Finding silver linings in the stormfront - Australia’s new mandatory climate reporting
Implementation of the new mandatory climate risk reporting regime in Australia under the Australian Accounting Standards Board (AASB) is somewhat like the late kid finally made it into the world’s responsible finance class. With a ‘lost decade’ of inaction to catch up, the policy was needed to ensure local expectations and requirements align with the shifts in global capital markets.
This includes rapid - and in some cases proactive - adjustment to regulations including the EU Taxonomy and frameworks including CDP, GRI, International Financial Reporting Standards, Taskforce for Climate-Related Financial Disclosures, and the UNEP principles for Responsible Finance, among others.
So, everyone has had plenty of notice that the AASB requirements were pending, even if some entities are now in scramble mode to try and work out what it means for their business and its bookkeeping.
Opportunities outweigh the risks
There are elements of risk, such as potential reputational issues where a company or entity reports large and apparently avoidable emissions, or where the assessed financial risk of physical climate risks looks unpalatable. There is also a degree of upskilling and time and expertise required to complete the reporting.
That said, there are also some substantial positive opportunities the process of reporting can deliver.
Firstly, an organisation will gain more practical and quantifiable insight into its own carbon footprint and climate risk landscape, beyond the simple math of the emissions associated with on-site energy consumption.
Secondly, because everyone has to abide by the same rules, it becomes possible to benchmark and compare entities across similar industries or sectors. This means more transparency and more accountability based on solid metrics, rather than trying to compare entities based on what their marketing or PR says about them.
Every organisation should be aiming for accountability and for emissions reductions – this is a key element of good governance and of ethical business practices. So, reporting should act as a trigger to improve procurement practices, convince boards to invest in asset upgrades for energy efficiency and electrification, and provide a stimulus for effective conversations with customers, stakeholders and suppliers.
Furthermore, because reporting is annual, progress is visible, and everyone gets an opportunity to see what other firms are doing to reduce emissions and therefore learn from each other.
Benefits for investors
For investors, the climate disclosures offer better insight into companies' exposure to climate risks. Those that transparently disclose and actively manage these risks will be favoured by investors looking to future-proof their portfolios.
On the flip side, companies that lag on disclosure may find accessing capital becomes more expensive—or harder to come by altogether.
The big takeaway here is that transparency is not just about compliance; it is about staying competitive in a market where sustainability is increasingly tied to value.
Scope 3 – start now
Scope 3 emissions – those generated from non-energy related activities within the entities control including travel, procurement, end-user decisions and so forth – are not yet mandatory. However, they will become so in future, so starting now to map, measure and manage those emissions is sensible.
Businesses will need to rapidly build the infrastructure to collect data from across their value chains. The phased-in approach provides a cushion, but only for so long. For many companies, the real challenge will be data availability and accuracy. Forward-thinking companies should already be establishing relationships with their suppliers and partners to streamline Scope 3 data collection—an area where early investment will pay off.
Also, Scope 3 is where many of the gains around nature impacts, social value creation and responsible procurement really start to balance the books in terms of reporting. Having a proper decarbonisation plan that incorporates Scope 3 is also going to be a major attraction for potential investors.
It’s not just about emissions
Reporting on the financial impacts of emissions or climate risks is not only about reporting the specific impact. The big challenge is assigning a dollar value to the impacts and risks. These might include business disruption due to climate events, pricing changes due to carbon levies such as the EU border tariff, compromised manufacturing capability due to input changes or grid disruptions, or changes to service delivery capability.
The Australian Auditing and Assurance Board is developing climate disclosure assurance standards. This means that, soon enough, climate-related information will need to be assured just like financial data. Companies should begin working with auditors now to develop processes for verifying emissions and risk disclosures. As auditing for non-financial information becomes the norm, businesses that delay may find themselves underprepared for compliance.
Examining this through the opportunity lens means there is a more solid case for attracting investment to mitigate, manage or rectify these risks. Investors are looking for strategic, positive options to deploy capital in response to the very strong market signals from reporting legislation.
There will of course be some activities that are going to struggle – fossil fuel exploration and extraction, for example. Or producers of disposable one-use plastics. However, changes and evolutions in industries have always been a feature of the progress of civilisation, and that’s why you are reading this on screen, rather than pulling it out of a physical envelope!
Carbon pricing is not just about carbon
Some organisations will have questions around what price should be put on carbon in terms of the financials of emissions. While the price of Australian Carbon Credit Units is a guide for external pricing, some companies are already implementing a shadow price on carbon for internal cost assessment. Ultimately, how the financial cost associated with emissions is reported under the AASB will be influenced by what the entity hopes to gain from reporting. Potentially, the bookkeeping could layer in social and economic benefit calculations where there is a reduction of emissions that delivers a plus such as health, social value or operational efficiency dividends that can be quantified in dollar terms.
The bottom line is, investors are shifting away from negative screenings, that is, basing decisions on things an entity does not do such as tobacco, arms trading, fossil fuels or nuclear. The new paradigm is about positive screenings – is an entity doing social good and environmental good, including nature-positive initiatives, climate risk mitigation and decarbonisation?
The people factor matters
The establishment of the Net Zero Economy Authority signals that the energy transition is no longer just about emissions but also about people. Companies in emissions-intensive industries need to begin thinking not just about how to decarbonise but also how to reskill their workforce. Programs and partnerships that help workers transition into clean energy or low-emission sectors will become increasingly important, especially in industries such as mining, manufacturing, and transport. This is an opportunity for companies to position themselves as leaders in sustainable employment practices.
The Net Zero Economy Authority will play a pivotal role in transforming regional economies, particularly those reliant on emissions-heavy industries. With clean energy industries set to expand, regions that act quickly to attract investment will be the winners. Expect to see a push for green industrial hubs, especially in renewable energy and hydrogen, creating opportunities for both new ventures and existing businesses to diversify their operations.
Rectifying market failure
Ultimately, climate change is a market failure. And because voluntary action has not succeeded, the only way to fix this market failure is using market instruments such as regulation and reporting.
Risk management strategies must evolve, integrating physical and transitional risks into corporate strategies. This may mean new teams, new technologies, and even new board committees focused solely on climate.
Above all, getting started on the reporting journey now means being ahead of the curve of regulation and having the advantage of being able to move swiftly into identifying and acting on the positive opportunities that decarbonisation brings.
