Clarity in financial reporting – October 2023 monthly newsletter

Understand key elements of the AASB’s climate exposure draft which is expected to be released shortly

The AASB has released its Action Alert from its meeting held on 11 October 2023.  The Action Alert provides information on Exposure Draft ED SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information which will be published shortly. 

The Exposure Draft will include three proposed Australian Sustainability Reporting Standards (ASRS):

• ASRS 1 General Requirements for Disclosure of Climate-related Financial Information  which is based on IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.  Based on previous AASB decisions, this standard would be ‘climatised’ to only apply to climate-related sustainability information
• ASRS 2 Climate-related Financial Disclosures, which is based on IFRS S2 Climate-related Disclosures.  The scope of this standard would be limited to climate-related risks and opportunities related to climate change and not include other climate-related emissions that are not greenhouse gas emissions
• ASRS 101 References in Australian Sustainability Reporting Standards, which would operate as a ‘service standard’ to give legal effect to references to various other documents (in a similar way to AASB 1048 Interpretation of Standards).

In addition to the decisions announced in our September 2023 newsletter, the Action Alert notes additional AASB decisions, including:

• Requiring the conversion of greenhouse gases into a CO2 equivalent value using the same warming potential values from the   Intergovernmental Panel on Climate Change assessment report as that applying under the Paris Agreement and the National Greenhouse and Energy Reporting Act 2007 and related regulations (NGER)
• Requiring the prioritisation of relevant NGER methodologies for measuring greenhouse gas emissions before referring to foreign measurement frameworks
• Permitting the use of scope 3 greenhouse gas emissions using data from the immediately preceding period, if reasonable and supportable data related to the current reporting period is not available to the entity without undue cost or effort
• Requiring an entity to undertake climate resilience assessments against at least two possible future states, one of which must be consistent with the most ambitious global temperature goal set out in the Climate Change Act 2022 (i.e. 1.5% above pre-industrial levels)
• Requiring an entity to disclose market-based* scope 2 greenhouse gas emissions, with transitional relief for the first three annual reporting periods in which the entity applies ASRS 2.

(*The market-based method under the NGER takes account of renewable electricity as represented by the surrender of Renewable Energy Certificates or the purchase of ‘GreenPower’ electricity from an accredited ‘GreenPower Provider’.  This measure is in addition to the location-based method which reflects the average emissions intensity of the grids on which energy consumption occurs.)

We will provide more information and analysis in our November 2023 newsletter.

Attend our Client financial reporting update sessions being held around the country and virtually during November and December 2023.  Hear about the transition to mandatory climate and sustainability reporting in Australia and globally, and understand the key focus areas for the next reporting cycle.

View dates and register here

Be aware of new voluntary guidance on nature-related sustainability disclosures that may be used for the ISSB’s future projects

The Taskforce on Nature-related Financial Disclosures (TNFD) has published final Recommendations and guidance for entities to report and act on evolving nature-related dependencies, impacts, risks and opportunities.

The TNFD Recommendations are structured around four pillars – governance, strategy, risk and impact management, and metrics and targets – consistent with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB).

The Recommendations contain 14 recommended disclosures across the four pillars, which are largely consistent with  the TCFD and ISSB requirements.

The disclosure metrics consist of ‘core global metrics’ (applying to all sectors) and ‘core sector metrics’ for each sector, disclosed on a comply or explain basis.  The core global indicators and metrics cover:

• Land, freshwater and ocean-use change – the total spatial footprint and extent of change
• Pollution and pollution removal – pollutants released to soil split by type, wastewater discharged, waste generation and disposal, plastic pollution and non-greenhouse gas air pollutants
• Resource use and replenishment – water withdrawal and consumption from areas of water scarcity and quantity of high-risk natural commodities sourced from land, ocean and freshwater
• Invasive alien species and other – measures against unintentional introduction of invasive alien species, ecosystem condition and species extinction risks.

The core metrics are supplemented by a larger set of additional disclosure and assessment metrics which preparers can use for assessment and disclosure if considered relevant and helpful.

The TNFD Recommendations were launched at the September 2023 Climate Week NYC and their adoption is voluntary.  A recent survey of the TNFD Forum indicated that nearly 90% of 239 respondents may start reporting on the Recommendations by calendar year 2026.

The ISSB congratulated the TNFD on finalisation of the Recommendations and indicated it will look to those Recommendations in its future work.  The ISSB’s recent agenda consultation included a potential project on biodiversity, ecosystems and ecosystem services and the ISSB will finalise its workplan in 2024 after considering responses to the consultation.

Sue Lloyd, Vice-chair of the ISSB said:

“We will consider the TNFD’s work—subject to the outcome of our recent consultation on future priorities—as we strive to simplify the disclosure landscape to deliver consistent, comprehensive sustainability-related disclosure for investors.”

More information:

• IAS Plus article TNFD recommendations on nature-related issues published
• Recommendations of the Taskforce on Nature-related Financial Disclosures (September 2023)
• Executive summary of the TNFD Recommendations
• Getting started with adoption of the TNFD Recommendations
• Sector guidance: Additional guidance for financial institutions
• TNFD Glossary.                                                                                                                                                                                                                  

Read our joint AICD/Deloitte/MinterEllison publication to understand the key reporting, legal and other considerations of mandatory climate reporting

Deloitte, working as part of the Climate Governance Initiative (CGI) together with the Australian Institute of Company Directors (AICD) and MinterEllison, has launched a key resource to help directors understand and prepare for mandatory climate-related financial disclosures.

The publication, A director’s guide to mandatory climate reporting is designed to assist directors and organisations to respond to the imminent introduction of this new  component of corporate reporting.

The guide:

• Outlines the proposed Australian mandatory climate-related reporting framework
• Sets out key legal obligations for directors
• Provides practical steps directors can take to ready their organisations for the commencement of the mandatory climate reporting regime.

A Snapshot accompanies the detailed guide, and a series of fact sheets is also available, providing more detailed analysis of key topics.

Be aware of important developments 

Global sustainability reporting measures impacting certain Australian entities

Australian entities with global operations should be aware of new sustainability reporting measures that effectively operate on a global scale:

• European Sustainability Reporting Standards (ESRS).  In late July 2023, the ESRS were finalised and adopted by the European Commission.  The ESRS will be used by entities reporting under the European Union Corporate Sustainability Reporting Directive (CSRD), which will be progressively required over the 2024-2028 period.  Australian entities listed in the European Union, or that have operations in Europe, may be within scope (subject to revenue thresholds in some cases) and be required to report under the ESRS on their consolidated operations at the global ultimate parent level.  For more information, see iGAAP in Focus European Sustainability Reporting Standards finalised and iGAAP in Focus Worldwide reach of the Corporate Sustainability Reporting Directive – final text published in Official Journal.  A new iGAAP chapter covering EU sustainability reporting (subscription required) is also now available
• Californian Climate Corporate Data Accountability and Greenhouse gases: climate-related financial risks bills.  Entities that have United States incorporated subsidiaries that have operations in the state of California may be impacted by new sustainability disclosure requirements being introduced by the Californian legislature.  Under bill SB-253, various entities incorporated under United States law doing business in California where revenue exceeds a US $1 billion threshold will be required to publicly disclose their scope 1 and scope 2 emissions from 2025 and scope 3 greenhouse gas emissions from 2027.  Bill SB-261 would require entities with more than US $500 million in revenue to prepare a climate-related financial risk report on a biennial basis from 2026.  For more information, see Heads Up #DeloitteESGNow – The Sweeping Impacts of California’s Climate Legislation.

Updated ASIC Corporations Instruments

ASIC has remade a number of Corporations Instruments, replacing Class Orders or other instruments that were due to automatically ‘sunset’ on 1 October 2023.  Entities should refer to the most recent version of the instruments in financial reports and other documents.

The new instruments cover:

• Reporting by stapled entities.  ASIC Corporations (Financial Reporting by Stapled Entities) Instrument 2023/673 allows stapled entities which are disclosing entities to present combined financial statements or consolidated financial statements of the stapled group where they have prepared combined financial statements or consolidated financial statements for a previous reporting period.  This relief is substantially the same as the previous instrument (ASIC Class Order [CO 13/1050])
• Australian financial services licensees and platforms.  Four instruments have been remade in relation to responsible entities, operators of investor directed portfolio services (IDPS) and retail CCIVs.  The revised instruments are largely consistent with previous requirements.  Whilst primarily focused on financial services regulatory requirements, some instruments contain explicit reporting requirements.  More details can be found in ASIC media release 23-247MR ASIC issues new legislative instruments for financial resource requirements and platforms.

Corporations Act 2001 amendments to consider

Parliament has recently passed legislation that impacts financial reporting:

• Treasury Laws Amendment (Modernising Business Communications and Other Measures) Act 2023.  This Act amends the Corporations Act 2001 to enable all documents under the Act to be signed electronically and for certain documents to be sent in either hard copy or electronic form.  It also provides that companies are not required to send document to a member where contact details are known to be incorrect
• Treasury Laws Amendment (2023 Law Improvement Package No.1) Act 2023.  This Act amends various acts to simplify wording, clarify meanings and to make minor changes throughout, including to financial reporting.  These amendments are a partial response to the Review of the Legislative Framework for Corporations and Financial Services Legislation.  The measures have minor impacts, e.g. clarifying how terms are to be interpreted, but otherwise are mostly innocuous.  Care should be taken to refer to the latest version of the Corporations Act 2001.