In January 2024, the Australian Government unveiled a landmark policy statement introducing mandatory climate-related financial disclosures for certain entities under the Corporations Act 2001.
The Government is committed to improving the quality of climate-related financial disclosures, providing Australians and investors with greater transparency and more comparable information about an entity’s exposure to climate-related financial risks and opportunities and climate-related plans and strategies.
This move aligns Australia with global efforts to provide transparency and accountability in how organisations report their climate-related financial risks and opportunities.
As these requirements take root, external financial auditors are set to play a pivotal role in ensuring the integrity and reliability of reported information.
This article delves into the implications of these new mandates for auditors and outlines the steps they need to take in this evolving regulatory environment.
Understanding the New Mandates
The policy mandates that large entities, including listed and unlisted companies, financial institutions, registrable superannuation entities, and registered investment schemes, disclose climate-related financial risks and opportunities within their annual reports.
Climate-related financial disclosures will include information about an entity’s climate-related risks and opportunities, as required by Australian climate disclosure standards and including:
- Governance – information about the reporting entity’s governance processes, controls and procedures used to monitor and manage climate-related financial risks and opportunities.
- Strategy – the entity’s strategy for identifying and addressing climate-related risks and opportunities (including scenario analysis)
- Transition planning and climate-related targets – the entity’s transition plans with offsets, target setting and mitigation strategies and any climate-related targets (if the reporting entity has them) and progress towards these targets.
- Risks and opportunities – for the entity, including information about material climate-related risks and opportunities for its business, as well as how the entity identifies, assesses and manages risk and opportunities.
- Greenhouse gas emissions – any metrics and targets of the entity related to climate, including the entity’s gross scope 1, 2 and 3 emissions.
- Industry-based metrics – the entity would be required to have regard to disclosing industry-based metrics, where there are well-established and understood metrics available for the reporting entity.(
While the proposed law currently targets larger corporations, there will be an inevitable ripple effect for SMEs. Large companies will start demanding ESG compliance from their suppliers and partners, many of whom are smaller businesses. It’s a chain reaction where the standards set at the top will permeate through the entire business ecosystem. This chain reaction means that SMEs, even if not directly bound by the law, must be prepared to align with these emerging norms to remain competitive and relevant in the supply chain.
Phasing of climate-related financial disclosure
The commencement date for Group 1 entities included in the exposure draft of the legislation is 1 July 2024. The Government welcomes stakeholder feedback on whether amending legislation to require a 1 Jan 2025 commencement date for Group 1 entities would improve the quality of reporting during the transition year. An entity will be phased in on the basis of size or level of emissions.
The table below sets out when entities must commence mandatory disclosure on the assumption they are required to prepare and lodge annual reports under Chapter 2M of the Corporations Act and they fall within one (or more) of the following three categories.
The Auditor’s Role
External auditors are now tasked with providing assurance over the reported climate-related financial information. This includes governance, strategy, risk management, metrics, and targets—extending to Scope 1 and Scope 2 greenhouse gas emissions initially, and Scope 3 emissions in subsequent reports.
The Australian Auditing and Assurance Standards Board (AUASB) is developing assurance standards to guide auditors, emphasising the need for specialised climate and sustainability expertise.
Challenges and Opportunities
The introduction of these requirements presents both challenges and opportunities for auditors. They must familiarise themselves with the Australian Accounting Standards Board (AASB) and AUASB standards, incorporating the International Auditing and Assurance Standards Board’s (IAASB) guidelines where applicable. Auditors will need to enhance their technical skills in climate and sustainability matters, perhaps engaging experts to meet the new demands.
Navigating Assurance Requirements
The assurance process for climate disclosures will mirror that of financial reports under the Corporations Act, with entities obtaining assurance reports from their financial auditors. This process starts with the assurance of Scope 1 and 2 emissions disclosures and will gradually include all climate disclosures. Auditors must ensure their methodologies align with Australia’s greenhouse gas emissions estimation methodologies and international commitments.
At this time, it’s expected that the auditor conducting general external financial audits will be expected to include in their scope of work assurance reporting in relation to these matters.
Adapting to a Changing Liability Landscape
The liability framework for climate disclosures falls under existing legislation, with directors responsible for ensuring accuracy and preventing misleading or deceptive conduct. However, a modified liability arrangement offers relief for disclosures related to Scope 3 emissions and certain forward-looking statements for a three-year period, highlighting a transitional approach to compliance.
What’s next from the Australian Government?
The government is expected to finalise and implement the amendments to the Corporations Act to mandate climate-related financial disclosures. This includes ensuring the legislation is comprehensive, covering all aspects of disclosure requirements as outlined in the policy statement.
The government plans to conduct a review of the climate disclosure requirements in 2028-29, led by the Treasury and the Council of Financial Regulators. This review will assess the effectiveness of the disclosure requirements, the appropriateness of the liability framework, and identify any barriers to quality disclosures, including issues related to data availability and supporting materials.
What about the AUASB’s intentions?
The AUASB intends to develop and issue assurance standards for climate disclosures that are in line with the IAASB’s final standard. This includes setting out a clear pathway for phasing in requirements over time, beginning with assurance of Scope 1 and 2 emissions disclosures from years commencing 1 July 2024 onwards, and eventually encompassing all climate disclosures by 1 July 2030.
They will provide auditors with the guidance and support needed to apply these new assurance standards effectively. This may involve developing training programs, technical resources, and best practices for auditing climate-related disclosures.
Embracing the New Norm
As Australia steps forward with its climate reporting regime, auditors are at the forefront of this transition, ensuring transparency, reliability, and confidence in climate-related financial disclosures. By embracing these changes, auditors not only contribute to a more sustainable future but also elevate Australia’s standing as a destination for international capital aligned with net-zero ambitions. The journey ahead is complex, yet it offers auditors a chance to lead by example, demonstrating how rigorous assurance practices can underpin global efforts to combat climate change.
What should external auditors be doing to prepare for assurance requirements in relation to climate-related financial disclosure.
1. Enhance Climate-Related Knowledge and Skills
- Invest in building their knowledge base on climate-related financial risks, opportunities, and disclosures. This includes understanding the implications of climate change on financial performance and the metrics used to measure these impacts.
- Seek training opportunities and certifications in sustainability and climate-related financial reporting to stay ahead in the field. This can involve participating in workshops, webinars, and courses offered by professional bodies and sustainability organisations.
2. Familiarise with New and Relevant Standards
- Study the ISSB and Australian standards: Deep dive into the International Sustainability Standards Board’s (ISSB) IFRS S2 Climate-related Disclosures standard, and the Australian equivalents developed by the Australian Accounting Standards Board (AASB) and the Australian Auditing and Assurance Standards Board (AUASB).
- Stay updated with legislative amendments to the Corporations Act 2001 regarding climate disclosures and the assurance standards that will govern the audit of such disclosures.
3. Integrate Climate Expertise into Audit Teams
- Where necessary, collaborate with climate and sustainability experts to ensure a comprehensive understanding of the subject matter, especially for complex or highly technical aspects of the disclosure requirements.
- Organise internal training sessions for audit team members to enhance their understanding of climate-related disclosures and the audit procedures involved.
4. Develop a Framework for Assessing Climate Disclosures
- Create or adapt existing audit tools and methodologies to specifically assess the accuracy, completeness, and reliability of climate-related financial disclosures.
- Develop benchmarking tools against industry standards and best practices to evaluate the quality of the client’s climate disclosures.
5. Prepare for Assurance and Reporting Challenges
- Initially focus on gaining assurance over Scope 1 and Scope 2 greenhouse gas emissions disclosures, understanding the methodologies and data sources used by entities to calculate these figures.
- Develop methodologies to tackle the assurance of Scope 3 emissions disclosures, which are more complex due to their indirect nature and the need for data from outside the organisation.
By following this roadmap, external auditors can better navigate the new requirements for climate-related financial disclosures, ensuring they provide high-quality assurance services that meet the evolving expectations of stakeholders and regulators.
The National Audits Group is keeping a close eye on external audit requirements as climate-related financial disclosure becomes a reality. For organisations looking to transition to mandatory climate-related financial disclosures, engaging with a firm like National Audits Group can provide the necessary expertise and support.
Steven Watson | Director, National Audits Group | www.audits.com.au
References
- Climate Related financial disclosure: exposure draft legislation
- AUASB Consultation Paper – Assurance over climate and other sustainability information
As Managing Director of National Audits Group, Steven provides assurance and advisory services to all types of entities in a diverse range of industries. His team has an enduring commitment to efficient, quality and value of auditing services.
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