Legislation ushering in mandatory climate related financial reporting cleared Australian parliament on the 9th September 2024. For directors charged with governance, risk and ESG integration, accuracy of the data that underpins both strategy, execution and reporting is mission critical.
Effectively managing climate risk and integrating ESG principles are crucial for ensuring sustainable business practices and long-term success.
Directors are charged with effective governance of those risks, along with everything else in their in-tray. That responsibility goes beyond identifying and managing climate risk (rising temperatures and sea levels, ecosystem collapse and the resulting social and economic fallout) but also the associated transition risks, i.e. the knock on effects of trying to mitigate climate change’s worst impacts.
These myriad and interconnected transition risks include:
- Financial risks from market instability and sovereign debt crises as assets (such as the fossil fuel sector) are re-priced.
- Energy system vulnerabilities as legacy infrastructure is overhauled.
- Economic disruption from capital stock write-offs and labour market shocks.
- Social and political tensions as policy/regulatory costs are passed through to consumers.
- Geopolitical tensions if the transition occurs unevenly.
- Environmental trade-offs that could have localised negative consequences if land is repurposed for low carbon/offsetting projects/resource extraction.
It’s a lot to get the collective corporate head around. Nevertheless, jurisdictions around the world are coalescing on the alignment of climate risk and ESG integration from governance and reporting perspectives.
Australia is now grasping the nettle.
As ASIC chair Joe Longo said last year, “the nation is in the centre of a once-in-a-generation shift in financial reporting and disclosure standards … The signal is clear: major, transformational change has begun. And we all need to be ready.”
A few weeks ago that shift took another big step with legislation that ushers in mandatory climate-related financial reporting passing parliament on 9 September.
It means Australia’s largest businesses, listed and unlisted, indeed need to be ready for more stringent reporting requirements from 1 January, with reporting periods coming in 2026 and 2027 for smaller firms that meet key thresholds. Final standards are expected from the AASB before the year-end and will cover four key pillars: Governance; strategy; risks and opportunities; and metrics and targets – with scope 1 and scope 2 emissions from the outset followed by scope 3 in the second reporting year.
Directors across industries and sectors must therefore ensure that they have the best available scientific data and expertise to inform their climate governance approach – and the right people, processes and reporting structures to tie everything together.
Which remains a challenge – because typically no single function ‘owns’ ESG. But it’s also an opportunity for directors to establish ESG priorities, define strategies and then drive integration of ESG across all functions, breaking down silos – and in the process propagate a genuine flow-through effect from top management to all employees and stakeholders throughout the supply chain.
If all stakeholders are aligned around priorities, incremental progress is all but guaranteed – provided action is driven by accurate inputs.
Data crunch
Accurate, actionable and auditable data remains a key issue. According to EY’s 2024 Global Integrity Report, unreliable, inconsistent or inaccurate data was identified as the greatest ESG compliance challenge by a third (34%) of business respondents with EY urging firms to “leverage technology and automation to build workflows that gather, compute and monitor performance metrics in a consistent and reliable manner.”
At EP&T, we couldn’t agree more.
Real-time monitoring of key environmental metrics like energy use and emissions provide vital insights to inform decision-making. Advanced analytics capabilities can help identify trends, risks and opportunities – and help businesses take those steps to drive commercial gain (i.e. reduced energy consumption) as well as deliver on ESG strategy (reduced emissions, demonstrable progress) and reporting compliance (solid, traceable data).
When evaluating data platforms or tools, boards need to consider:
- Data accuracy, consistency and auditability
- Ability to track relevant metrics aligned with reporting standards
- User-friendly dashboards and visualisations
- Scenario analysis and forecasting capabilities
- Integration with existing systems and processes
Without data robustness and the insights enabled by intelligent analytics, informed governance and risk management around climate and ESG issues will remain more challenging than necessary.
Fortunately, that is precisely what EP&T’s EDGE platform delivers, enabling businesses to track their environmental performance in real time. Which means directors, their boards and their employees can ensure they have reliable data needed to mitigate business risks associated with climate change, drive meaningful ESG integration – and make mandatory climate-related financial reporting a business driver over and above a compliance issue.
On 17 October, EP&T Global’s Non-Executive Chair, Paul Oneile, will discuss Climate Risk and ESG Integration through a directors’ lens alongside NSW Net Zero Commissioner, Meg McDonald, at an AICD Sydney Director’s Breakfast.
Join us as we explore the dynamic landscape of sustainable finance, integrating ESG into corporate strategy, mitigating climate risks, and driving financial innovation with environmental responsibility.
Details and registration here.
