Standards.
The key difference between the two standards is that ASRS is centred on disclosures related to climate change, instead of the broader sustainability-related disclosures outlined in the ISSB standards.
The ASSB has presented these as three separate standards. Here's a breakdown of each:
ASRS 1: General Requirements for Disclosure of Climate-related Financial Information (similar to IFRS S1).
ASRS 2: Climate-related financial disclosures (similar to IFRS S2).
ASRS 101: References (relevant versions of non-legislative documents published in Australia, and any other documents referenced in the ASRS Standards).
Overall, organisations will need to report on the following:
Governance: This involves the processes, controls, and procedures used to oversee climate-related risks and opportunities, including:
- Details about governance bodies or individuals overseeing these risks and opportunities.
- Management's role in governing processes related to climate risks.
Strategy: This covers the approach to managing climate risks and opportunities, including:
- Identification of relevant climate-related risks and opportunities.
- The impact of these risks and opportunities on the business model, value chain, and decision-making.
- Financial effects and planning considering climate-related risks.
- The resilience of an organisation’s strategy against climate risks.
Risk management: This focuses on processes for identifying, assessing, and monitoring climate-related risks and opportunities.
Metrics and targets: Performance in managing climate-related risks and opportunities, including progress towards set targets and assessment against climate-related metrics.
The CDP questionnaire
The CDP questionnaire is the world's most-used sustainable reporting tool that can help you better understand your organisation’s climate impact. Though it isn’t a mandatory reporting tool, it’s worth noting due to its global proliferation and its ability to help organisations better understand their climate impact and emissions.
The 2024 questionnaire has been designed to be more integrated and interoperable with other reporting frameworks, making the disclosure and reporting process more streamlined. This interoperability is critical for financial institutions facing diverse stakeholder pressure and other drivers to disclose.
Continuing to disclose via CDP will equip your organisation with a robust data strategy, and encourage stakeholder engagement in your disclosure program.
Common challenges faced during ESG disclosure and reporting
Despite the growing recognition of the importance of ESG considerations, CFOs in the finance sector encounter a number of challenges in adapting to ESG reporting requirements. These include:
- The complexity of integration with financial reporting: Integrating ESG reporting with financial reporting processes poses logistical challenges, requiring CFOs to ensure consistency and accuracy in their disclosures while adhering to established accounting principles. If CFOs aren’t using a carbon accounting platform that integrates with financial systems or their ERP, it can be hard to report with confidence when it comes time to disclose sustainable behaviours.
- Complexity of standards: The proliferation of ESG reporting standards and frameworks can be overwhelming. This makes it difficult to navigate the maze of requirements and determine which ones are most relevant to your organisation.
- A misunderstanding of the goals behind ESG disclosure and reporting: Because of how sporadic the implementation of reporting standards in Australia has been, many companies have resorted to developing their own ESG compliance policies and practices that focus on short-term effects instead of long-term risks and opportunities. A well-thought-out ESG strategy not only helps with managing short-term shocks, but also supports the long-term transition to a low-carbon and resource-efficient way of operating.
- Trouble managing data collection and verification: Gathering and verifying ESG data can be a mammoth task, especially for organisations with sprawling operations or limited resources dedicated to sustainability reporting. For organisations that don’t make use of carbon accounting platforms like Sustain.Life, their method of data collection and management often involves multiple spreadsheets and documents, and a lack of streamlined processes.
- Navigating stakeholder expectations: Meeting the diverse expectations of stakeholders—including investors, regulators, customers, and employees—regarding ESG disclosures can be demanding and time-consuming, requiring you to strike a delicate balance between transparency and confidentiality. Because of the rates at which greenwashing happens, where corporate entities promote their compliance with certain standards (often created and implemented internally, with no-third party endorsement) to seem as if they are complying with more rigorous standards, stakeholders are asking for more clarity and scrutiny as to how implementing ESG factors affects their finances.
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How CFOs can effectively navigate ESG and reporting regulations
So, how can CFOs effectively navigate evolving ESG disclosure and reporting regulations? There are a few steps that can be implemented to help gain a more holistic understanding of the disclosure and reporting, including:
- Understand which reporting group of the ISSB and ASR standards your organisation falls into
Many Australian financial institutions are part of the “large company” reporting group, identified as meeting two of the following three thresholds: having over 500 employees, a value of consolidated gross assets $1B or more, and a consolidated revenue of $500M or more. Mandated reporting for this group begins in 2024.
The other two reporting groups are medium companies (who begin reporting in 2026, and meet two of the following three thresholds: over 250 employees, value of consolidated gross assets $500M or more, and a consolidated revenue $200M or more) and small companies (who begin reporting in 2027, and meet two of the following three thresholds: over 100 employees, value of consolidated gross assets $25M or more, and a consolidated revenue $50M or more). - Monitor regulatory developments
The shifting goal-posts of ESG disclosure and reporting expectations can often be difficult to keep pace with, especially as more robust standards and procedures are implemented in Australia. Stay informed about developments in ESG reporting standards, regulations, and best practices—both domestically and internationally—by keeping up-to-date with government media releases and policy framework updates, as well as advisory boards and industry regulators such as APRA, ASIC, ACCC, and CFR. It’s important to proactively monitor changes in regulatory requirements and adjust your ESG reporting strategy accordingly to not only keep compliant, but also stay ahead of emerging trends.
- Utilise external expertise and strengthen your data management approach
Consider partnering with specialised ESG service providers to navigate complex reporting requirements, address specific challenges, and adopt best practices. Partnering with a sustainability software platform like Sustain.Life can help you streamline your disclosure, properly account for emissions, and generate audit ready reports that gives you confidence and peace of mind when it comes time to disclose your emissions.
Sources
1. Australian Government Department of Finance, “Commonwealth Climate Disclosure Policy,” https://www.finance.gov.au/government/climate-action-government-operations/commonwealth-climate-disclosure-policy Accessed on May 24, 2024
2. PwC Australia, “CFOs and ESG: A growing role,” https://www.pwc.com.au/assurance/esg-reporting/cfos-and-esg-a-growing-role.html Accessed on May 24, 2024
3. Research in International Business and Finance, “ESG in the financial industry: What matters for rating analysts?,” https://doi.org/10.1016/j.ribaf.2023.102045. Accessed on May 24, 2024
4. Australian Accounting Standards Board, “Climate-related financial disclosure,” https://aasb.gov.au/media/5jmkf3er/ps_climate_03-23.pdf Accessed on May 24, 2024
5. K&L Gates, “The State of ESG Reporting in Australia,” https://www.klgates.com/The-State-of-ESG-Reporting-in-Australia-12-15-2022, Accessed on May 24, 2024
