New climate policies in 2023 (and upcoming changes) analysed

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

Dr Jane Rennie:
Hello, and welcome to With Interest. I'm Dr. Jane Rennie, General Manager Media and Content, at CPA Australia. When the Labour government was selected last year, they made a number of big commitments on climate and we're now starting to see these come to fruition. 2023 had barely begun when the government released proposed rules to enforce new pollution caps. This, and other aspects of the government's environmental policies, will necessitate significant changes for many businesses this year. Joining me to explain some of the business implications is Senior Manager of Environmental Social and Governance Policy at CPA Australia, Patrick Viljoen. Welcome to With Interest, Patrick.

Patrick Viljoen:
Thank you, Jane.

Dr Jane Rennie:
Well, Patrick, to someone like myself, it certainly seems as though the government is moving quickly to implement its environmental policies, and by contrast, the previous administration moved very slowly. What are some of the implications of that previous approach on the current administration?

Patrick Viljoen:
Yeah, thanks Jane. I think first and foremost, the fact that we saw very slow movement from the previous government has basically left us with very little buffer room in order to transition Australia to a lower carbon state. Now, the pace of change will need to increase exponentially in order for us to make that particular kind of headway that we're wanting to see. And this also, particularly if we reflect on the transition away from coal powered energy generation, something which has traditionally been something that Australia's relied on. Now from our perspective, we've been firm in our position on the need for the current government to act with purpose and speed. And if you look at Labor's overarching Powering Australia policy, it's exactly what is being done at the moment.

Dr Jane Rennie:
In terms of acting with purpose, as you said, certainly Labour, after they were elected last year, they set aside a slab of money for environmental policy in the October budget. Why was that so critical?

Patrick Viljoen:
It is very important and as I've already mentioned, the Powering Australia policy and which is being used at the moment provides that baseline for Labor's approach to Australia's transition. They've also coupled this with a dedicated view towards enacting the policy through empowering our regions. So in effect, what they're saying is we should no longer be looking at Melbourne, Sydney, and Brisbane for clean power production, it should come from the regions itself. Now, I think it's important that the policy piece also has budget attached to it because of the fact that it acts as an anchor for the government's aspiration and it anchors it in some sense of economic reality, the dollars and cents that we need to apply in order to drive that aspiration for Australia to move to a cleaner state.

Dr Jane Rennie:
I mentioned that the government has now released detailed new emissions limits and these apply to Australia's top 215 biggest emitters. They've been told they'll need to cut their emissions by 4.9% each year until 2030. Who exactly are they and what industries do they represent?

Patrick Viljoen:
Yeah, so that reducing baseline of 4.9% refers to what we call the safeguard mechanism, and that was a replacement mechanism following the abolition of carbon taxation in Australia. That's also administered and regulated by The Clean Energy Regulator. Now by and large, if we look at the top emitters, those are energy production companies and that really is not all that surprising. That's usually given the nature of their business. Then outside of those primary industries, larger corporates, particularly also in the manufacturing industry, are bigger contributors in terms of what we're seeing of the top two 15 of global or Australian emitters I should say.

Dr Jane Rennie:
You've just mentioned the energy sector, Patrick, will an initiative like this hasten the exit of some of the really big polluters such as coal mining for example?

Patrick Viljoen:
Look, like I mentioned earlier, I think the pace of change would definitely need to increase. And what does reducing baseline aims to do is remove any potential headroom and also to focus attention on reducing energy intensity, so how we use energy. Now then there's also the perennial issue of balance. How do we exit coal while scaling up clean energy? This is more important for us in order to keep the grid stable. Now, in essence, it's no longer good enough to just focus on total carbon emissions that you produce, and this is what used to happen in the past, but also using management accounting speak, perhaps for our audience, you need to identify the key drivers of your emissions and then focus on adapting your business and production models to effectively drive down consumption in terms of your business activity. I think we've moved past that point of saying, "We can do this softly, softly. We will need to do that exit from coal quickly." But it's about how do you strike that balance?

Dr Jane Rennie:
Well, how do you actually do it from a practical perspective then, because you talked about drive down consumption from a business perspective, what does it mean? What does this look like?

Patrick Viljoen:
Yeah, look, I think in terms of that balance piece, potentially what we'll see is it's not a situation of shutting off coal on Monday and shutting on clean energy on Tuesday. That's just not going to happen. What we'll need to find is a situation where coal is still used for energy production until such a time as we can have the economy of scale and the capital investment in place in order to do... Almost like a side-by-side energy production, and then do the switchover. When we come back to the leeway conversation and the buffer room, what we are trying to get to is to do that in a short as possible space of time. This is not decades that we're talking about, we're talking about years, in terms of making that switch over. The approach is still the same of keeping coal until such a time as we can switch over in full, but it's just that the time horizon has considerably shrunk.

Dr Jane Rennie:
Well, that sounds to me to be costly. Whenever you need to do something really quickly, inevitably it involves higher costs. What's this going to mean for consumers? I mean, we are currently going through a cost of living crisis. Should consumers and small businesses expect their energy and fuel prices to skyrocket?

Patrick Viljoen:
Yeah, look, I think there's no way you can argue around this. It is going to be costly, but I also think it's important for us to state that it's going to be costly in the short-to-medium term, but it is also vital to keep our emissions in check and to avoid the most catastrophic impacts of climate change. The capital investment will be substantial, and the issue is that somebody is going to need to pay for this. Now we know that in the budget there was money earmarked for that, but by and large, over duration and time, what I expect will happen is utilities would seek to recover the cost that they're spending in terms of their own infrastructure and development... or development, and that would need to come from end users. Now, this might sound like a bit of a trivial analogy, but much like every time we see a new television being launched, now, whether that's... I'm giving away my age here, but LED or OLED or something similar, the cost initially is going to be quite high, but then as you reach that point of economy of scale, the prices will come down. That's something we need to probably... clearly articulate to the Australian people is that there will be an increase in price in the short-to-medium term and that's in order to recoup on that particular capital investment, but what we don't anticipate is to see that increase lasting in the longer term because as we reach that economy of scale, and as we paid down on that investment, we'll go back to a normal price point. It's not going to happen at price parity. I don't think that's going to happen in the short term at all.

Dr Jane Rennie:
I understand that there is some sort of mechanism that the government's built in to protect businesses, or is it actually consumers, from those cost spikes? What can you tell me about this?

Patrick Viljoen:
Yeah, so what you're referring to is offsetting costs and the charge that's being placed on that offsetting cost. Now, depending on you who you talk to, offsetting elicits quite a range of reactions and sometimes extremely vehement opinions. Maybe just to start, offset should only be used to the extent that an organisation has no reasonable further recourse to change its business and operating models to transition to net zero. Now, that's quite a lot of words, but what we're trying to get to is you have to reanalyze the way you do things. If you then reduce your emissions to a point where you cannot do anymore... reasonably can't do anymore, that gap in between where you are at that particular point and net zero would need to be funded somewhere or somehow and you'd need to plug the hole. And that's where offsetting comes in. Now, the way that we do that in Australia is by the use of ACCUs, that's just the acronym we use, but those are carbon credits and that's a regulated market. Now, we know that businesses won't be able to transition to net zero overnight and also, due to the nature of some of their operations, they could end up with a very large cap. This is what the cap is trying to mitigate. Ultimately, again, this comes back to the conversation about balance. What we're trying to balance between is having a reasonable cost to drive behaviour... business behaviour, but also not ending up in a situation where you hold businesses to ransom if they're trying their level best to transition to a net zero state or a lower carbon state.

Dr Jane Rennie:
Speaking about business behaviour, I wanted to talk a little bit now also about greenwashing. 2023 kicked off with action from ASIC, in this space. A fracking company in the Kimberley's was fined for greenwashing over their net zero claims. Separately, the Australasian Centre for Corporate Responsibilities pursuing Santos in court, and they're alleging that Santos' plan to achieve net zero emissions by 2040 amounts to greenwashing. What exactly is greenwashing, and how is it regulated?

Patrick Viljoen:
In accounting terms, and I know we're talking sustainability here, but accounting is valid or, accounting terminology is valid. There's a concept that we usually talk about in terms of substance above form, and what that implies is that it doesn't matter what you are saying as much, right? What assurance or auditors will probably do is they look beyond what is being said and they look at the substance of what this transaction actually is. That's from an accounting perspective. Greenwashing follows exactly the same principle. This is where companies usually position themselves as doing something of benefit for sustainability, but if you actually cut through that, it's basically fluff or they're doing the wrong thing, but they're trying to dress it up as being something different. It's misrepresentation really, that's what it gets down to. It is regulated in as much as even if not outright, in terms of legislation linking it particularly to sustainability. If you apply assurance standards and reporting standards, and this is something which sits squarely within the accounting space, it gets wrapped up in that whole concept of, is what you're showing and what you're reporting accurate, does it reflect the truth, and can it stand up to scrutiny? And if it doesn't, well then inevitably you're going to end up in a very tricky situation.

Dr Jane Rennie:
Well, what evidence do I need then to make those sort of claims? If I'm a small business and it matters to me and it matters to my customers, what am I going to need to have or be able to show in order to prove that I have these environmental bonafides?

Patrick Viljoen:
Yeah, look, and I think if we're talking about sustainability, and we're talking about climate, these things are uncertain. As new information comes to light, we need to adapt the models that we utilise to do these forward expectations and potentially where organisations might land. What you're talking about is future-looking statements. Now, the moment you mention that, directors and senior leaders tend to get a little bit worried because you are talking about placing your name on uncertainty and placing assurance on uncertainty, which is never a... It's not an exact science. What we're after is to provide sufficient guidelines. This usually comes through the reporting standards that we apply, in this instance, sustainability standards, to ensure that directors and business leaders can evidence that they've basically applied themselves to the thinking around sustainability, and in climate change terms, net zero. Again, also assurance would be critical in testing those assumptions as they underpin the statements. Again, we recognise that there's a lot of uncertainty that's being built into this whole process, and we should make allowance for that. It's not being, I think, punitive or vindictive when we do the assurance work, but it's also recognising that companies and directors and leaders are on a journey. It's making sure that you drive the correct behaviour.

Dr Jane Rennie:
Since we are talking reporting then, I understand that Treasury is currently consulting on a proposal to mandate climate related financial disclosures. What are the current requirements on these?

Patrick Viljoen:
Sustainability is broadly wrapped up at the moment in terms of an, if not, why not approach? If you look in terms of how the ASX has their methodology around sustainability, it is expected for organisation... or of organisations on the ASX to report sustainability related considerations. And if not, they need to explain why not? What we're moving towards, and this is something which Treasury and the Treasurer is seeking, is to mandate sustainability requirements. You no longer have the option of saying, "If not, why not?" You have to consider this. The anticipation is that it would be mandated from June, 2024, so next year, with the first reporting cycle in 2024, 2025. But it is moving to that mandated space, no longer a situation of, if not, why not?

Dr Jane Rennie:
For whom would it apply? Is it all businesses, wholesale across the board or only the biggest ones?

Patrick Viljoen:
Yeah, look, and I think Treasury has posed that as a question in terms of what the first cohort should look like? How should we be looking at it? Look, I think the truth of the matter is it'll apply to larger corporate. What we're potentially looking at is the ASX 200, right? Within an extrapolation over duration and time of saying, "Okay, maybe we should move it to the ASX 300, and then other organisations." What we are also wanting to get to is to include larger emitters that may not be listed as part of that because you have to cast the net broader than just the ASX. And over duration and time that'll have a trickle-down effect on small-to-medium enterprises as well.

Dr Jane Rennie:
Now, just on that, I did want to ask about small-to-medium enterprises because if it comes in, and say it is the ASX 200, I'm wondering if they just get a free pass or whether it's a case that the water level rises and it will bring everyone along with them?

Patrick Viljoen:
Yeah, look, and I think it's an important note to make. SMEs won't get a free pass and you might think that, "You might not be material," but if your... Say for example, you have a situation where an SME provides goods and services to a larger corporate, they might become material for inclusion. When we boil this down, one organisation, scope 1 and 2 becomes another organisation scope 3, which scope 3 measures emissions along your value chain. We know that as part of the mandating of standards, and if that's being based on the ISSB, which we expect it would be, scope 3 would become mandatory. And that's the issue. You no longer would have a situation or you won't get away with saying, "Oh, I'm doing my little piece of work in isolation as an SME," but it doesn't touch on anyone because what will happen is the larger entity, if your material to them, you will be getting a call from their auditor saying, "What is your scope 1 and 2, because we need to include that as part of our scope 3?" There will be that trickle-down effect. I think larger corporates will have a lot of focus in terms of their scope 1 and 2 because that's usually the larger part of what they do. But SMEs will be wrapped up as part of that scope 3 piece of work if they're material in terms of the kind of business that they conduct with that larger entity.

Dr Jane Rennie:
Would businesses also have the discretion as to which framework they apply because there are a number of internationally recognised reporting frameworks? Would they continue to have a choice or would the new law mandate a particular approach?

Patrick Viljoen:
Yeah, look, I think similar to accounting standards, we talk about international accounting standards, and that's something which is then interpreted and put into play by the AASB or the Australian Accounting Standard Board. For sustainability standards at the moment, the way that they want to change the Corps Act and the ASIC act is to say you just include international sustainability standards. Now the truth of the matter is, if you look in terms of the way we're moving it... that presumably is going to be the ISSB or the International Sustainability Standards Board. Then also, we need to be very clear that the ISSB standards will be a global baseline. That's the starting point. If you then have a situation like in Australia where we know according to IFAC, a large proportion of our entities report according to the GRI, for example, some other corporates report according to integrated reporting, CPA Australia does the same. We are not saying to entities you have to stop what you're doing and move away from that. All we're saying, the ISSB will form the baseline, your standard that you apply, whether that's GRI or integrated reporting, will then operate in an interoperable fashion with the ISSB. The clearest example I can use or illustration is the building blocks approach that we talk about, where the ISSB will be the foundational building block, like Lego. The next block on top of that would be your framework that you utilise. Then a block on top of that could be jurisdictional requirements, the bespoke reporting that we see within particular countries. All these things will fit on top of each other to build up to a comprehensive piece of sustainability reporting.

Dr Jane Rennie:
The CPA Australia, are we making a submission to this consultation? And if we are, what is our position?

Patrick Viljoen:
Yeah, so we are indeed. I think it's important also to point out here, CPA Australia is not just speaking on behalf of our members. What we are talking about here are implications on the profession. The submission will be a joint submission in between CPA Australia and Chartered Accountants, Australia, New Zealand. I'm working quite closely with my counterpart at CAANZ on this. Look, I can't go into details about submission proposals until we've done it, but however, we do endorse the work of the ISSB as being a global baseline, and therefore we should be using that. Also, we are broadly supportive about mandating, but then with due consideration on things like assurance and the nitty gritty that's written into that. Things like scope 3, where we know there is still a bit of a disconnect, data requirements, this is the robustness of information sources and making sure that that is correct because that needs to falter back into the system. Broadly, we spoke about Labor's approach to sustainability. This is the next evolution and the next step in that, so they're doing the right thing at the right time.

Dr Jane Rennie:
If you are a forward thinking accountant, business or financial advisor, and you're thinking, "I think mandatory reporting will come in," what should you be thinking? What should you be considering in terms of your own professional practise?

Patrick Viljoen:
Yeah, look, I think in terms of getting across the terminology is probably key. In larger corporates, I would be very surprised if you have a large corporate that does not understand climate change, does not understand the impact of climate on businesses because that just means you are operating way behind the curve. As you would let down to SMEs and to public practitioners, over duration and time, there will be increased pressure I think on our members working in that particular space, in as much as how do you provide advisory? We know that smaller enterprises and sole proprietorships don't have the money to avail themselves of things like scenario analysis, for example... To the same level of detail that Westpac would apply themselves. These are considerations that can have tangible impact. It's, how do you make sure that you can whittle down the... without dumbing down, I should say, the information about sustainability that can make it applicable for SMEs? How do they need to think about their value change? How do they need to think about their vendors? How do they need to think about the way that they just do business on a day-to-day basis? So getting across the terminology, getting across the practical business implications, and then providing that level of advisory to your customers.

Dr Jane Rennie:
Patrick, lastly, I'd like to ask you about the social impact of climate action. At the top of the show you mentioned that we no longer have the luxury of time when it comes to climate action, but a lot of Australia's economic prosperity is built on the backs of miners and oil rig workers, for example, people who work in those industries that are potentially earmarked for phasing out. What does this mean for the concept of just transition, of making sure that people aren't left behind? Can the government in fact act quickly and achieve a just transition, too?

Patrick Viljoen:
When we talk about the transition or the just transition, Jane, I think it's very important for us to also note that we can't do these things in a piecemeal fashion. If we think about things like climate change or nature biodiversity, considerations around that should never come at the expense of society. I think, what we need to get to is a point of thinking about all of these sustainability dimensions and then in an integrated manner. So apply yourself in terms of integrated thinking around how are we going to move society into this new particular space? Now at the top of the podcast, I did mention about the pace that we need to move at, and that being a lot shorter, but it does give me a lot of worry about how do we transition people that are, for example, working within mining, coal mining in particular, and have been working within that particular space for generations into this new energy provision state? Reflecting on the budget, the one thing I think in there for me, which was missing is education. Individuals that have worked within the mining sector, particularly in coal for generations, will need to have skills that they can reliably pour into whatever new energy provision mechanism we want to follow. It's, how do we provide these people with the level of education to make sure that their livelihoods can be secured and they are resilient to move into this future state that we are all so boldly pursuing at the moment?

Dr Jane Rennie:
That's all we've got time for today. Thanks very much to our guest expert, Patrick Viljoen. With Interest is a weekly podcast. If you like what you've heard, why not subscribe on your favourite podcast app. From all of us here at CPA Australia, thanks for listening.

Garreth Hanley:
Thanks for 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 podcast and CPA Australia, check the show notes for this episode. We hope you can join us next time for another episode of With Interest.