August 28, 2023

How the ISSB Standards Impact Australian Companies

Learn about upcoming changes to disclosure frameworks within Australia, the importance of measuring Scope 3 emissions, and how Australian companies can prepare for the ISSB standards.

Marc Allen
How the ISSB Standards Impact Australian Companies

Recently, the ISSB released the first set of their much-anticipated sustainability standards. As a follow-up to our piece on the details, importance and impact of this announcement, we’re focusing on how adoption of the ISSB standards will play out in Australia. Specifically, we’ll examine the current state of reporting and disclosure within the country, the effect that the ISSB standards will have on Australian companies, and how businesses can begin preparing for the anticipated changes to Australia's corporate landscape.   

Greenhouse gas emissions reporting within Australia 

For context, Australia already has a robust system for companies to report their greenhouse gas (GHG) emissions, and a strong culture of businesses taking their sustainability and climate responsibilities seriously.

The NGER Scheme, a compliance reporting framework in place since 2007, requires Australian companies to disclose their carbon emissions to the Clean Energy Regulator.

The framework focuses primarily on the emissions directly tied to a company’s operations (Scope 1), indirect emissions from electricity consumption (Scope 2), and is very prescriptive about the methods that an organization must use to calculate their carbon footprint.  

Key differences between the ISSB standards and the NGER Scheme

The NGER Scheme is required of Australian companies if they’re above the reporting thresholds for participation. Similarly, the ISSB standards also mandate the disclosure of greenhouse gas emissions, however, there are some major distinctions that exist between these two frameworks.

First, while the NGER Scheme only focuses on a company’s Scope 1 and 2 emissions, the ISSB standards ask for Scope 3 as well.

The second point to consider is that whereas the NGER Scheme obligates companies to disclose their emissions from the preceding year, the ISSB standards take a different approach.

The ISSB standards are risk-based, forward-looking and prompt organizations to evaluate how prepared they are for the transition toward a zero-carbon economy. Though this structure turns forecasting your GHG emissions into a pivotal task, it by no means eliminates the need to report on your actual emissions as well. To that point, the reporting of actual emissions across Scope 1, 2, and 3 is a component of the "Metrics" section of the ISSB standards.

The ISSB standards largely align with the TCFD frameworks, and a key objective of each is determining how climate and sustainability risk are projected to affect a company’s financial performance. 

They’re both designed to guide decision-making by shareholders and investors, and to ensure that future financial performance under different transition and physical risk scenarios assumes a high degree of importance.

How the ISSB standards impact Australian companies

One of the biggest impacts that the ISSB standards will likely have on Australian companies is the requirement to measure and disclose their Scope 3 emissions, and then ultimately, to have that information be assured by a third party.

In practice, this means that organizations must now analyze their entire supply chain, and take stock of the indirect emissions that occur both upstream and downstream of their operations.

Though the NGER Scheme has very clear guidelines for calculating the emissions that are directly linked to your facilities, a similar approach just isn’t possible when it comes to measuring Scope 3.

The reason: by definition, Scope 3 are the emissions that are beyond your control, so creating a one-size-fits-all, prescriptive methodology that all companies can use to compute their carbon footprint is quite difficult.

Whether it’s collecting the right information from a supplier or determining if said information is even available, calculating Scope 3 emissions varies from sector to sector and from business to business. True, the core principles related to measuring carbon output remain the same, but a lot of complexity starts to arise because of how varied each company’s business goals, methodologies and data sources can be.

Though carrying out your Scope 3 measurements can be challenging, the process of unlocking that underlying data, and refining it, can provide you with a much deeper understanding of your GHG emissions. 

This resulting improvement in both quality and granularity of your insights allows you to develop credible net zero targets, as well as a comprehensive plan to achieve them

The ISSB standards are keenly focused on a company’s future exposure to climate change risk, and because of this, it’s critical to note that your Scope 3 emissions are likely to be a large source of climate risk exposure when it comes to both the upstream and downstream emissions that your organization is linked to (depending on your sector and products).

Due to the future-oriented nature of the ISSB standards and their ability to uncover detailed data, these standards will be effective in helping Australian companies determine how well-adapted they are for a global economy that, increasingly, is having companies pivot toward developing deep decarbonization pathways and aligned with the goals of the Paris Agreement.

Starting your decarbonization journey can be challenging, but that's why we're here to help. At Unravel Carbon, we specialize in measuring Scope 3 emissions, and would be glad to support your company’s sustainability efforts in any way we can.

Both public and private companies are affected 

This flowchart is relevant for all companies that have a reporting obligation under Chapter 2M of the Corporations Act (2001).

Correction: In the previous version of the infographic, Cohort 2's consolidated annual revenue was incorrectly stated as $50M. The correct figure is $200M. This has been rectified in the updated version of the infographic.

In June, the Australian Treasury released a discussion paper that specifically discusses the ISSB standards—adapted in part by the Australian Accounting Standards Board—and which focused on new disclosure requirements that’ll compel companies to report their climate risk exposure to the market in a phased approach

In terms of what this document means for Australian businesses, it’s likely that the Treasury will end up mandating that all companies, both listed and non-listed, with revenue over $50 million must adopt the new standards that are under consideration. 

Via annual disclosures, these businesses will have to define scenarios for future climate action (economy-wide), and determine how their particular company will be impacted by changing policy landscapes, access to debt and equity, social licence, and other climate-specific risks.

Ultimately, the Treasury’s aim is to elevate the importance of non-financial metrics, and have them become essential components of an Australian company’s annual filings. 

At the moment, it seems like we can expect the Treasury to release their finalized approach soon, and that the government is looking to have it mandated by July 2024. 

What Australian companies can start doing now

The most important thing that companies in Australia can do, right now, is to conduct gap analyses.

This involves a thorough review of your current sustainability efforts and company performance, understanding how they could be impacted by the ISSB standards, and formulating a plan to implement any changes that are needed.

Also, companies should be proactive in identifying and coordinating with key stakeholders, particularly from financial institutions, that may have heightened expectations regarding compliance with the ISSB standards.  

As you navigate this process, it’s crucial to bear in mind that the ISSB standards, and reporting frameworks in general, aren’t meant to impose an additional regulatory burden on businesses.

Instead, they take the view that most companies already have systems for risk management and business strategy development in place.

Therefore, it’s preferable that something like the ISSB standards be integrated into existing processes, as opposed to companies having to create entirely new protocols. This helps ensure that climate strategy development becomes central to an organization’s business roadmap, and that climate considerations are taken into account when crafting a company’s long-term plans.

By formulating a deeper understanding of the ISSB standards and incorporating sustainability and climate risk assessment into the nexus of their operations, Australian businesses can better-position themselves to handle the evolving terrain of corporate responsibility.

Interested in learning more about how Unravel Carbon can help Australian companies prepare for the ISSB standards? Get in touch with us.

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