The Australian Government is one of many global economies taking an active approach to addressing global climate change.

In 2022, the government committed to reducing greenhouse gas emissions across the Australian economy to 43 percent below 2005 levels by 2030. Australia’s whole-of-economy long-term emissions reduction plan is to achieve net zero emissions by 2050.

This has and will drive significant investment and change throughout
our economy and presents significant opportunities for all businesses, no matter their size or industry.

In support of these initiatives, in January, the Australian Treasury released plans for the implementation of mandatory climate-related reporting disclosures.

The current proposal before parliament would require entities (subject to size) to commence reporting climate-related disclosures from as early as 1 January 2025.

The Australian reporting standards for climate-related disclosures will be aligned with the climate management standards set by the International Sustainability Standards Board (ISSB).

The ISSB sustainability disclosure standards incorporate some of the established sustainability measurement and reporting guidance in the market, including the Taskforce on Climate-Related Financial Disclosures (TCFD).

Reporting entities will be obliged to delve into:

1. Governance: the processes, controls and procedures employed to oversee sustainability and climate- related risks and opportunities.

2. Strategy: addressing how these sustainability and climate- related factors could influence their business model and overall financial performance over short, medium and long-term horizons.

3. Risk management: outlining the processes used to identify, assess and manage sustainability and climate-related risks.

4. Metrics and targets: this means ‘spilling the beans’ on gross greenhouse gas (GHG) emissions (Scopes 1, 2, and 3) in metric tonnes of CO2 equivalent and revealing the company’s GHG intensity using the GHG Protocol.

WHAT THESE ‘SCOPES’ MEAN

Scope 1–3 greenhouse gas emissions describe the sources of emissions expressed in kilotonnes of carbon dioxide equivalence.

• Scope 1 emissions are the emissions an entity directly controls and owns, such as those produced by their business-owned vehicles.
• Scope 2 emissions are the indirect emissions linked to purchased or acquired energy, electricity, heating or cooling consumed by the entity.
• Scope 3 emissions are the broadest class and stem from activities not controlled or owned by the entity but are a result of the entity’s value chain, including upstream and downstream emissions. When an entity reports on Scope 3, it opens a vast array of emissions data from upstream and downstream partners in its value chain. This means supplier or customer activities might find their way into another organisation’s emission calculations.

In response, reporting entities will likely show a preference for suppliers that not only measure their emissions but can also prove they’re cutting down their emission intensity. This will drive changes in customer/supplier relationships.

IMPACT ON SMALL AND MEDIUM-SIZED ENTERPRISES

While the mandatory reporting requirements will initially impact the largest entities in the economy, there will be a rapid flow of impacts to every organisation.

Small and medium-sized enterprises (SMEs) will undergo a major transformation due to mounting pressure from supply chain partners and customers who are directly impacted by stakeholder requirements to capture and measure the greenhouse gas emissions within their enterprise activities.

As the pressure mounts on reporting entities to reduce their carbon footprint,
a greater number of SMEs will find themselves on the path to decarbonisation or risk being shut out from valuable customer opportunities.

As such, now is the time for SMEs to consider their impact on supply chain greenhouse emissions and calculate their carbon footprint – a vital first step on the journey towards decarbonisation.

While emissions measurement and reporting requirements may seem onerous, there are rapidly developing solutions available to assist SMEs.

If not prepared, businesses could potentially run the risk of losing existing clients or being excluded from new client tender opportunities if they cannot provide relevant emission-related information when required.

OPPORTUNITIES AT STAKE

Being aware of the sustainability impacts of your business will add value to the business and potentially provide a competitive advantage.

There are many ways SMEs can harness benefits from investing in
ESG and sustainability. Businesses can differentiate their market position if they are progressive in adopting an emission reduction target, which may add value to their proposition within the supply chains of larger businesses.

As companies develop a robust, sustainability reporting ecosystem, they can monitor their progress as they roll out a strong ESG strategy. This should help them to drive value and crucially, make them attractive to customers, suppliers, employees and financial providers.

PERSONAL RISKS FOR DIRECTORS

While it’s important and valuable for entities to establish an emissions-related strategy, directors must be conscious that many aspects of climate-related disclosures are inherently forward-looking.

Under the Corporations Act, forward-looking statements made without reasonable grounds may be taken to be misleading.

ASIC has provided guidance that it is actively alert to the risk of ‘greenwashing’ claims made by organisations.

To minimise risk, directors need to actively ensure the content of climate- related disclosures is based on high-quality information and can be substantiated.

About the author:

Nicholas Guest is a corporate advisor at HLB Mann Judd. HLB Mann Judd assists business owners and managers in commencing their emissions measurement and reporting journey.

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