Day 1 readiness for mandatory climate reporting

 Directors’ duties and liability

Directors have a duty of care and diligence. In the context of climate reporting, ASIC’s recent guidance (which we have written about in more detail elsewhere) notes that to discharge this duty, directors of reporting entities should have an understanding about the entity’s sustainability reporting obligations, and the climate-related risks or opportunities that could reasonably be expected to affect the entity’s prospects, amongst other matters. Directors should also require the establishing of policies and procedures for keeping sustainability records, and for preparing the sustainability report, which may include identifying how climate-related data is obtained and used, according to the ASIC guidance.

It is important directors are aware of their obligations under the new regime, and their potential liability. Some entities are providing their directors with guidance on the practical steps the directors can take to discharge their directors’ duties and ensure there is a basis to resist challenge to their directors’ declaration in relation to the sustainability report.

Many entities are also revisiting their board skills matrices, board and committee charters and board education programs in preparation for making the governance disclosures under the new regime.

Understanding the regime

Outside of the boardroom, entities are also working to familiarise themselves with the new regime, including reporting obligations and reporting standards. This is a substantial task. In its Climate-related financial disclosures - Policy Impact Analysis, Treasury estimates a total of 860 hours for 3 executives, 15 managers and 25 analysts of a reporting entity to read the relevant regulatory guidance materials on the regime. Treasury’s estimated cost for this exercise alone is about $170,000.[1]

That of course assumes interpretation of the new regime is straightforward, which is far from the case in many areas. In the absence of established market practice, we are finding many entities reaching out to external advisers for assistance in interpreting elements of the regime, and for insights into how other reporting entities are managing areas of ambiguity.

“The [intention behind the new regime] is to improve the quality and comparability of disclosures of material climate-related financial risks and opportunities within the financial reporting framework”[2]

Materiality

All of the mandatory climate reporting disclosures are subject to materiality. Considered and clear materiality guidelines are therefore key to ensuring the preparatory workstreams are efficient, as well as being key to determining the information to include in the report. By focusing on material aspects, entities can produce reports that are both concise and effective, maximising their usefulness to users, while mitigating liability risk for the entity.

In this context, we’ve seen entities taking steps to confirm or develop climate reporting materiality thresholds and prepare climate reporting materiality guidelines. While existing materiality frameworks for financial reporting and risk management can generally be leveraged, there will need to be uplifts to specifically capture climate-related risks and opportunities.  

 Significant judgements

Similar to financial reporting, entities will need to make many judgements as part of mandatory climate reporting. The new regime requires disclosure of the judgements that have the most significant effect on the information included in the sustainability report. Accordingly, as part of Day 1 preparedness, entities are ensuring they have in place appropriate systems for the making and recording of judgments that may need to be included in these disclosures. 

 Record-keeping and verification

Despite the modified liability settings under the mandatory regime, entities are remaining alert to the greenwashing and reputational risks associated with sustainability reporting. Accordingly, many are revisiting their record-keeping practices and reviewing processes for forward-looking statements, alongside other verification processes, protocols and related documentation.

Guidelines in these areas are either being prepared or updated to promote more robust and consistent practices and processes across the entity, and external advisers are being engaged to undertake an independent review to identify potential gaps and risks. 

 Data / AI

Technology is also playing an increasingly pivotal role in strengthening ESG and emissions reporting frameworks. Some entities are using software solutions powered by artificial intelligence to efficiently extract and prepare greenhouse gas emissions data. The use of such solutions may help to uplift the accuracy of underlying data, but also needs to be considered in light of the entity’s broader approach to using AI and any associated AI governance framework.