FTI Consulting’s key takeaways of the Sustainability Reporting Standards

On 26th June 2023, the International Sustainability Standards Board (‘ISSB’) released its inaugural global sustainability reporting standards, IFRS S1 and IFRA S21 (‘Standards’).

All Australian companies must proactively prepare for these forthcoming changes, with mandatory climate-related financial disclosure anticipated to impact Australia by Q2 2024 as the Standards are translated to Australian context.

The Standards represent one of the most significant shifts in financial reporting in recent years, marking the next step towards equal prominence for sustainability and financial reporting.

The ISSB Standards are vital to investors by providing reliable sustainability information to support investment decisions.

Over the next six months, Boards, CEOS, CFOs and sustainability executives must start planning and allocating sufficient funds and resources in preparation for the Australian implementation of the Standards and the mandatory requirements which in Australia will extend to climate-related financial disclosures.

Commencing in January 2024, the Standards will take effect globally. They will not be immediately mandatory across markets, with each jurisdiction needing to define the extent to which they will be implemented, however, with the global community seeking a consistent sustainability disclosure baseline, the ISSB Standards are likely to be widely adopted across the globe.

Covering governance, strategy, risk management, metrics and targets, the Standards establish a consistent global framework, requiring companies to report on all relevant sustainability topics, not just climate-related ones.

Be aware, this is more than just a reporting requirement; it is also a rewiring of how company value is determined, articulated and how performance is measured.

Companies will need to assess information to disclose that can reasonably influence decisions by key stakeholders such as investors, lenders, and creditors.

Once adopted internationally and in Australia as a consistent set of standards, businesses will need to align financial reporting with sustainability reporting. As a result, there may be a requirement for additional disclosures in an entity’s financial statements.

This means companies must be ready to share a much more comprehensive range of information than before with investors, lenders and other financial stakeholders.

The development of mandatory climate-related financial disclosures is part of the Australian Government’s commitment to ensure greater transparency and accountability regarding climate-related plans, to ultimately deliver on the country’s net zero commitments.

As such, the Treasury is leading the policy design of the new mandatory requirements, with the Australian Accounting Standards Board (AASB) responsible for the draft, consultation, and issuance of the standards.

The Treasury has signalled that mandatory climate related financial disclosures for Australian large-listed and unlisted companies and financial institutions will follow the ISSB Standards.

The Treasury’s proposed framework would therefore cast a wide net on thousands of companies.

The AASB is consulting on proposals for the disclosure design and is expected to issue Australian climate-related disclosure standards in Q2 2024.

These are to follow the ISSB IFRS S2, with some aspects of IFRS S1, for example, materiality definition, implemented to give effect to IFRS S2.

Beyond climate disclosures, AASB is developing sustainability disclosure standards for the Australian market, likely to be closely aligned with the ISSB Standards.

There is currently no indication these standards will become mandatory in Australia in the near future.

With the phased rollout of the Treasury’s climate-related disclosure standards over the next year, companies have reasonable time to prepare and adjust, as mandatory reporting may commence as soon as FY2024-25. Noncompliance will result in civil penalties.

The Standards, as implemented for Australia, will help ensure investors have the data they need to make more informed investment decisions related to climate risk and opportunities.

The Treasury’s mandatory climate-related financial disclosure rules would apply to the largest Australian companies for the reporting period commencing 1 July 2024 and then expand to smaller companies over the following three years.

The LFRA will continue to monitor and update the industry as the Standards are introduced.