By BDO's Aletta Boshoff
Consumers, investors, and regulators are calling out for more transparent communication from organisations about environmental, social and governance (ESG) matters. However, a recent BDO poll found that more than 70 per cent of respondents have not yet produced a sustainability report. If you haven’t started your sustainability journey, you’re certainly not alone – but could FY2023 be your year to dive in?
With the start of a new financial year upon us, it’s important to start planning for the year ahead. In the spirit of growth, it’s a valuable time to think about what you’d like your organisation to achieve in the coming 12 months. What progress will you make? What will look or be different? And how will you know if you’ve achieved this?
In the lead up to the recent Federal Election in Australia, more Australians identified climate change as their number one issue than any other topic, resulting in the election of a significant number of pro-climate independents and Greens candidates. The Australian public has spoken through their votes, and now the Australian Government appears committed to action on climate change too.
But what does this mean for organisations? Consumers, investors, and regulators are calling out for more transparent communication from organisations about environmental, social and governance (ESG) matters. However, a poll in a recent BDO webinar found that more than 70 per cent of respondents have not yet produced a sustainability report. If you haven’t started your sustainability journey, you’re certainly not alone – but could FY2023 be your year to dive in?
Sustainability reporting standards developing around the world
Internationally, there has been momentum for sustainability reporting standards, which is expected to pave the way for Australian sustainability standards in the future.
In November 2021, the International Financial Reporting Standards (IFRS) Foundation created a new standard-setting board - the International Sustainability Standards Board (ISSB)- to work alongside the existing International Accounting Standards Board (IASB) and develop specific sustainability standards. It has published its first exposure drafts on the general requirements for sustainability-related financial disclosures (IFRS S1), suggesting that every business needs to determine fit-for-purpose metrics to reflect their business strategy, while also disclosing:
- How they define the metrics
- Where the data comes from
- The methods for the calculations, and
- Whether the metric is validated by a third party.
Climate-related disclosure standards have also been proposed in IFRS S2. The ISSB intends on finalising both standards by the end of 2022. We expect the next standards released by the ISSB to address environmental matters beyond climate, as well as social and governance matters.
Task Force for Climate-Related Disclosures
In December 2015, the Financial Stability Board (FSB) launched the Task Force for Climate-Related Disclosures (TCFD). The aim was to ‘develop voluntary, consistent climate-related financial disclosures for use by companies’. Their recommendations, released in 2017, were a collaborative effort with input from global investors, banks and reporting issuers. It provided four pillars for disclosing a general risk or opportunity within business:
- Risk management, and
- Metrics and targets.
The ISSB amalgamated this approach from TCFD with SASB 77 when creating IFRS S2. Many regulators around the world have also started incorporating the TCFD recommendations in their jurisdictions. Learn more about the TCFD history and framework.
European sustainability developments
Meanwhile, the European Commission has proposed introducing a Corporate Reporting Sustainability Directive (CRSD) to work in tandem with the existing Non-Financial Reporting Directive (NFRD) – enabling companies to “report reliable and comparable sustainability information that investors and other stakeholders need”. The proposal suggests the European Financial Reporting Advisory Group (EFRAG) would develop the draft standards, to be tailored to suit EU policies. The first set of standards is expected to be adopted by October this year. Australian businesses selling goods and services in Europe are expected to comply with the requirements. You’ll find more details in BDO’s EU Sustainability Reporting bulletin.
Sustainability reporting in Australia
While sustainability reporting is not currently mandatory in Australia, many parties are showing significant interest in sustainability reports and the methodology behind them, while keeping an eye on the developing international standards.
The Australian Securities & Investments Commission (ASIC) has increased its interest in sustainability disclosures over the past year. In a recent media release, ASIC urged organisations to “provide useful and meaningful information for investors and other users” as they prepare their end of year and half year financial reports. While not solely focused on sustainability reporting, it called out several risks that may be affected by changing circumstances, including “commitments and policies on climate and carbon emissions by governments”, while also cautioning that high carbon-emitting organisations might be particularly affected.
The Australian Securities Exchange Limited (ASX) has also recently begun a crackdown on greenwashing, to ensure companies are accurately portraying the environmental and social aspects of their business or products.
Australian disclosure standards
Meanwhile, the Australian Accounting Standards Board (AASB) published a position paper supporting the voluntary adoption of recommendations made by the TCFD. Its intention is to promote consistent and comparable extended external reporting (EER) between organisations. (Note that this is not necessarily the AASB’s final position and “nothing in the Position Statement is to be taken as mandating, encouraging or recommending that any EER be undertaken by entities now”.)
Getting started on your sustainability reporting
Sustainability reporting isn’t mandatory, so why bother?
Many organisations are choosing to make disclosures in response to growing stakeholder demands. Boards and leaders are also seeing the potential for a focus on sustainability to create long-term value in corporate reputation and brand, risk reduction, opportunity management, company culture and employer value proposition.
As the start of a new financial year is typically a time of planning for the 12 months ahead, now is the ideal time for organisations to set the wheels in motion to start their sustainability journey.
What is involved in sustainability reporting?
It’s a common misnomer that carbon emissions are the only factor for sustainability reporting. While this is an urgent issue which needs addressing, and both the TCFD and ISSB have begun by focussing on financial disclosures in this space, there are a lot more factors to be considered in sustainability reporting.
The initiatives and metrics that each organisation will look to include and improve as part of their sustainability reporting will differ, since every organisation is different. There is no boiler-plate list of items to achieve. There are, however, several financial and non-financial frameworks that could be adopted to help guide reporting. At BDO, we like to look at the environmental, social and governance (ESG) factors as a general frame of reference to assess how an organisation manages risks and opportunities. Some examples of ESG factors that might be important to stakeholders include:
While the TCFD recommendations and ISSB standards are currently focused on financial disclosure, particularly for investors and financiers, it’s important to identify and address the needs of all stakeholders, some of whom have interests beyond financial disclosure.
Once the relevant initiatives have been established for an organisation’s sustainability journey, the best metrics for measurement should be identified. Commitment to re-measuring periodically will help to establish and report on progress.
Where to publish a sustainability report?
The publication of a sustainability report requires careful consideration also, and the AASB and ASIC have not yet provided guidance on where sustainability reports should be positioned. Options include:
- In financial statements, or
- As an independent sustainability report.
If published in a financial statement, the sustainability report will also be subject to audit. On the other hand, if it’s not published in the financial statement, an auditor still has a responsibility to ensure the sustainability report is consistent with the audited reports, but there is a choice over getting assurance. Whichever road is taken, organisations should consider publishing all reporting elements around the same time for a holistic view of the organisation.
This article was written by Aletta Boshoff, Partner - National Leader, IFRS & Corporate Reporting, National Leader, ESG & Sustainability. It was first published HERE on 20 June 2022