Expert analysis of new changes to climate reporting

Garreth Hanley:
This is With Interest, a business finance and accounting news podcast brought to you by CPA Australia.

Simon Downes:
Hello, and welcome back to With Interest. I'm Simon Downes. You might think that accountants already have enough on their plates. And you're right, of course. The world of financial reporting, auditing, assurance, and tax advice seems about as far as you could get from a subject like climate change. But as we head into the fourth month of 2024, the challenge of sustainability reporting and the requirements that will fall on the accounting profession are getting closer and closer. If you've ever wondered why should accountants and finance professionals care about climate change, you're about to find out. That's because we're joined today by CPA Australia's, resident policy expert in this area, Patrick Viljoen. Hello, Patrick. Welcome to With Interest.

Patrick Viljoen:
Hey, Simon. Almost good to be here.

Simon Downes:
Patrick, anyone working in the accounting profession will be aware of at least some of the climate reporting requirements on the horizon to a greater or a lesser extent, but the extent to which they will impact individuals or businesses is probably a little unclear to many, so we'll come to that in a moment. But let's start with a high-level introduction to the topic, if we can. Any accountants or finance professional hearing us talk about impending requirements on sustainability reporting could be forgiven for feeling a little anxious. So let's set the scene for them. What is the political and social backstory to why accountants will really need to start taking this seriously in 2024?

Patrick Viljoen:
That's a very good question, Simon. And I think maybe a good place to start is to not view it purely from an Australian specific lens. And obviously, there's a lot of ambition that's been built in by the Treasury in terms of their own requirements, and we'll speak about that in a bit more detail later. But these things are not driven in isolation, so it's a global effort to try to get carbon emissions under control. So climate change predominantly being driven by carbon emissions and how can we get those down globally because unfortunately, this is not something which is contained in a particular jurisdiction. So if you pollute in one jurisdiction, that will inevitably have impacts on others. So it's a global problem that we're facing at the minute.

The most recent conference of the parties or as we refer to it as the COPS, which was held in Dubai, basically highlight a couple of important things of where we're at globally. The first thing that they basically spoke about was that net-zero remains a principle for private sector leaders and for businesses more broadly, but there's also this recognition that we need to accelerate action. One thing that comes out of COP quite a lot is all these grandiose promises. It's like the song of the eighties, isn't it? Heal the World, make it a better place. But it doesn't always manifest in action. And you find that language coming through the international community quite a lot in as much as how can we accelerate getting to that lower carbon state.

But I also think secondly, the important thing that we have to recognise is that we'll probably have to run two energy systems in parallel. There's a lot of talk in Australia, particularly if you take the greens as your barometer of saying, "Oh, we need to shut off coal mining tomorrow and we need to switch over into renewables." The problem with that is we are not even remotely close to scale in Australia, and this is not something which is unique to us. This is something which is actually a bigger problem globally. So we'll have to have that unhappy marriage of running two systems in parallel until such a time as we can sort of make that switch over without having the whole grid collapse on us.

And then there's the financing situation as well. All of these new developments that we see don't come for free. There is a finance requirement of how these new technologies would need to be developed, and I think the quantum that was placed on that and COP is around about 41 trillion US dollars. That still isn't finance, and that's a big number. But I think whittling it down in terms of the actions that we see, definitely we need to accelerate decarbonization.

Secondly, we need to leverage climate technologies and scale new green businesses. And as it relates to SMEs, we can speak about that a bit later. The financial sector would need to facilitate and deploy significant capital investment. And if they do finance that through loans, how do you price that loan adequately? How do you apply a premium that is not too high or too low in order for you to make that money available for investments? Then also this whole concept of net-zero being equitable and inclusive. The quickest way of explaining that is just to say that you shut up a coal mine in the Hunter Valley, but what actually happens to that society?

And then also we need to proactively explore how we can create value in nature and biodiversity. And if climate does tend to get out of hand, it will directly have an impact on nature. And we are dependent on nature for a whole host of things, you just need to think about things like agriculture. And then the last point that I raised is actually quite an interesting one where they talk about this new forms of collaboration which need to apply across sectors. That's a nice little segue to talk about government action and what that actually means for business. And you just need to reflect in terms of the ambition that the treasurer is showing at the moment in terms of trying to make up for lost time because we have had a bit of a sticky situation in terms of trying to get to increasing our own emissions targets and all that kind of stuff, and that's now happening. But what does that actually look like?

Treasury has just finalised their consultation into climate-related financial disclosures. We did a joint submission to that alongside CAANZ. If you want to read through all of that, it is available on our website. But I think this is evidence of how government is trying to partner with business. Accountants know that numbers don't just magically fall out of thin air.

So if government has made a commitment in terms of our own nationally defined contribution, or NDC, saying we want to reach eight percentage of reduction, that's great and that's wonderful to say that, but how does business need to contribute to that? So how do you give them a number and how do you give accountants a number that they can gauge their own resilience and transition plans to make sure that we don't end up in a situation where we get to that deadline point, which is 2030 or 2050 depending on what your own deadline is and you try to match these numbers up and it's like year-end with spreadsheets that nothing speaks to each other.

Simon Downes:
So in an effort to create a standard that supports the consistent performance of quality sustainability reporting and assurance engagements, the International Sustainability Standards Board and the international Auditing and Assurance Standard Board, so that's the ISSB and the IAASB, to those who like their acronyms, have developed an overarching standard for reporting and assurance on sustainability reporting. That's the IFRS S1 and S2 and ISSA 5000 General Requirements for Sustainability Assurance Engagements that can be applied for all sustainability topics. So Patrick, tell us about the standards that we're talking about, when they're supposed to come into effect, and what this is going to mean for those in the profession here in Australia. And we'll come to maybe more globally in a moment.

Patrick Viljoen:
The important thing to note about IFRS S1 and IFRS S2, those are the two standards that was produced by the ISSB, they were already in force. They became effective 1st of January this year, 2024. Now, just because they became effective does not mean they're mandatory internationally. So jurisdictions need to make decisions in terms of adoption. If we look at the Australian environment, the AASB or the Australian Accounting Standards Board, is going through a consultation process at the moment in terms of looking what IFRS S1 and IFRS S2 should look like for Australia. And this means a change in legislation because you need to think about the ASIC Act, you need to think about the CORPS Act in terms of how all these things are built into that. We're pretty much there with the legal kind of background and that level of topology, but now we have to think about the framework would look like. So S1 let's just talk about S1 quickly.

So S1 gives you that overarching reporting framework. So it basically looks at four content pillars that you need to comply with. So governance, strategy and business models, risk management, and then metrics and targets. So that's theme neutral. If I can use that terminology piece, so that doesn't really matter whether you look at climate or nature, you can apply to most things. So there is a technical underlay, and that then manifests through particular standards for particular topic items.

So IFRS S2, for example, will be for climate. So that's the reporting framework. And what it tries to get to is to give you that level of consistency and comparability. So say for example, you have a report coming out of, I don't know, Germany, reporting on a particular organization's carbon emissions in their, for example, in logging and you want to compare an organisation in Australia in a very similar kind of industry, you'll be able to do that because the standard should be able to give you that of comparability in between the two irrespective of location.

Jacqueline Blondell:
If you're enjoying this podcast, you should check out our in-depth business and finance show INTHEBLACK. Search for INTHEBLACK on your favourite podcast app today. And now, back to With Interest.

Patrick Viljoen:
Now the devil's in the detail because jurisdictions can decide what they want to apply. And the problem with Germany being part of the EU is they haven't gone down the IFRS S1, S2 route. They've got a dedicated set of standards which applies across Europe. So we still have a level of fragmentation. So Europe's going their particular way in terms of their own corporate sustainability disclosure requirements or the CSRDs. And then you find the United States going down their version, and that's more of a listed requirement coming through the USSEC. From our perspective, we're signing up to IFRS S1 and S2. There will be adjustments made to that to make sure that it is robust for us. And then across the ditch, our friends in New Zealand have adapted the underlying principles that also gave rise to IFRS S1 and S2 to utilise as NZ CS 1. And they are actually ahead of us because they've already had a year's worth of reporting or close to a year's worth of reporting on the NZ CS 1.

Simon Downes:
We're talking about the globally recognised standards here. So how are other countries managing? What sense do you get? What do you know about how well things are progressing in Australia compared to some of those other markets? And obviously I note that your explanation there around the EU and the US. What about other parts of the world? How are things going compared to in Australia?

Patrick Viljoen:
We do realise that climate related risks and opportunities will impact on income statements. They will impact on balance sheet items, particularly if you look in terms of resilience of your assets over duration and time. So there is a number that needs to be applied to that. What we're trying to get to is for both your accounting and your sustainability standards to match up.

Now, a lot of people when we talk about sustainability standards will remember the glorious issues we had switching from generally accepted accounting practice or GARP into IFRS or International Accounting Standards. And we're facing that again to a certain degree. Europe tends to operate in a block like fashion. So for them, they've got their own sustainability standards and they're waiting in terms of to see what happens with ISSA 5000 which you've mentioned earlier on, which is the assurance standard to get that end-to-end approach for them.

Now, that has got implications because if you operate within Europe, the question now arises, if I'm a multinational, will I need to comply with all of the jurisdictional requirements that kicks in from a sustainability perspective? The short answer to that is yes. You might have exemptions in certain jurisdictions, but mostly you'll have to have that range of understanding.

Just coming back to the acronym, yes there's IFRS S1 and IFRS S2 in Australia. At the moment, it looks as if we'll end up with ASRS 1, ASRS 2 then you've got NZ CS 1, all these kind of things happening. And a lot of countries want to put their stamp on it by giving it a bit of a flavour. The thing is, all of these kind of recommendations are built on the same principles. So it's all built on the recommendations from the task force for climate-related financial disclosures. And I know people will say, "Yeah, but that's not what happened in Europe." But it has the same source of inspiration. So I think that's what we're trying to get to is that level of comparability.

So if you're trying to attract capital, you can. It's a match-up of trying to say what you're reporting in a particular jurisdiction needs to be the same as what's coming out of another jurisdiction. So if you talk about just IFRS S1 and S2, and just to give you a brief indication, Japan's going down that avenue, they're busy with translation of IFRS S1 and 2. Brazil is doing the same thing. Brazil will follow Australia very shortly in terms of adoption. So it's happening and it's happening very quickly.

Simon Downes:
So a lot of people in the accounting profession will be impacted by all of this. What do you think concerns people most in the profession? What do you hear from our members and what is CPA Australia doing to assist where we can?

Patrick Viljoen:
There's a lot of concern about sustainability reporting didn't necessarily always sit with finance teams. Some organisations had a dedicated sustainability team, which would've been made up by scientists or specialists operating in that particular kind of area that could give guidance about advisory and what you need to do in that particular space. What we are now seeing is that because it's becoming a standard that you need to report on and investors are predominantly now wanting to see what the impact on risk is for organisations of the resilience of that business model, is it more risky or less? And also trying to understand how climate impacts on financial statements.

If you use that word, quantification, impact on financial statements, setting off signs, back targets and metrics, these are all things that sit within the accounting sphere, and that's why I think it's becoming increasingly important for accountants to get across this because if you think about things like carbon, we do the initial carbon assessment, now we need to look at what our carbon is over duration and time.

Now that sounds like management accounting 101 to me, because you set a target, you do the measurement, you feed that as part of your management commentary on a monthly basis, and at the end of the year that is fed back into your general-purpose financial reporting. So this is why it's becoming real. And a lot of finance teams now being tasked with saying, "You need to provide me with my baseline carbon number. You need to provide me with all of this information."

Simon Downes:
What else do those in our sector need to be aware of and start considering this year, Patrick, whether it's already on their radar or maybe things that they're not aware of that are going to be impacting them down the road?

Patrick Viljoen:
What we're trying to get across to members is not to think about sustainability in a siloed kind of fashion. So it's not on Monday, I think about climate. On Tuesday, I think about nature. On Wednesday, I think about first nation engagement. All of these considerations and themes actually are interlinked. So I'll use an example in that sense, climate. So let's start with climate. If we know that over duration of time temperatures is going to start increasing and that can impact on certain regions more than others, this is why it's an average, because it won't impact in a uniform fashion globally, that'll have an impact on nature. Because if you have more sunny days out there, hotter days where you've got a loss of natural water vapour just by evaporation, what's going to end up happening is you'll see reduction in yield from agriculture. That's got an impact on societies. So all of these things are connected to each other.

If there's one thing I can get across to members, and we've got an ESG work plan that's going to happen throughout the year and there's a lot of support that'll come out of that, but there's three key things as an organisation we've identified. Firstly, we have to prioritise climate in the first instance. If it's not going to hit you through legislation, it's going to hit you by implication. Because if you are a supplier of somebody else, you'll be wrapped up as part of their value chain for reporting purposes. We have to maintain traction on modern slavery. And thirdly, nature's the next big one coming our way. So the long and the short is think about things holistically, make sure you've got that technical acumen to apply judgement scrutiny, and then apply that to whichever theme we're looking at.

Simon Downes:
Thank you, Patrick. That's going to bring us to a close for today. Thank you to our guest, Patrick Viljoen. We'll include some links in the show notes on the topics we've discussed today for anyone who's interested in learning and reading a little more around them. For now, and from all of us here at CPA Australia, thank you for listening.

Garreth Hanley:
You've been listening to With Interest, a CPA Australia podcast. If you've enjoyed this episode, help others discover With Interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business, and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode. And we hope you can join us again for another episode of With Interest.