As countries across the world are adapting their mandatory climate-related financial disclosures to align with the International Sustainability Standards Board’s standards, the time for retail leaders to act and prepare is now.
ISSB released its two standards, IFRS S1 and IFRS S2 in June 2023. The Australian Government soon after, indicated that mandatory climate disclosure reporting based on the standards will likely begin for larger companies in mid-2024. The proposed disclosure regime is set to cover approximately 20,000 Australian companies, many of these in the retail sector.
As a consumer-facing industry, retail holds a major influence in consumer behaviour and preferences, and sets standards for other industries. Historically, sustainability reporting in Australia has been largely voluntary and based on several international reporting standards, the ISSB could soon change all that. Besides Australia, many countries around the world, including the UK, Japan, Canada, New Zealand, and Singapore have indicated their national disclosure regime will closely follow the standards set by the ISSB.
As a global industry with far-reaching supply chains and influence, the retail sector in Australia is strongly affected by global investor trends and sentiment. Getting ahead by reviewing your current approach to GHG emissions reporting and disclosure, may work as a competitive advantage when mandated disclosures become the norm both in Australia and worldwide.
What will the suggested climate-related financial disclosure standards look like in Australia?
To understand what the proposed standards will look like in Australia, it’s important to familiarise yourself with the ISSB standards, IFRS S1 and IFRS S2. IFRS S1 focuses on sustainability-related financial closures, while IFRS 2 narrows on climate-related financial disclosures. The overseeing body in Australia, the Australian Accounting Standards Board (AASB) has released a consultation draft that outlines how the standards will be implemented in Australia. The plan is to develop a limited scope domestic IFRS S1, that focuses on climate-related financial disclosures, and then use that to support the implementation of IFRS S2 domestically as close to the original standards as possible.
The standards will centre around four pillars: governance, risk management, strategy, and targets and metrics. The implementation will take a phased approach, based on the three reporting thresholds, related to the size of the reporting entities. As part of the transition period, companies are required to report on scope 1 emissions and scope 2 emissions from the beginning, with scope 3 emissions reporting beginning from the second year. Scope 3 reporting will include upstream and downstream emissions, meaning it is crucial that retail leaders start practical action now to make sure they track and measure emissions across their entire value chains.
Many retail companies in Australia already base their climate-related disclosures on the Task Force on Climate-Related Financial Disclosures (TCFD) frameworks, which will prove advantageous as the ISSB standards are largely drawn from the TCFD standards.
Some differences between TCDF and IFRS S2 indicated by IFRS include the requirement of more detailed information on climate-related risks and opportunities, and where in the company and supply chain they occur. IFRS S2 also emphasises industry-specific information disclosures on climate risks, and requires data to be more quantitative than in previous standards.
What do Australian retail leaders need to consider in preparation for the mandated disclosures?
Start by finding out which of the reporting groups your business falls into.
- Large companies that meet two of the following three thresholds will begin reporting in 2024: over 500 employees, value of consolidated gross assets $1B or more, and consolidated revenue $500M or more.
- Medium companies that meet two of the following three thresholds will begin reporting in 2026: over 250 employees, value of consolidated gross assets $500M or more, and consolidated revenue $200M or more.
- Small companies that meet two of the following three thresholds will begin reporting in 2027: over 100 employees, value of consolidated gross assets $25M or more, and consolidated revenue $50M or more.
If you operate a retail business that doesn’t yet reach the reporting thresholds, there are still many benefits to reporting voluntarily. As bigger retail businesses and investors report on data across their value chains, chances are you will be requested emissions data by them.
Australian Institute of Company Directors have put together A director’s guide to mandatory climate reporting, which sets out the preparation frameworks under each of the pillars of the new standards.
1. Review who is responsible in your organisation for ESG matters and climate reporting.
When it comes to responsibilities on climate-related matters in your business, identify who and which teams will be primarily responsible for reporting under the standards. There might be some upskilling and education required for your teams to ensure everyone is involved in steering the business towards decarbonisation.
2. Assess if you have adequate resources in reporting.
In the beginning when mandated reporting starts, expect some challenges and possible delays, especially when it comes to obtaining clear and accurate data from your supply chain partners. Make sure your team has the time and resources required to accurately and comprehensively produce climate-related reports.
3. Continue to review your governance structure over time.
The implementation of ISSB is expected to shift the climate reporting landscape permanently, and subsequently increase the importance of ESG factors in retail. As time goes on, continue to review your governance processes and ensure climate reporting stays a permanent part of the business agenda.
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Strategy and risk management
1. Identify short-, medium-, and long-term climate-related risks and opportunities.
Climate-related risks can be categorised in two ways: physical risk and transition risk. Physical risk means possible effects of extreme weather events, temperatures, and other climate-related changes to your business, its supply chain, transport, and property for example. Transition risks relate to moving away from an economy that relies on fossil fuels.
There are already many current physical risks in Australia stemming from extreme climate events, like the possibility of bushfires or floods destroying property or disrupting a shipping route, that businesses should develop strategies for. Besides risks, there are some opportunities to seize. As an example, becoming more self-reliant on energy production through renewable options, like solar or bioenergy, is a great way to future-proof your business and cut down your scope 1 and scope 2 emissions.
2. Consider financial risks and effects of climate change, including through scenario analysis.
Companies will be required to report on the financial risks relating to climate change. This includes impact on revenue, like extreme weather affecting the price and access to materials, as well as cost line implications, like the potential impacts of a carbon tax, if one were to be implemented.
Businesses need to be prepared to conduct climate scenario analysis to understand how the physical and transition risks of climate change will affect their business. The Australian Government has indicated that it will require companies to report on this, starting with qualitative scenario analysis, with plans to move to mandated quantitative scenario analysis against the global temperate goal set at 1.5°C.
3. Set a climate strategy and transition plan to manage risks and seize opportunities.
Your strategy should cover how your business is responding to current and future climate change risks and challenges, including how you’re tracking your GHG emissions and working to reduce them, and how you’re preparing for the more unavoidable effects of climate change.
IFRS S1 will also require companies to disclose if they reach their emissions targets by reducing emissions or through carbon offsets. If using carbon offsets, companies need to report on the extent to which they are using them. For retail businesses, emissions reduction through supply chain decarbonisation should be the priority, and use of offsets limited to where reduction isn’t possible.
4. Oversee communication and reporting, and review processes.
Set plans to track your reporting and how you prepare to communicate your strategy both internally and externally. Make sure management is confident that any communication to investors, stakeholders, and the public is consistent with reporting. Even small misleading claims or inaccuracies expose you to greenwashing risks, so accuracy and transparency should be front of mind with everyone involved in internal and external communications.
Be prepared to periodically review your strategy, as climate factors, consumer behaviour, policies, and your business structure might change.
Metrics and targets
1. Understand your company’s current carbon footprint.
Review how your company currently measures its carbon footprint, and whether there are improvements to be made to make this process more efficient and accurate. Ensuring you have a robust carbon accounting system in place is critical in achieving this, and Sustain.Life can support you on this journey.
It’s important to know where your emissions are coming from. If you’re currently tracking your scope 1 and scope 2 emissions in line with the GHG protocol, Treasury has indicated you will need to move to reporting on them under the National Greenhouse and Energy Reporting (NGER) scheme.
Assess your ability to track the scope 3 emissions coming from your supply chain. This data is often the most difficult to obtain, and there are few ways to standardise the process besides changing to supply partners with available and clear data. One option is to introduce emissions disclosure requirements into contracts with supply partners to slowly move towards a decarbonised supply chain. You can also use spend data to calculate supplier emissions based on purchased goods and services to streamline and automate the process.
2. Identify gaps in data and capabilities, and get comfortable with estimates.
As mandated reporting begins, no retail business will have perfect access to data, or a fully comprehensive report. As a leader, identify areas where there are gaps in data and processes. These uncertain areas could include your scope 3 emissions, target plans, or activities exposed to climate risk. Are there ways you can cover these gaps, for example with expert help or technology assistance?
ISSB accepts the role of assumptions in the new reporting framework, and that not all data can be measured directly or accurately. Disclose these assumptions and uncertainties in your reports, including which areas of your business are particularly exposed to them. This way it will be easier to return to them when data quality improves and your climate reporting evolves.
3. Assess assurance and verification options.
For additional confidence in your climate reporting, retail leaders should look at external assurance and verification options. Reasonable assurance is proposed to be required for each reporting group from their fourth reporting year onwards. Sustain.Life allows you to prepare your emissions data for audits and supports the internal verification process.
Whether your retail business falls under the reporting thresholds or is simply looking to standardise reporting to comply with the new standards, this mandated climate reporting will affect the Australian retail industry as a whole, as more diligent emissions accounting will be expected from businesses of all sizes. Getting ahead with thorough preparation doesn’t have to be a burden, but an opportunity to gain an advantage in a competitive and crowded industry, and communicate to the market that climate considerations are a permanent part of your business.
1. International Financial Reporting Standards Foundation, “Comparison: IFRS S2 Climate-related Disclosures with the TCFD Recommendations,” https://www.ifrs.org/content/dam/ifrs/supporting-implementation/ifrs-s2/ifrs-s2-comparison-tcfd-july2023.pdf Accessed on December 19, 2023
2. Australian Institute of Company Directors, Deloitte, Minter Ellison, “A director’s guide to mandatory climate reporting,” https://www.aicd.com.au/content/dam/aicd/pdf/tools-resources/director-resources/directors-guide-to-mandatory-climate-reporting-web.pdf Accessed on December 19, 2023
3. Australian Institute of Company Directors, Deloitte, Minter Ellison, “A director’s guide to mandatory climate reporting,” https://www.aicd.com.au/content/dam/aicd/pdf/tools-resources/director-resources/directors-guide-to-mandatory-climate-reporting-web.pdf Accessed on December 19, 2023
4. The Treasury, “Climate-related financial disclosure - consultation paper” https://treasury.gov.au/sites/default/files/2023-06/c2023-402245.pdf Accessed on December 19, 2023