ESG standards are changing. What’s the impact on business?
With new ESG reporting requirements rapidly developing, Australian businesses must start to prioritise integrating climate-related data sooner rather than later
In today's fast-changing business world, Environmental, Social, and Governance (ESG) standards have become a focal point, driving governments and organisations around the globe to improve their transparency and dedication to environmental responsibility. Rigorous ESG standards not only prompt companies to recognise their impact on people and the planet but also provide a means to proactively address them by blending finance and the broader impact of the business. With this in mind, ESG reporting's alignment with investor interests and integrating financial and non-financial data are becoming pivotal aspects of modern corporate reporting.
With draft regulatory changes proposing to mandate more rigorous ESG reporting in Australia, what will the impact be on businesses, and how can they prepare? Recently, UNSW Business School’s Professor Paul Andon spoke with Aletta Boshoff, Advisory Partner and National Leader of IFRS, Corporate Reporting & Sustainability at BDO, and Brendan O’Dwyer, Professor of Accounting at UNSW Business School and the University of Amsterdam, about what businesses can expect from the proposed changes to mandate reporting.
Australia’s changing ESG regulatory landscape
ESG standards are changing worldwide, and Australia is no exception. In June 2023, the Australian government initiated steps to make ESG reporting mandatory for major companies and financial institutions, which is expected to start in 2024. The Australian Treasury is also leading in formulating a comprehensive sustainable finance framework, aligning with the government's pledge to attain net-zero emissions by 2050.
As part of the recent changes, the Australian Accounting Standards Board (AASB) issued an Exposure Draft, ED SR1, which centres on divulging climate-related financial particulars. This draft introduces three envisioned Australian Sustainability Reporting Standards (ASRS Standards), with a pronounced focus on climate-related financial data. Stakeholders and parties can offer input on ED SR1 until March 1, 2024.
“June was a big milestone month in Australia for sustainability reporting,” explained Ms Boshoff. In a nutshell, she explained that the proposed changes mean large companies will have to start preparing for mandatory reporting on sustainability beginning from the financial year 2024-2025. And as Australian regulators increasingly align with global norms, she said it will significantly affect how large organisations report information.
Numerous international markets have already adopted parallel regulations, underpinning Australia's drive to furnish investors and regulatory bodies with reliable and analogous data concerning financial risks that are tied to climate change. While these regulatory changes are well-intentioned, Professor O’Dwyer raised a critical point: the challenge of harmonising sustainability and related climate reporting standards between Australia and Europe and the need to address “interoperability” issues in practice.
According to Professor O’Dwyer, there is a need for interoperability among these standards and regulations to reduce complexity for companies. Interoperability, he explained, aims to uncover alignment between respective disclosure requirements in overlapping standards to reduce complexity and duplication for entities wishing to apply the different standards.
While there are claims of increased interoperability, he said achieving such alignment may be complicated and challenging for many organisations, primarily as European regulations encompass various ESG aspects beyond climate. Companies must seek simplicity and clarity in ESG reporting to avoid unnecessary work and resource allocation duplication.
He explained that there are differences and challenges between Australia and Europe regarding aligning their sustainability and climate reporting standards and that we, in Australia, are slowly starting to catch up to the rest of the world.
The challenge of integrating financial and non-financial information
Unlike traditional, separate annual and sustainability reporting, integrated reports disclose and connect financial, social, and governance inputs and performance information. They improve transparency of a company's social responsibilities and help demonstrate how a company creates social value over time.
Both Ms Boshoff and Professor O’Dwyer discussed the challenge of integrating non-financial ESG data with more traditional financial reporting. They also emphasised the importance of merging these elements for more comprehensive corporate reporting, especially since sustainability and addressing carbon emissions directly impact on financial statements, such as asset values, liabilities, income, expenses, and, more broadly, on business models.
“Sustainability reporting is not separate and unconnected from the numbers in the financial statements. It's got an impact on these numbers that investors care about,” said Ms Boshoff. “And that is how these risks and opportunities and numbers and carbon footprint impact values of assets in the balance sheet,” she said.
“The other thing is that many people think that sustainability and all these things add costs. But it's a good way to revisit your way of operating. And your business model shouldn't always add cost.”
For example, in Australia, directors are already expected to include sustainability information, including climate risks and opportunities, in the Operating and Financial Review (OFR) section of the director's report. “We need you to disclose business risks, where you have opportunities, and recently ASIC has gone as far as to say, we want you to include climate risks and opportunities, we want you to include how you're dealing with transitioning to carbon reduction to a low carbon economy.”
“That is the place for directors to put it in perspective. And to comment on it as they do with other business risks and opportunities, which are somewhat forward-looking,” explained Professor O’Dwyer.
Practical tips for business
Since some Australian companies are subsidiaries of the European Union, they will come under the realm of this regulation because of their size and activities within the European context, explained Professor O’Dwyer. “So, when I talk about European legal requirements to various individuals in Australia, they often say, 'Well, yeah, that's Europe. But unfortunately, or fortunately, for some of you, this will also mean increased complexity here in Australia,” he said.
As businesses strive to meet evolving global standards, they must uncover new opportunities to improve their operations and demonstrate their commitment to sustainability and corporate responsibility.
So, what can they do now to ensure they don’t fall behind? Ms Boshoff suggested not waiting until it’s too late to implement changes. “When we look at accounting standards, people tend to wait until it's mandatory at the end of the financial reporting period and try and solve it between the reporting date and the date they issue their financials,” she said.
“Organisations must measure the carbon footprint, scope one, scope two, and scope three. And as you know, there are problems there. It's difficult; it's not data that is generally collected. We need systems and processes,” she said.
“So, to go back in time and gather this information will be tough. You must look at climate risk and the potential risk for your business. So, for example, are you subject to transition risk if you've got buildings, flood zones, fire zones, or all those natural disasters?
“If you've got a high carbon footprint, you must reduce that transition to a low carbon economy. Is that something in your industry in your business? Now, all of that, you must start with a baseline and be able to set targets. And I think the biggest problem is to measure your carbon footprint,” she concluded.