Mandatory Climate Reporting: Lessons from Group 1

In 2024, the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 amended the Corporations Act 2001, arguably making Australia a global leader in sustainability reporting.

The first group of reporting entities must provide their first reports by 30 June 2026 (for June year ends). Group 2 starts mandatory reporting in 2026, with Group 3 following the year.

So, what is Group 1 learning about this process and how can SMEs leverage that information to benefit their own businesses?

Key lessons from Group 1: Mandatory Climate Reporting

1. Start early

This may not come as a surprise, but the key advice is to start early. A robust climate disclosure reporting system takes time to set up. Early indicators suggest at least 12 months is usually needed, mainly due to the number of cross-functional issues involved. Climate considerations need to be integrated into “business as usual” operations, as well as strategy and decision making, which requires a mindset change from the entire organisation. This in turn requires upskilling, leadership and proactive management of your business at all levels. All of this takes time.

2. You can leverage your existing capabilities

Many businesses already have relevant data and systems in place—the challenge is applying a “sustainability lens” to existing risk and financial frameworks. To do this, each business must decide what climate risks and opportunities might affect its cash flows, access to finance and/or cost of capital, and then quantify the potential impacts.

That sounds difficult (and can be) but many businesses are already doing this. For example, your finance team already understands the underlying drivers of profitability and balance sheet changes, and your lawyers (in-house or not) understand compliance. In other words, you already have some of what you need.

To pivot towards a ‘sustainability lens’, you might need to engage an expert to help you identify the physical and transition risks and opportunities for your particular business model and strategy. At least in the early stages of implementation this might prove a good investment.

The skill here lies in knowing when you don’t know enough and when you need to get help – and then having the resources to pay for that help.

3. Whole of business collaboration is critical

To manage implementation, businesses must identify a team which will have to include members from various parts of the organisation. You will probably need people from your commercial, legal, finance, risk, strategy, sustainability and procurement functions, as well as C-suite and board representation. This has three implications.

• Educate your people on sustainability as early as possible.
• Your CFO (even with the full finance team) will not have the ability to do mandatory climate reporting by themselves.
• Silos in a business are now riskier than ever.

Because this is a relatively new regime, there is a fair bit of heavy lifting required to start with, especially getting things set up across the business. Consider identifying extra people within your business in case more resources are needed. Few businesses these days have spare capacity, but preparation is key to success with this regime (as with so many things in life) and you might consider temporary staff or outsourcing.

4. Scenario analysis is complex

Section 296D of the Corporations Act 2001 requires at least two climate scenarios must be selected to test the resilience of the entity’s strategy and business model to identified climate-related risks and opportunities. Broadly, these minimum scenarios are where the increase in global average temperature is limited to 1.5°C above, or well exceeds 2°C above, pre‑industrial levels.

To analyse a scenario, you need climate data, emissions pathways and socio-economic assumptions amongst other things from your supply chain. Entities often rely on public sources like:

• IPCC scenarios
• NGFS (Network for Greening the Financial System)
• IEA (International Energy Agency).

AASB S2 (the climate disclosure accounting standard) allows some flexibility, so that smaller or less exposed entities can start with simpler, qualitative scenarios and build sophistication over time. This might be enough for many SMEs for the time being.

5. What is ‘material’ requires judgement?

‘Materiality’ is defined under AASB S2 as:

Information that, if omitted, misstated, or obscured, could reasonably be expected to influence decisions made by primary users—namely, investors, lenders, and other creditors—who rely on general purpose financial reports to assess an entity’s prospects (i.e. future cash flows, access to finance, and cost of capital).

That said, materiality is also entity-specific because it depends on context. What is material for one organisation may not be for another. For example, transition risks like carbon pricing are probably material to a large miner, but carbon pricing is less important for most small boutique fashion labels.

Chartered Accountants ANZ suggests a two-step approach:

• Step 1: Identify climate-related risks and opportunities through scenario analysis and risk assessments.
• Step 2: Evaluate which of these are material based on their potential to impact cash flows, access to finance, or cost of capital.

SMEs might need to discuss with their key reporting entity clients how those clients intend to address this question. It might be appropriate for the SMEs to adopt a similar approach although this should be discussed with your own finance team.

6. Improve governance and assurance frameworks now

None of this reporting is going to be possible without robust governance and assurance frameworks. Even entities like Rio Tinto back assurance requirements but have stressed the importance of a phased and practical approach.

Governance is key to any business’s survival but is often overlooked or minimised because it can be a bit dry. It is fundamental here though. Most SMEs could start by assessing their overall risk profile, risk management processes and risk appetite. This requires board involvement but much of the leg work probably needs done at C-Suite level.

An entity’s attitude to this reporting regime can be inferred from its conduct. Early information indicates that businesses that include climate-related performance metrics in their senior executives’ remuneration policies often find they have a head start. BHP links executive pay to ESG performance and discloses high-risk sites, showing a commitment to transparency (whether this is influenced or not by BHP’s recent litigation history is irrelevant).

7. Boards are often a bottle neck

Board and management oversight of the approach to identifying, assessing and managing climate-related risks and opportunities is necessary for good governance, as well as for the reporting itself.

The board should authorise the implementation plan for the new regime. That means engaging the board early and educating it before a plan is put to it.

Board education sessions on director’s duties associated with the new climate reporting requirements can be useful to start the board thinking about these issues, because board members generally need to sign off on the reporting. Updating board governance frameworks can help ensure nothing falls through the cracks. Climate risk is now a standing agenda item in the banking sector, with directors seeking assurance on assumptions and methodologies. SMEs might consider whether their boards need to be refreshed and/or upskilled in these areas.

Boards should always want a clear audit trail and rationale for why a decision has been or should be made. Having a board champion for sustainability helps drive progress and can give boards a level of confidence in their approach.

Next steps for SMEs

Don’t overcomplicate it, but don’t underestimate the time it’s going to take either.

• Training and education:
  Upskill staff and boards on climate risk and disclosure standards. An entity’s approach to climate risk and opportunity management is not an issue for just a few key personnel to deal with. It requires a whole of business response necessitating training and development of everyone.
• Gap assessments:
  Conduct internal reviews to identify where current reporting falls short of AASB S2 requirements. Identify physical and transition climate-related impacts and prioritise these, assessing the materiality of the impact on your business.
• Scenario Planning Workshops:
  Appoint cross-functional teams to explore climate scenarios and financial impacts, having discussed the approach your key clients are taking. You might need external assistance for this.
• Technology Solutions:

If resources allow, implement ESG data platforms to streamline reporting and analytics.

• Stakeholder Engagement:
  Communicate with your investors and stakeholders to align expectations and build trust. For example, Rio Tinto sees climate reporting as a tool to keep investors informed and aligned with their transition strategy.

Despite the challenges (and they are considerable), SMEs can turn climate disclosure into something genuinely valuable—a reason to get to know your business and supply chains better, improve business strategy, understand your financial exposure and future-proof your operating model. Who doesn’t want that?

Reach out to our ESG lawyers for support

If you are an SME looking to undertake mandatory climate reporting, our ESG industry can provide hands-on assistance to ensure your business is compliant with the incoming regime. Reach out to our team for support.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.