The Third Wheel (ESG Australia) EP50: Looking back at the first wave of climate reporting

Welcome back to The Third Wheel. In this episode, we turn our attention to one of the new features of the annual reporting landscape: mandatory climate disclosures.

With the first wave of reporting now completed, we thought it was the perfect moment to pause and reflect. What’s working well? Where are organisations still finding their footing? And what challenges are starting to surface?

This episode kicks off a two-part series, where we explore early trends emerging from the first round of disclosures. We share our initial observations, highlight recurring hurdles or challenges, and point to areas where reporting is already showing real progress.

Transcript

Welcome Back And Why Now

SPEAKER_00 0:08

Welcome to the Third Wheel Hramer Podcast on all things ESG in Australia. I'm your host, Anna Coronio, from the firm's Head Office Advisory and ESG team. I'm joined by two of my colleagues from my team today, Tim Stutt, who is also the Australia Head of ESG, and Andrew Owen, a solicitor in our Melbourne team. It's been a while since our last Third Wheel podcast, and we're now coming out of hiatus. Given the amount of policy change and continued focus on integration of ESG into business, we thought this might be an opportune time to refresh and revamp our podcast. Over the coming months, you'll hear from a range of our colleagues from across the firm on ESG issues more broadly and quite a lot of updates because this has been an area that we've seen a lot of attention on lately. For today's edition, we wanted to talk about the elephant in the annual report, which is climate reporting or the new sustainability report. Our last Third World podcast was about structuring the report, but that was before we had the mandatory requirements in force. Now that we've had one round of mandatory reporting, we thought it would be a good time to reflect on what we've seen and some of the challenges. So we're kicking off with a two-part podcast. Today, we will talk about our observations on the reports released so far, some of the challenges we've seen, and where the reports have performed well. Part two will be about

First Impressions From December Reports

SPEAKER_00 1:28

some of the key takeaways and learnings for the 30 June and 30 September year end companies, and we'll also touch on our six recent observations and our reflections on this. So to kick off, I will ask a pretty general question and get some insights from Tim and Andrew. Reflecting on the December year-end reports we reviewed, what were your overall impressions? Are there some key takeaways or themes that stood out?

SPEAKER_01 1:53

I'll go first if you don't mind, Andrew. A lot of law firms, but also broader service providers have done wrap-ups on the 31 December cohort. And what they probably haven't covered in great detail is that it was actually really hard to get to a compliant report. It took a lot of paddling. And without wanting to name names or anything, not all companies got there. So certainly all companies got to the point of having an unqualified audit opinion, but in looking at some of the reports, there was a really wide range in terms of level of detail and in terms of compliance. I think the shortest was 10 pages-ish, maybe sub-10 pages. The longest, I think, was 80 pages. Most of them tended to be 30 to 40 pages. Looking at them, there was variable approaches in relation to a lot of the requirements and some that we would consider missed requirements or didn't interpret requirements as per ASBS2, the standard which informs the reporting. So I think my overarching observation on the reports is there are a lot of them now that we can look at, but not all of them are compliant, and a little bit of caution is needed in relying on them too much to inform your own reporting for 30 June and 30 September companies. But also, it took a lot of paddling to get to the point of having a compliant report and probably more than was expected.

SPEAKER_02 3:26

Yeah, I'd agree with that, Tim. There's a lot of reports out there now with lots of different approaches to answering the disclosure requirements. But in some reports, it's not completely obvious what disclosure requirements are being answered and concepts are being conflated. However, it was a big push to get to the 31 December reporting out. And so as ASIC has noted as well, it's a sort of big tick for these companies. While while there isn't complete compliance, we are moving all in the same direction towards more comparable information and and the like. So difficult and and not 100%, but small improvements for sure.

SPEAKER_01 4:09

And some were 100%, I should say. There are some, and in fact, quite a few, which got to compliance. I think to get there though, it was a lot more work than either we or they expected. So I think a lot of companies had sort of initially thought that they might have a couple of rounds of review from a compliance perspective. So there might be an initial round, you address the comments, and then you have a final round to tick things off. In reality, actually, it was probably more like three or four rounds of review for most companies if they were trying to get to a nice green compliance down every one of the items. A lot of companies had moderated approaches as well, where they were focusing on material gaps and bigger buckets of issues and then doing their own sort of compliance assessments and things like that internally as well. So there were a range of different approaches, but it probably

Why Compliance Took So Many Rounds

SPEAKER_01 5:06

was a more significant exercise than a lot had expected. I think in some ways, actually, maybe the story of the first wave of reporting, it does have a message of uplift. And that was true around the compliance aspects, which we've just talked about. It was also true around a lot of the process aspects as well. So I would say most companies had a good understanding that ASBS2, while the end output is a sustainability report focused on their climate-related risks and opportunities, actually, it has a lot of process aspects embedded in it around materiality, around how you assess business resilience, around how you articulate your climate-related risks and opportunities and the impacts that they might have over different time horizons or different dimensions of your business in terms of like cash flows, financial position, financial performance. And there was quite a bit of process uplift to be able to do that type of reporting and to do it in a way where it was picking up the relevant information from across the business, some of which sits in finance, some of which sits in legal or risk, some of which sits in governance or COSEC, some of which, or a lot of which sits in the sustainability team or even operational teams in terms of a lot of the inputs for things like emissions and stuff like that. So I think that process uplift was another aspect which really came out clearly from the reporting as well.

SPEAKER_00 6:35

I guess another question is around the structure of the report. And I know I mentioned our last podcast was about structure, but there have been a range of approaches. So some have followed the four pillars and others have done a more narrative approach. Do you have any reflections on that?

SPEAKER_01 6:49

So I don't want to be a naysayer, but I would say following the standard pretty carefully is quite important. And I would say that from a couple of

Process Uplift Across The Business

SPEAKER_01 6:58

perspectives. So one is actually it demonstrates that you're within the four walls of what's required and signals that you've thought about the specific requirement. You've followed the process, which is sort of integrated into ASBS2, and you've disclosed in accordance with the law. That in and of itself means it's worth pretty carefully following the language and the process that's set out in the standard. The second one really goes to comparability. So comparability and also, I guess, assessment, maybe we'll call it. That's a way of saying that there's an expectation that AI will be used to analyze companies reporting. And that might be by the regulator, trying to understand across the market whether companies have complied with the standard. That may be by proxy advisors or investor groups who are trying to understand a company's particular risk exposures or opportunities and compare them across a sector or compare a group in a portfolio or whatever it is. And if you're not following the language of the standard and the structure of the standard, actually that's going to be a bit of a problem. You're not going to be as comparable. And from a regulator perspective, you might be throwing up red flags for potential non-compliance. Could you talk through those issues if ASIC came knocking? Yes, you probably could. If you've followed the right process and done it the right way, and you know, you can peel back a layer and explain the approach you took. Is it better to follow the language of the standard and follow the structure of the standard in a fairly obvious way? Yes, it is going to be better to do that, is my perspective. Others might have a different view on that. I would say in terms of structure, we've seen a good number of companies mixing up the order of the pillars. So that might be bringing forward risk. So you're talking about the governance in relation to climate, then you're talking about your risk processes, then you're talking about your specific climate-related risks and opportunities, which are under the strategy pillar, then you're talking about your transition plan as part of that. And then you have your metrics and targets which flow on from the transition plan. That's a pretty common approach that we've seen. Others have changed it entirely and they're focused more on strategy up front because they're trying to talk about their decarbonization approach and land some of their key messages around how they're responding to climate-related risks and opportunities. And then from there, they've moved some of the granular detail about accountabilities and risk management processes further towards the back. So it's more supporting material rather than front and center in terms of key messages.

SPEAKER_02 9:33

I would say where we've seen companies move away from using the pillars of AASBS2 to structure the report, it's often been to align with their climate transition plan. So, like Tim was saying, moving content around, but for alignment with the climate transition plan and alignment with how disclosures about sustainability and climate change were made in previous years. And like Tim was saying, from a review perspective, it can be a bit more difficult to follow because as readers of the reports, we're sort of used to seeing the information in the pillars. So that's something to keep in mind as well when considering how to sort of set out the report.

SPEAKER_00 10:09

That's a lot of food for thought for the companies that are now going through the process of preparing their first reports that are 30 June year end and also 30 September year end. I think that brings us to maybe talking about some of the common challenges that were faced by the December year end companies and also maybe some of the gaps that we saw emerge.

SPEAKER_01 10:29

Probably one of the biggest themes on the topic of pillars, one of the biggest themes coming through the challenges related to the strategy pillar, where it was a disproportionate amount of the work to be able to produce the climate report, probably one of the biggest areas of uplift. And we did see a number

Structure Choices And Comparability Risks

SPEAKER_01 10:48

of companies where they conflated some of the concepts or some of the topics under that pillar. So for those who are not super familiar with the standard, there's a few concepts which are particularly relevant to the strategy pillar. One is your climate-related risks and opportunities or your crows. So applying the materiality lens that ASBS2 has, you will prepare a list of risks and opportunities which might be reasonably expected to impact your prospects. And that's looked at through the lens of your cash flows, access to capital, cost of capital. And then you look at that long list and you work out materiality in terms of quantitative and qualitative materiality and what would be relevant to primary users of your reporting. And wind up with your crows. There are then requirements to talk about current reporting year, impacts of those crows or expectations for potential impacts in the next reporting year, and then to talk about your anticipated financial impacts over short, medium, and long-term horizons. And that has a few dimensions to it in terms of financial position, financial performance, and cash flows. That's really quite a broad range of information. And we'll maybe come back to it. But that was probably one of the newest areas for this reporting regime, one of the areas that very few companies had done reporting on previously, and one of the biggest areas of uplift. But that idea of crows and financial impacts is sort of one aspect of the strategy pillar. Then there's business resilience. And the standard has specific reference to doing scenario analysis to inform the company's assessment of business resilience. What business resilience really looks at is how will the company be impacted under different warming scenarios? So in a low scenario with a faster transition, what does it look like? What are the impacts on business model, on value chain? Then in a higher warming scenario, what happens? Are there greater physical risks to the business, side interruptions, things like that? That business resilience assessment is sort of done under hypotheticals. That's not entirely the case. So you sort of need to have some regard to what's realistic in picking your scenarios, but it is testing

Strategy Pillar Pitfalls And Conflation

SPEAKER_01 13:08

the business under specific sets of circumstances. It's not necessarily grounded in the company's expectations or the reasonable expectations or the anticipated financial impacts in the way the earlier Crows and anticipated financial impacts disclosures are. So they are a little bit separate. Then there's a third aspect of that strategy pillar, which is the transition plan. And that is the company's goals and how it's planning to achieve those goals. So what steps is it taking? Its decarbonization strategy that gets picked up under the transition plan. Across the strategy pillar disclosures, we saw quite a bit of conflation of the different concepts. So heavy reliance on business resilience, where the company was disclosing its crows and impacts of crows. That might make sense in some circumstances. It might be a useful input. But ultimately, if the scenario analysis reflects scenarios which the company doesn't think are particularly likely, there's going to be a bit of a disjunct there. We also saw, in relation to the scenario analysis, a real focus on the crows and looking at how might risks and opportunities get bigger or smaller under the different scenarios, which makes sense, but probably not drawing the linkages back to then how does the business model change? How does the value chain get impacted? Which is a key aspect of the business resilience concept and the idea that you will be testing the resilience of what you're doing, but also how the business might change under different scenarios and disclosing that. So there across the different concepts under that strategy pillar, there was quite a bit of conflating different aspects or muddying some of the analysis between them.

SPEAKER_02 14:57

And then I think as well, a common challenge for clients was also just the quantitative information for their crows. Now there are mechanisms under ASBS2 which would allow you to only provide qualitative information about the financial impact of climate-related risks and opportunities. But the standard also provides that if you're providing qualitative information, you need to provide a whole range of information like the particular line items that may be impacted in future financial statements, if the risk or opportunity is able to be combined with a broader risk, like the impact of the broader risk. And so what we found is there were a number of reports where a decision was made that it wasn't possible to provide quantitative information. And that's certainly a pathway available under the standard. But what wasn't ticked off was the supporting disclosures of we can't disclose a quantitative information and providing a reason and providing the line items, providing as much qualitative information as possible. So I think that was certainly a gap we saw. And the process under there when we were talking about uplifts earlier is ensuring that there are appropriate sustainability records being kept about those decisions, as we know that that's a an interest area for ISIC. So actually having the documentation within management and showing what's gone to the board of why those decisions were made and how those decisions were made were particularly important and I think also a challenge for some reporting companies.

Strong Areas Plus Closing And Part Two

SPEAKER_00 16:28

So maybe turning to the other side of the coin now, where did the reports perform particularly well? And were there some specific areas where there's really high standard of compliance?

SPEAKER_02 16:40

I think particularly well, it's unsurprising that lots of clients and companies, governance and risk management disclosures were largely compliant, and cross-referencing was used by a number of companies. Now, the reports that we've seen, it looked like cross-referencing was used appropriately and well. I know that there are some other opinions from ASIC about that, which I think will be discussed in our next episode. And so a hook to keep listening. But it was also generally well done was yes, the governance and risk management disclosures, the most of the reports that we had seen followed a structure closely aligned to AAS, BS2. So they were also quite easy to follow. And while there was conflation in the strategy pillars, many companies did have really decent disclosure of the risks and opportunities that they have.

SPEAKER_01 17:32

Just picking up on that, I think my overarching observation for the companies which have now reported is they've come out of it with a much better understanding of their risks and opportunities than they had going into it. In some cases, intuitively, they might have had the list of things, but I think now they understand much more specifically what the impacts of those might be and what the sort of ranges or sensitivities sitting around those impacts might be, the time horizons they're going to hit, even down to where in the value chain are they going to hit. I think we've heard a fair amount of criticism from boards, others as well, that the reports are quite long, that detail is quite granular. I think all of that's fair and true. The reports are quite long, the standard is quite detailed, but I do think it has resulted in a meaningful step forward for most companies in terms of their understanding of the risks and opportunities and an understanding of the time horizons and the ways in which impacts might be felt. So that is probably in my mind one of the positive areas to come out of the reporting regime and having pretty specific and distinct disclosure around what those crows are, I think, has also been one of the areas which most have done pretty well. I think where it's gotten a little bit harder is drilling down into the anticipated financial impacts and so on and so forth, the more granular level of detail. But I think crispness around what are the risks and opportunities has been done well by most and been certainly a step forward from the previous voluntary reporting that companies did.

SPEAKER_00 19:10

Great. Thank you for sharing all of those insights. I think that brings us to the end of our part one of our sustainability report update after the 31 December year end companies reported. As I mentioned earlier, we've got part two coming up with some specific lessons for the 30 June and 30 September year end companies. So stay tuned for part two. But in the meantime, thank you, Tim and Andrew, for joining us today and sharing those insights. And thank you to everyone for listening. Goodbye.