The Australian government’s response to the ISSB - How might it impact Australian Enterprise businesses?
July 13, 2023
At the end of June, the ISSB released two inaugural standards, IFSR S1 and IFSR S2. As Emmanual Faber, Chair of ISSB, puts nicely, these standards are here to “translate sustainability into an accounting language, a new common global language to build more resilient economies around the world.”*
“The AASB intends to use the work of the ISSB as a baseline, with modifications for Australian matters and requirements where necessary to meet the needs of Australian stakeholders. In particular, the AASB is taking active steps to help ensure that Australia adopts reporting requirements that meet the needs of users of financial and other related information and supports Australia’s role in the international sustainability reporting environment.”**
Submissions and comments are open now, and you have until 21 July 2023 to lodge your views. See here for more info.
We’ve summarised a few key points from the Australian Government’s proposed exposure draft to help gather your thoughts.
Who is this going to impact and when?
A three-phased approach with thresholds is proposed, starting with large public entities and moving towards smaller public entities over a three-year period from 2024 onwards as per the table below. The proposed approach allows smaller public entities more lead time before they are subject to mandatory requirements, enabling them to build the capability and skills required to meet their obligations.
While the proposed standards may not be immediately relevant to all organisations, businesses of all sizes throughout the supply chain may soon be affected. Reporting entities that are required to report will need to calculate their scope 3 emissions, particularly if their supply chain is a significant source of climate impact. This may cause entities that are not required to report under the framework, such as small and medium-sized businesses (SMBs), to measure and report their carbon footprints in order to meet the changing needs of stakeholders in their value chains.
The climate disclosure reform is likely to increase the demand for professional services such as carbon accounting, climate risk advisory, and assurance.
What does the Australian Government’s proposed exposure drafts cover and how does it compare against the ISSB?
Greenhouse gas emissions
As part of the Metrics & Targets pillar, the exposure drafts have proposed:
Proposal: From commencement, scope 1 and 2 emissions for the reporting period would be required to be disclosed.
Gross scope 1 and 2 emissions would need to be disclosed.
Entities can choose to also disclose net scope 1 and 2 emissions (gross emissions after eligible units and certificates have been deducted), however, this would require disclosure that would help users understand the nature of any units or certificates surrendered (such as the source and quality).
The exposure drafts have specified that disclosure on Australian-based emissions would need to be calculated consistent with methods set out in the NGER Scheme legislation (National Greenhouse and Energy Reporting). They have acknowledged the NGER Scheme does not provide methods for the estimation of emissions from agricultural sources or land use, land use change and forestry, it is expected guidance on the estimation of emissions from these sources would be provided over time, drawing on Australia’s national greenhouse gas inventory methods.
Reporting of scope 2 emissions (both location-based and market-based accounting methods) would be required by the state where the electricity was consumed, using methods under NGER Scheme legislation.
Treasury has anticipated that the disclosure of scope 1 and 2 emissions would be relatively straightforward for all reporting entities. Around 900 entities (more than 700 of which are companies) are already required by legislation to report scope 1 and 2 emissions as part of the NGER Scheme legislation.
Proposal: Disclosure of material scope 3 emissions would be required for all reporting entities from their second reporting year onwards. Scope 3 emissions disclosures made could be in relation to any one-year period that ended up to 12 months prior to the current reporting period.
Scope 3 emissions will be required from the 2nd reporting year onwards under this framework, which can be seen as a reflection to ISSB’s transition relief approach to scope 3 → under IFRS S2, section C4 relieves entities from reporting scope 3 emissions for their first year of reporting.
The exposure drafts have specified scope 3 emissions should include the material emissions from both upstream and downstream for the reporting entity. This should be done according to a recognised emissions accounting framework, such as the GHG Protocol, and by utilising Australia-specific emissions factors where applicable, such as National Greenhouse Accounts Factors.
Reporting entities must also provide information about how they have identified the boundaries for material scope 3 estimation, and what components of the upstream and downstream value chain are included and excluded from this calculation. In addition, the framework used to guide scope 3 estimations (e.g. Climate Active Carbon Neutral Standard) should be disclosed.
ISSB: Per section 29, requires the disclosure of scope 1, 2, and 3 emissions, in accordance with GHG protocol unless required by a jurisdictional authority or an exchange on which the entity is listed to use a different method for measuring its greenhouse gas emissions.
First round of consultation feedback over scope 3 emissions
The first round of feedback from Dec 2022’s consultation raised concern over the difficulties associated with calculating and reporting scope 3 emissions, we applaud the Australian’s treasury’s response in recognising the value and importance of reporting scope 3 emissions.
“A number of concerns were raised about the difficulties associated with calculating and reporting scope 3 emissions. Excluding scope 3 emissions would significantly reduce the value of disclosures. Scope 3 emissions are an important source of information for companies and investors about where transition risks may be present within supply chains. Conversely, requiring economy-wide disclosure of scope 1 and 2 emissions to enable entities to calculate their scope 3 emissions using actual data from across entities’ supply chain is considered disproportionate to the value of disclosure.”
Treasury also acknowledged their first round of consultation feedback called for more guidance on scope 3 estimation methodologies, including guidance on the interpretation of materiality, boundaries for estimation and how best to disclose data gaps and changes in methodologies and assumptions, along with scenario analysis selection suitable to the Australian context.
In recognition of these challenges, the Treasury considers further guidance and progress on data challenges is necessary to support broad adoption of best-practice disclosure in the medium term. The Government is currently developing a Sustainable Finance Strategy which will look in more detail at options and priorities for addressing key data challenges and providing clearer guidance in these areas. As part of the consultation process on the Strategy, stakeholders will have an opportunity to provide further input on these issues.
What are the assurance expectations?
The exposure drafts have indicated the preferred policy parameters for climate disclosure assurance cover:
a requirement for limited assurance, moving to reasonable assurance over time.
reasonable assurance of scope 3 as a final step in scaling requirements.
assurance would need to be provided against the Australian equivalent standards to the ISSB and Corporations Act/Corporations Regulations, in line with AUASB standards.
assurance to be carried out by a qualified and experienced independent provider (conducted or led by the financial auditor).
Key takeaway for Sumday advisors
There is going to be demand for advisors to support clients with their carbon accounting.
Very soon this framework will become mandatory or impact many of your clients.
Preparing now will best enable you and your clients’ to be ready. Use Sumday’s Partner Toolkit to communicate the value of carbon accounting to your clients.
For Australian-based emissions, the framework requires that emissions are calculated inline with the methods set out in the NGER Scheme legislation. Sumday’s emissions factor database incorporates NGER emissions factors and calculations consistent with the legislation to ensure your client’s assessment is compliant with the requirements.
Scope 3 emissions will be required from the 2nd year of reporting and assurance is imminent, including reasonable assurance over scope 3 emissions. Having quality data along the supply chain to work towards transparency and audibility is more important than ever. Use Sumday’s Better Together Supplier Engagement pack to get your client’s suppliers onboard.
Start now and use Sumday to account for and report on emissions across scope 1, 2 and 3 emissions.