- In line with international regulations, Australia proposes to adopt mandatory climate-related reporting for large Australian companies starting in 2024.
- This is a new era of legislated sustainability reporting and accountability for Governance Institute members, governance and risk management professionals, and company directors.
- This article explains the new obligations, key risks, and why digital tools are the only solution to meet evolving compliance and sustainability targets.
For the first time in Australia and across the world, legislators, shareholders, investors, employees and market sentiment have aligned to demand sustainability reporting transparency, particularly for energy-intensive industries. Beyond our borders, the Carbon Border Adjustment Mechanism (CBAM) puts a price on carbon-intensive products entering the EU from October 2023, with other countries set to follow.
Built using a similar approach to financial accounting standards, new international disclosure standards are elevating sustainability reporting to an equal footing with financial reporting in terms of accountability and priority. This finance-grade scrutiny makes it a senior-level responsibility.
Dr Keith Kendall GAICD, Chair of the Australian Accounting Standards Board (AASB) — which is accountable for both financial and sustainability reporting standard setting in Australia — underlined the significance of the new regulations:
‘It’s difficult to understate the importance we’re giving to sustainability reporting at the moment. The only thing in the history of financial reporting in Australia that comes close to this was the adoption of international financial reporting standards (in 2005).’
What do Governance Institute members need to do to comply and mitigate risks?
Driven by the ISSB, leading European Union (EU) bodies, the U.S. Securities and Exchange Commission (SEC) and the Safeguard Mechanism in Australia, new standards will require public annual reporting on emissions and demonstrated strategies to reduce them. In the case of the EU green deal, sustainability reporting will be required on a quarterly basis for companies operating within the EU.
Depending on your local jurisdiction, the new rules will require disclosures on a wide range of sustainability indicators such as GHG emissions across Scopes 1, 2 and 3, water, energy, air quality, waste, hazardous materials, pollutants, nature-related risk factors, Product Carbon Footprint (PCF), Life Cycle Assessment (LCA) and Taskforce on Nature-related Financial Disclosures (TNFD) impacts.
To meet evolving compliance frameworks, organisations will need to track and report on these sustainability indicators at a granular level across their operation and supply chain – increasingly down to a product level in many cases.
With Australian Securities and Investments Commission (ASIC) already cracking down on greenwashing in their May 2023 report with strong civil penalties, shareholder activists demanding action by boards, and share prices and capital markets hinging on ESG credit ratings, now is the time to act with only a short runway to prepare before new regulations take effect.
While supporting stronger disclosure measures, Governance Institute’s Feb 2023 response to Treasury’s ‘Climate-related financial disclosure (Consultation Paper)’ expressed concern about the level of skill required to provide a reasonable level of assurance and the burden on directors responsible for forward-looking statements.
‘Our members support improved climate-related financial disclosure. However, as the Consultation Paper notes, compared to financial reporting, climate disclosures involve substantial use of forward-looking information and are dependent on externalities that are subject to uncertainty such as climate scenarios, potential global responses to climate change, regulatory and policy developments and the development of technologies and business models not available today.’
Governance Institute also refers to the need for careful consideration of how climate disclosures should appropriately incentivise accurate reporting, without company directors and governance officers taking on disproportionate liability risk given their skills and experience.
‘Our members consider environmental, social and governance (ESG) assurance providers should be subject to the same independence and quality management standards as financial auditors. They also consider the existing systems for quality management standards and independence requirements are appropriate to apply to the ESG space, modified as appropriate to recognise that the service providers will typically not be financial accountants.’
Digital tools are the only way to meet evolving regulations
The need for regular reporting in a machine-readable digital taxonomy, detailed scenario analysis and forward-looking statements means that data-driven technology is the only solution to meet evolving sustainability disclosure rules and new reporting standards.
Deploy machine-readable digital taxonomy from day one
Digital reporting taxonomy structures provide a standardised machine-readable format for sustainability reports to enable fast and consistent interpretation and comparison. In a recent article, Dr Andreas Barckow, Chair of the International Accounting Standards Board (IASB) supports digital taxonomy:
‘Already required throughout Europe, the US and other global jurisdictions, he notes that global regulators have been ‘quite clear’ that when ISSB’s first standards are adopted within the next year, they should come with a digital taxonomy from day one.’
Delivering machine-readable data relies on consistent and automated electronic data capture, consolidation and output.
Enable automation, data quality and auditability
Manual spreadsheets simply cannot capture or process the volumes of data needed to deliver immutable, unalterable and auditable sustainability reports. The biggest challenge is that siloed legacy systems and manual processes mean most organisations lack the data and digital tools to achieve this to the required levels. Often multiple spreadsheets (typically from manual data entry) and exports from other systems from across the organisation are consolidated and analysed to report on sustainability indicators.
The data is raw, not validated and not contextualised. This process is laborious, open to error and data can be changed or lost and would not meet the level of assurance required from investors, company directors and other stakeholders.
Data-driven forward-looking scenario analysis
Traditionally, financial statements looked at historical performance, whereas the ISSB sustainability reporting disclosure requirements are strongly future-focused, and companies will be required to use scenario analysis when assessing their climate resilience.
One of the biggest concerns for organisations lies in the confidence they have in the quality of their data. Digital tools – using artificial intelligence (AI) such as machine learning (ML) and artificial neural networks – automate data collection, validate and contextualise data, and simulate and calculate more data to close data gaps. Companies use the predictive capabilities of these models to test various future scenarios with confidence and to report on their assessment of climate resilience.
It’s all in scope: Track Scopes 1, 2 and 3 emissions across the supply chain
Sustainability reporting requirements are going further than just reporting on an organisation’s Scope 1 direct emissions and Scope 2 indirect emissions. Under the ISSB disclosures, Scope 3 will be mandatory applying the current version of the GHG Protocol Corporate Standards.
With Scope 3 emissions estimated to account for more than 70% of a business’s carbon footprint, organisations that have not yet begun to calculate these emissions have a lot of catching up to do.
Again, Scope 3 emissions across the supply chain can only be accurately gathered and reported using advanced data-driven tools.
Industry-specific approaches will be required
Sustainability reporting is not a one size fits all approach. Standard setters are moving towards industry-based disclosures about sustainability risks and opportunities assessed as having a material impact on the performance of an organisation.
The Global Reporting Initiative (GRI – currently the world’s most widely used sustainability framework – is part way through developing sustainability disclosure standards across 40 sectors, starting with those that have the highest impact. The Sustainability Accounting Standards Board (SASB) has over 77 industry-based standards and the ISSB has announced that they are ‘committed to maintain, enhance and evolve the SASB Standards and encourage preparers and investors to continue to use the SASB Standards.’
Industry-specific digital tools customised to industrial processes are therefore essential to meet the various levels of complexity across these frameworks.
Flexibility to adapt to evolving sustainability frameworks
Using digital tools to capture and validate granular activity data means that emissions and other sustainability indicators can be calculated, reported and adapted to various sustainability frameworks. While the ISSB claims to rationalise the hundreds of global frameworks down to one, reporting tools will need to be malleable to continually meet evolving regulations and rules in local jurisdictions.
Widespread calls for digital sustainability solutions
Today’s largely manual and disconnected processes are not working. In fact, a global Carbon Measurement Survey of executives across nine major industries found that 91% fail to measure emissions comprehensively. Given that precise tracking is even more difficult for complex industrial processes, now is the time to prepare.
In their report Sustainable economy: Parliament adopts new reporting rules for multinationals, the European Parliament backs digital information.
‘To ensure companies are providing reliable information, they will be subject to independent auditing and certification. Financial and sustainability reporting will be on an equal footing and investors will have comparable and reliable data. Digital access to sustainability information will also have to be guaranteed.’
Carol Adams, Chair, Global Sustainability Standards Board (GSSB) at GRI, in response to Treasury’s consultation of climate-related financial disclosures, recognises digital technologies as an important part of sustainability reporting capability:
‘As organisations require emissions data from different stakeholders within their supply chain, who often use differing methodologies for calculating emissions, collecting and aggregating this data can be problematic. Used together, IoT and blockchain technologies can overcome these problems by enabling the automatic capture and transmission of this data, as well as by ensuring the validity and integrity of the data – leading to efficiency and effectiveness in reporting activities.’
Proven technology helps bridge the data and skills gap
The good news is that data-driven tools are available and have been proven to solve these data challenges for large and complex organisations, so that governance, assurance and risk management professionals, and company leaders, can confidently sign-off on industry-based disclosures.
For the industrial sector, organisations can leverage the latest machine learning technology to centralise asset-wide industrial data, validate and contextualise their data, dynamically simulate their operation as a digital twin, perform an asset-wide mass and energy balance, and deliver granular, finance-grade reports across sustainability indicators.
John Vagenas, Founder and Managing Director at Industrial Sustainability Solutions (ISS), and his team have developed the Sustainability Tracker (ST) analytics software and digital twin technology based on over a decade of experience streamlining industrial plants all over the world.
‘ST integrates seamlessly with your existing systems and is customisable to your unique processes. It automatically centralises huge volumes of data from multiple sources across your operation and supply chain, and uses machine learning to validate and organise the measured and corrected data,’ he explains.
Global sustainability reporting standards are taking an industry-based approach, so reporting solutions must be able to centralise data and measure processes unique to industrial assets.
‘Uniquely, ST uses dynamic simulation to perform an asset-wide mass and energy balance to reconcile your delivery, consumption, inventory and production activity data. Using source data as inputs, the simulated data contextualises your measured activity data for completeness and accuracy. This means your verified sustainability indicators are fully traceable, immutable and unalterable, and surpass any rigorous audit tests for complete assurance,’ says John.
Drive change beyond compliance and risk management
Based on over two decades of experience as a metallurgist, engineer and analytics consultant, John sees digital transformation as a broader opportunity for fast movers to take the lead.
‘On top of ticking compliance boxes, taking control of your climate-related data can improve operational efficiency, build goodwill in the market and boost your bottom line. We welcome the ISSB legislation adoption in Australia. It will give local organisations the impetus and focus they need to accurately track and report on emissions, keep pace with international progress and compete on a global stage,’ he explains.
‘The ability to effectively track, optimise and report on tangible reductions in emissions, energy consumptions and water usage gives you a significant competitive advantage as global markets increasingly favour sustainable operations.’
In terms of environmental outcomes, accurate measurement is the first step in reducing emissions. Setting decarbonisation goals and tracking progress requires two essential ingredients: finance-grade sustainability data and an auditable emissions accounting process.
Sustainability and digital transformation are two of the global business megatrends in recent years. Not only are they complementary, but digitisation is increasingly proven to be a path towards better business and environmental outcomes. Without digital tools, opportunities will be missed.
To learn how to meet evolving sustainability reporting standards with an intelligent data-driven reporting platform, download the Sustainability Tracker guide at www.industrialsustainabilitysolutions.com.