Preparing for the climate reporting revolution: A guide for directors

With the intersection of climate change and business operations becoming ever more critical, company leaders must ensure that the transition towards a decarbonised economy is embedded in their strategic vision. This goes beyond the traditional boundaries of corporate reporting, reaching into the heart of risk management, business model innovation, and stakeholder engagement.

But how do company directors ready themselves for the impending regulatory requirements?

The imperative of readiness

Preparing for the new Australian Sustainability Reporting Standards, promulgated by the International Sustainability Standards Board (ISSB) standards, is daunting yet presents a strategic opportunity. Directors proactive in this phase will position their organisations for resilience and trust in a net-zero economy.

Key points for directors are:

1. The imminence of mandatory climate reporting: The ISSB is about to release its first set of standards, with general sustainability and climate-focused standards anticipated by mid-2023. Australia’s Treasury Consultation Paper on Climate Reporting points to a 2024/2025 commencement for mandatory climate reporting, initially targeting major listed companies and financial institutions, though potentially expanding in scope.
2. Heightened stakeholder examination: Climate reporting will draw significant scrutiny from regulators, investors, and stakeholders, necessitating expert guidance for directors to steer through complex legalities.
3. Blueprint of the reporting framework: Despite lingering uncertainties regarding initial applicability, timelines, and Scope 3 emissions regulation, the main expectations of the framework are established, extending beyond the Task Force on Climate-related Financial Disclosures (TCFD).
4. The necessity of early preparation: The window for adopting new reporting obligations is likely narrow, demanding diligent attention from boards and management. Directors should perceive the disclosure and comparability this brings as opportunities for market differentiation, not as compliance burdens.
5. Strategic preparatory actions: Boards should now evaluate governance structures for clear responsibilities, craft measurable sustainability and climate strategies, and identify current vs future resource, data, and disclosure gaps.

Proposal for a defined route to mandatory reporting

The ISSB proposes two standards for sustainability reporting that will set the global benchmark for sustainability-related financial disclosures, responding to the financial report users’ calls for insight into material sustainability risks and opportunities impacting financial outlooks.

Recognising the opportunities that reporting presents

The upcoming ISSB framework offers directors both challenges and potential gains. The threat of greenwashing – the overstatement of ESG credentials – must be weighed against the perils of green-hushing –underreporting due to the fear of overstatement. It’s a balance of maintaining authenticity and seizing the competitive edge that comes with a demonstrable commitment to sustainable practices.

Managing legal risks

The transition to ISSB-compliant reporting will necessitate substantial skill enhancement for many organisations. 

Directors must navigate this shift, balancing the need for thorough market disclosures with managing legal liabilities from regulators and investors.

The evolving role of the company board

Historically, directors have focused on internal strategy and risk oversight, with sustainability reporting often secondary. 

The market now demands more substantial, decision-useful information. Directors need to appreciate the financial implications of sustainability risks to effectively guide their companies through the ISSB’s forthcoming mandates.

As Australian companies anticipate the ISSB’s definitive reporting standards, the role of directors becomes increasingly multifaceted. Now is the moment for board members to fully grasp the implications of these changes, both for their business strategies and financial reporting. With the standards on the horizon, it is imperative for directors to evolve in their thinking and to prepare for disclosures that will increasingly shape industry norms and expectations.

Where to from here?

Some Australian businesses have already embarked on the preparatory journey, leveraging their extant sustainability disclosures such as emissions data, health & safety records, and modern slavery reports as a foundation. However, the mandates set forth by the ISSB, coupled with the expected Australian regulations, promise to be more comprehensive and far-reaching. 

What stands unequivocally clear amidst these impending changes is the necessity for substantial and proactive preparation. Initiating this process at the earliest opportunity is not just advisable but critical for seamless adaptation and strategic foresight. Directors who steer their organizations to anticipate these requirements will be at the vanguard, setting a precedent for corporate stewardship in the new age of sustainability reporting.