Australia’s Approach to Sustainability Reporting: Shaping the Landscape for Financial Disclosure

In a welcome move towards bolstering sustainability reporting, the Australian Accounting Standards Board (AASB) has unveiled an Exposure Draft (ED) known as ED SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information. The primary objective? To introduce novel climate-related financial disclosure requirements. The AASB extends an earnest invitation to stakeholders and the public to have their say until Friday, March 1, 2024.

So, what precisely does this Exposure Draft entail? It serves as a preview of forthcoming regulations, specifically geared towards shaping the landscape of financial reporting concerning climate change. It is enshrined in three draft Australian Sustainability Reporting Standards (ASRS Standards):

1. [Draft] ASRS 1 General Requirements for Disclosure of Climate-related Financial Information: This standard establishes comprehensive guidelines for articulating climate-related financial aspects. It draws inspiration from IFRS S1 but with a distinct focus on climate-related financial disclosure.
2. [Draft] ASRS 2 Climate-related Financial Disclosures: A meticulous guide to encompassing climate-related financial disclosures, drawing inspiration from the IFRS S2 framework.
3. [Draft] ASRS 101 References in Australian Sustainability Reporting Standards: An enduring reference compendium, ASRS 101, will undergo periodic updates, ensuring the inclusion of the most pertinent non-legislative documents published both in Australia and internationally, essential to ASRS Standards.

The AASB welcomes active participation and feedback from stakeholders, offering multiple avenues for engagement:

• Constructive feedback can be communicated through comment letters posted on the AASB website.
• An online survey is accessible to gather insights and opinions.
• Roundtable discussions will be convened, providing a platform for direct interaction with interested parties.

The release of an Exposure Draft constitutes an instrumental step in the AASB’s approach to crafting a set of comprehensive Australian Sustainability Reporting Standards. It serves as a conduit for public commentary and insights into the proposed standards, facilitating refinement.

The Motivation Behind These Proposals

The crux of the matter is that Australian Accounting Standards mandate entities entrusted with formulating general-purpose financial statements (GPFS) to contemplate climate-related concerns when such issues bear material significance to the primary users of GPFS. However, the extant Accounting Standards need explicit references to climate-related issues. Recognising the burgeoning demand for enhanced guidance and regulatory provisions for climate-related financial disclosure to engender uniformity and comparability in reporting, the AASB has assumed a pivotal role.

The decision to cast a wider net by addressing sustainability reporting more holistically emerged as a response to the feedback gleaned during the Invitation to Comment ITC 46 AASB Agenda Consultation 2022–2026. Australian stakeholders expressed unwavering support for the AASB to embrace sustainability reporting as a paramount initiative, ultimately leading to formal integration of the Sustainability Reporting project into the AASB’s robust work plan.

The tide turned further in February 2022, with the International Sustainability Standards Board (ISSB) of the IFRS Foundation releasing two pivotal Exposure Drafts: [draft] IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and [draft] IFRS S2 Climate-related Disclosures. These drafts were meticulously structured upon the recommendations furnished by the Task Force on Climate-related Financial Disclosures (TCFD), a progeny of the Financial Stability Board (FSB). In response, the AASB published Exposure Draft ED 3212 in April 2022, endeavouring to solicit stakeholder feedback regarding the approach to formulating sustainability-related financial reporting mandates within the Australian milieu. This initiative also evaluated the appropriateness of embracing the [draft] IFRS S1 and [draft] IFRS S2 for adoption in Australia.

A noteworthy development is the Australian Government’s unequivocal commitment to align with international mandates, specifically through the mandatory imposition of climate-related financial reporting for corporate giants and financial institutions. This strategic commitment encompasses the introduction of standardised reporting prerequisites that align seamlessly with the four pillars underpinning the TCFD Recommendations: governance, strategy, risk management, and metrics and targets. An ensuing commitment also entails the overhaul of legislation, conferring upon the AASB the authority to promulgate Australian Sustainability Reporting Standards, thereby aligning with the overarching goals of the Australian Government.

The AASB’s Strategic Approach

In cognisance of the Australian Government’s unwavering commitment and stakeholder feedback, the AASB has taken a discerning approach. Their plan entails the creation of a distinct suite of Australian sustainability-related reporting stipulations, distinctly demarcated from conventional Accounting Standards. This suite of standards will be underpinned by the foundational work accomplished by the ISSB, with requisite adaptations to cater to the unique requisites of the Australian landscape.

The initial focal point revolves around climate-related financial disclosure prerequisites, aligning with the overarching trajectory charted by the Australian Government. This approach enables the expeditious creation of climate-related financial disclosure standards in isolation from the broader sustainability reporting domain. It serves as a strategic first step, providing the necessary runway for formulating reporting mandates governing other sustainability-related facets over a more protracted timeline.

In June 2023, the ISSB issued the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. This milestone spurred the AASB to unveil the Exposure Draft ED SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information. The draft outlines a framework for climate-related financial disclosure requirements specifically for the Australian context, with IFRS S1 and IFRS S2 serving as foundational pillars. The proposed standards necessitate entities to delineate climate-related financial information within their general-purpose financial reports, such as annual reports.

The Proposed Australian Sustainability Reporting Standards

The Exposure Draft ED SR1 comprises three distinct draft Australian Sustainability Reporting Standards (ASRS Standards):

1. [Draft] ASRS 1 General Requirements for Disclosure of Climate-related Financial Information: This standard presents an all-encompassing guide for articulating climate-related financial aspects, grounded in IFRS S1, but meticulously tailored for climate-related financial disclosures.
2. [Draft] ASRS 2 Climate-related Financial Disclosures: An exhaustive guide centred on climate-related financial disclosures, this standard is built on the framework of IFRS S2.
3. [Draft] ASRS 101 References in Australian Sustainability Reporting Standards: This reference standard, ASRS 101, assumes an enduring role as a compendium of references, subject to periodic updates. These updates will ensure the inclusion of contemporary non-legislative documents pertinent to ASRS Standards, originating from both domestic and international spheres.

The formulation of [draft] ASRS 1 and [draft] ASRS 2 was diligently informed by Treasury’s Climate-related Financial Disclosure: Consultation Paper (June 2023), constituting the second consultation paper on the subject. Additionally, informal feedback from stakeholders, including representatives from Treasury, the Australian Government Department of Climate Change, Energy, the Environment and Water (DCCEEW), and the CSIRO, has substantially shaped these drafts.

A salient caveat is that the proposals enshrined within this Exposure Draft remain subject to revision contingent upon the forthcoming policy pronouncements of the Australian Government and the final adjustments made to the associated legislative framework.

Effective Implementation Date

As we embark upon the publication of this Exposure Draft, the Australian Parliament has yet to pass legislation that explicitly designates the entities bound by the obligation to compile climate-related financial disclosures in conformity with ASRS Standards. The Treasury’s second consultation paper, characterised by its “Proposed roadmap for mandatory disclosure requirements,” delineates the classification of entities deemed subject to mandatory climate-related disclosure requirements, a critical aspect of the ongoing discourse.

The future application date of these proposed standards remains contingent upon the legislative developments that transpire in the wake of the Australian Government’s resolute commitment to sustainable financial disclosure. It is a pivotal juncture that underscores the nation’s unwavering resolve to align with international sustainability standards and foster greater transparency in financial reporting, a commitment that promises to reshape corporate accountability and reporting practices.

The AASB, in tandem with stakeholders and the broader public, anticipates the invaluable contributions that will be made during the comment period. These collective insights will be pivotal in refining the forthcoming Australian Sustainability Reporting Standards. As a nexus for deliberation and dialogue, the Exposure Draft ushers in an era of heightened awareness and engagement, fostering a climate of cooperation and cohesion as we collectively stride towards a future characterised by enhanced sustainability and financial transparency.

In conclusion, releasing the Exposure Draft ED SR1 represents a significant step forward in Australia’s commitment to sustainability and transparency. The nation’s pursuit of international best practices and dedication to a more comprehensive and structured framework for financial disclosure will do well for the business landscape and stakeholders. This exposure draft invites you, the public, to actively participate in shaping the trajectory of sustainability reporting in Australia. It underscores the importance of collective input and feedback in developing standards that will have a lasting impact on the nation’s financial reporting landscape. As Australia takes the lead in fostering sustainability reporting, it is incumbent upon all stakeholders to actively engage, providing their insights and expertise to ensure the standards reflect the diverse and evolving needs of the business community and society.

The ball is now in your court, and your contributions will be instrumental in forging a path towards a more transparent and sustainable financial future. We encourage you to participate actively in this critical endeavour and look forward to witnessing the transformation of financial reporting that will benefit everyone.

Please feel free to share your thoughts, comments, and suggestions as you embark on this journey to shape the future of sustainability reporting in Australia.