“For most, this is a really big, pull up your socks moment,” said Meg Fricke (pictured above), EY’s Melbourne-based climate change and sustainability services partner.
On Friday, Australia will pass another milestone on the way to compulsory climate-related financial disclosures. Following the International Sustainability Standards Board’s (IISB) release of sustainability and climate-related standards – called IFRS S1 and IFRS S2 – last month, Treasury announced a second round of public consultations.
The consultation period ends this week. In a timeline, Treasury’s consultation paper said the implementation of some of the new climate reporting standards will start next financial year.
“The key takeaway from the release is the short transition timeframe that Australian businesses will be subject to – starting FY25 for the largest companies – and the ramp-up of assurance requirements each year,” said Fricke, who is on the Australian Accounting Standards Board (AASB) Sustainability Reporting Advisory Panel.
In an interview conducted just before Treasury’s announcement, Fricke said these ISSB developments represent one of the most significant shifts in financial reporting in over one hundred years.
“This shift is a really big change in the way an organization thinks about the value that they create and have within their organization,” Fricke said.
She said financial reporting is about to move to a “much wider lens of value” and over different time horizons than before.
“The ISSB talks about impacts on enterprise value over the short, medium and long term and understanding your sustainability-related risks and opportunities,” said Fricke.
She said the standards are written with an investor audience in mind and represent a “shift in integration” within an organisation because they enforce the integration of financial and non-financial reporting.
“Investors have already been driving companies to understand where there are significant climate risks, for example, that impact financial performance,” said Fricke. “So the standards are really requiring companies to understand that connection between financial performance based on what these future non-financial risks and opportunities might be to the business.”
She said the ISSB’s four pillars of governance strategy, risk management, metrics and targets are an indication of how big this shift will be for companies.
“It’s not just about changing the numbers in a financial report, it’s the understanding and the integration and demonstrating that you've got appropriate governance, that you have a strategy to manage these risks and wholesale change within an organization, as opposed to just extra reporting,” Fricke said.
After trailing behind in adopting climate-related financial disclosures, EY’s climate disclosure expert said Australia is now among the leaders.
“Australia, who in some ways was a little bit behind, has now definitely caught up and been one of the first countries to say that they're going to align to ISSB,” Fricke said.
However, New Zealand has already adopted a slightly different set of international climate-related financial reporting standards. Those standards were based on recommendations released by the Task Force for Climate Financial Disclosure (TCFD) in 2017. That organisation has since become part of the ISSB.
“These standards are very similar in terms of their overarching structure,” Fricke said.
For example, she said, both sets of standards are based around “four pillars” and ask companies to understand and report on their climate related risks and opportunities and explain their strategy for managing them including the use of metrics and targets.
Fricke said each country is expected to adapt these international standards to local conditions.
“For any accounting standards, the US often goes its own way or doesn't necessarily align, but Australia has indicated they are largely going to align but there are a few changes they can make to deal with particular local contexts,” she said.
Treasury is expected to start that work together with the AASB, the body where Fricke sits on the sustainability reporting panel.
Fricke said that many insurers are ahead of the curve in understanding both financial and non-financial reporting around climate disclosures. However, she suggested insurers could encourage customers to keep this issue on board agendas.
Fricke said the first step is education. She said EY has already seen considerable “board upskilling” at Australian firms because of the role boards have directing climate strategy. Part of that process is establishing cross functional working groups to deal with the new standards.
“What we are very much recommending is clear accountability for this and a cross-functional accountability,” she said. “So breaking down the barriers but also making sure they’re building up that knowledge across the business.”
Fricke said the second step companies should take is gap assessments to understand where their current reporting regimes fail to comply with the new standards.
“The third step is probably around the robustness of that information,” she said. “When I spoke before about it being a big pull up your socks moment for the non-financial area, that includes leveraging the existing understanding in the business and looking at how you can get that information to be reliable.”
Fricke said assurance, internal systems improvements and controls around data are all part of this process.
EY’s climate financial reporting expert also said insurers should be mindful of regulators’ increasing focus on greenwashing. As companies become more aware of greenwashing dangers, she said, at the same time, regulations are pushing them to disclose more climate risk information, which could heighten greenwashing risks.
However, Fricke said she wouldn’t want companies to pull back on climate related initiatives and disclosures out of fear of being accused of greenwashing.
“I think that would be the saddest outcome for this,” she said. “Our encouragement would be, where there is a greenwashing risk, lean into the transparency, make sure that it's right, robust and complete, but then explain and clarify without putting wild statements out there.”
