Australia has introduced new mandatory climate reporting rules that require business owners to estimate their company’s emissions and outline plans to tackle future risks.

The legislation, passed in 2024, is the most significant change to reporting requirements and director responsibilities in a generation, according to the Australian Institute of Company Directors (AICD).

It will require companies to disclose their greenhouse gas emissions and explain how a range of future climate scenarios could impact their business, in a sustainability report filed alongside their financial data.

Initially, the legislation will apply only to Australia’s largest companies but by 2027, thousands of corporate and not-for-profit organisations will be included — something AICD managing director and CEO Mark Rigotti said would be a significant change in the way companies approach their mandatory disclosures.

“It’s actually quite a fundamental step change in reporting and there probably hasn’t been as significant a change since 2003, when we moved from sort of domestic financial standards to international financial reporting standards,” Mr Rigotti said.

What’s changing?

The law requires companies to publish an annual “climate statement” that outlines any material climate risks they may face, and their scope one, two and three greenhouse gas emissions.

Information about any of the company’s strategies, governance or risk management plans pertaining to those risks and emissions must also be disclosed.

And it will have to run those risks through a range of scenarios, which at minimum must include a global temperature increase of 2 degrees Celsius and a global temperature increase of 1.5C.

Until now, sustainability reporting has been done on a voluntary basis and under a range of differing standards, according to Julia Bilyanska, partner in charge of climate change and sustainability at KPMG.

Now, they’ll be formalised under standards set by the International Sustainability Standards Board (ISSB), and require auditing like the rest of the organisation’s financial statements.

Once the sole domain of sustainability departments, companies are restructuring to adapt to the new regime.

“When it’s [happening in] a voluntary space, it’s been a case of best endeavours,” Ms Bilyanska said.

“[Now], good practice has it changing from just sustainability staff being involved to much more multidisciplinary teams forming.

“Even to the point where there are multidisciplinary management executive committees that are being set up that then report through to sustainability committees.

“So that shift, both at management and board level, is certainly occurring.”

Who’s included?

From now until 2027, the legislation will capture more listed and private companies, as well as a range of superannuation and investment trusts with more than $5 billion of assets under management.

Gazing forward

While corporate Australia is well-versed in reporting on its past performance, these new requirements mean now they’ll have to make their best assumption about how future events may impact business.

The legislation does not demand completely accurate forecasts, but does require entities to disclose the assumptions and data they used to arrive at their conclusions.

Mr Rigotti said this has created a degree of nervousness among company directors, who’ll be required to sign off on the forward-looking statements.

“They’re nervous because it’s different and it’s new, and they’re nervous because the assurance function is still dialling up.”

“Of course, by 2050 there are some uncertainties, but as long as there’s transparency and disclosure, I think that’s where the board’s focus should really be,” Ms Bilyanska said.

“Our focus will be, as auditors of this information, is to make sure that there is a really good transparent presentation of how the business is being managed.”

Early mover

The legislation makes Australia one of the early movers in adopting internationally aligned mandatory standards about how climate change may impact the financial future of corporations.

The European Union leads the pack, with its Corporate Sustainability Reporting Directive requiring corporations to report on a broad range of sustainability-related matters.

But with the ISSB standards being formalised only recently, Canada, New Zealand, Japan and Brazil are among other countries where elements of the standards are being incorporated into corporate reporting requirements.

“The European legislation in particular is already penetrating globally because a lot of the value chains are located in South America and China,” Ms Bilyanska said.

Who wants this information?

Investors have shown an increasing appetite for consistent sustainability reporting that can be compared among companies within a market, and across international borders.

“To actually have a common set of standards and a way of looking at those issues through a reporting lens is going to meet the needs of both the broader community, but in particular investors and financial markets,” Mr Rigotti said.

“The second thing is probably more a broader reason and that is around decarbonising the world, actually addressing climate change through transition.

“And if it’s measured and reported on, it’s more likely that action will be taken.”

Analysis by KPMG shows 82 per cent of ASX100 companies are already publishing a stand-alone Environment, Social and Governance report with their existing financial statements.

Among those 97 companies, 78 per cent are reporting their scope 3 emissions and 58 per cent have a climate action plan.

But the companies defined as group 3 may face a steeper learning curve than those captured by the legislation this year.

“At the risk of overgeneralising, at the bigger end of town where resources are more plentiful and there’s a greater level of scrutiny, they’re more prepared,” Mr Rigotti said.

“As you go down in scale, of course, less resources, more competing demands, less focus on it.”