The Third Wheel (ESG Australia) EP51: ASIC observations and lessons for future climate reporting

In Part 2 of our climate reporting series, we build on the themes from Episode 50 and shift the focus to what comes next.

As the first wave of disclosures has wrapped up, attention has turned to the next climate reporting cycles - particularly for June and September year-end companies. The question now is: what lessons can organisations take forward?

In this episode, we unpack key takeaways from the first round of sustainability reporting and explore how they can be applied in practice for future reporters. We also take a closer look at ASIC’s early observations and share our perspective on what these mean, and how companies can consider them going forward. 

Transcript

Why This Reporting Cycle Matters

SPEAKER_01 0:08

Welcome to the Third Wheel HSF Kramer podcast on all things ESG in Australia. I'm your host, Anna Coronio, from the firm's Head Office Advisory and ESG team. Joined today by two colleagues from my team, Tim Stutt, a partner in our team who is also the Australia Head of ESG, and Izzy Darby, a solicitor in our Melbourne team. Hey guys.

SPEAKER_00 0:30

Hello.

SPEAKER_01 0:31

Hello. This podcast is actually part of a two-part series where we're sharing our reflections on the first round of mandatory sustainability reports under the newish climate reporting regime. Part one, we talked about our observations on reports released so far, key challenges that we saw faced, and whether reports performed well. In today's podcast, we will look ahead and cover the key takeaways and learnings for the 30 June and 30 September year-end companies, and we'll also touch on ASIC's recent guidance.

Building A Forensic Compliance Trail

SPEAKER_01 1:03

So, Tim, I might start with you. Looking ahead, what key lessons should the June year-end or 30 September year-end companies or the group two reporters take from the reporting cycle that we just saw? And are there any ways that they can maybe better position themselves to avoid some of the pitfalls that we've seen?

SPEAKER_00 1:24

I think a big one from my perspective, Anna, and this will give everyone an instant allergic reaction, but I will explain it and unpack it a little bit for them, is having a pretty forensic approach to tracking compliance. So under the new regime, boards have to give a declaration in relation to the report that they have taken reasonable steps to ensure the substantive provisions of the sustainability report meet the requirements of the Corporations Act, including the sustainability standards, which sort of sit under the Act. In terms of putting the board in a position to give that declaration, there does need to be a system for tracking each of the disclosure requirements and making sure that it's being ticked off in the reports. And that's an area where we saw a pretty wide range of approaches in the early phase. And I think it's an area which requires a bit of thinking and a bit of proactive planning in terms of the 30 June, 30 September cohort. So the sorts of things that we might see there could be something fairly informal, like a Excel spreadsheet tracking the requirements in the standard and where they're being ticked off, or a checklist type approach. It could be internal or external. We do a lot of compliance reviews ourselves, but some clients will do them internally, or they might have consultants or or others help them with some of that as well. They might also use a digital platform. So we have our own digital platform Hero, which is the HSF Kramer ESG Reporting Organizer. We worked long and hard on that name. We're very proud of it. But what it does is it's sort of like a database where you can track where each of the provisions is ticked off and collate feedback, including audit feedback and legal feedback and store documents, which are underpinning each of the requirements. I think actually having some sort of process like that will be quite important going forward. And we saw a real range of reports in the 31 December cohort from some very, very high-level short reports through to some very, very comprehensive reports. A lot of examples we looked at, which were publicly available. There was some fairly obvious gaps from our perspective, flicking through them, and we weren't confident that everyone had necessarily ticked off on the requirements of the standard. Did they take reasonable steps? Well, you know, I think ASIC is thinking about what that might require and potentially going to update RG280 to give a bit more guidance on that. But having a process for tracking compliance, I think is probably a fairly foundational step that companies should be thinking about. Areas that sort of got missed quite frequently were some of the application guidance, which is actually binding. I think there was also conflation of some of the topics, which we talked about in our part one episode. There was also a level of detail which was sometimes missed. So below the headline requirement, it might have been an X including Y, and Z, and people had given X, but not necessarily included Y, and Z. It might have been a time frame issue where something needed to be disclosed over short, medium, long-term horizons, and it wasn't necessarily done across multiple horizons. Might have been financial performance was ticked off, but not financial position or cash flows. It might have been that there was reliance on exceptions or relief and the conditions for that were not met. So those sorts of issues tripped up quite a lot. And in all honesty, working with clients on compliance reviews, there was more work and more paddling than they typically expected. So suffice to say, having a system around that and putting some early thinking into what sort of process will be followed, how long will that process be, how many rounds of review, what sort of internal and external resources will be needed. Quite important. The reason I say it might trigger an allergic reaction is I think there was a pretty resounding feeling from a lot of the directors we've talked to that the reports are much more compliance-y than they would like. And they don't necessarily highlight the level of ambition or the sort of live planning that the businesses are doing around decarbonization. I think that's fair. Like the standard is very comprehensive, and a lot of the information it requires is really quite technical and quite granular. So ticking off on all of that in a report, they're quite long, they're quite detailed, they're quite dense, and there is a lot of compliance-type stuff. I think our reaction, and maybe we're biased because we're lawyers, but our reaction is there's legal obligations under the Corporations Act, the disclosure obligations under the standard are not voluntary, mandatory. It's in the name of the regime, the mandatory climate reporting regime, actually having systems underpinning it is quite important.

Making Dense Disclosures Readable

SPEAKER_00 6:29

And the way to address some of that want for this not to be a compliance exercise is really around putting effort into the messaging and putting effort into the way a lot of the information is communicated, including landing some of the key messages up front and including not necessarily slavishly following all aspects of the standard. I think following the language of the standard, the structure of the standard generally is important, given that a lot of investor groups, proxy advisors might be using AI to review these reports. But at the same time, I think the key messages around what is the company trying to achieve, what is the company doing, really quite important. One other thought, which I'll flag quickly because I know that we have plenty of other questions.

Getting Early Board Buy In

SPEAKER_00 7:12

One other thought is around ensuring a level of board buy-in as well. So the reports which sailed through most readily were the ones where the board had been brought into the tent around some of the key decision points and the key judgment areas. And the reality is that there is a whole bunch of decision points which come up along the way to producing the report. And expecting the board to get across those in the final stages of approving the report is really difficult. The earlier the board can be brought into some of those key decisions, the better. So making sure that they have an understanding of where things are landing in terms of materiality and what are the material climate-related risks and opportunities, the approaches which are going to be taken to closing the current and anticipated financial impacts, whether there's going to be reliance on relief for scope three emissions or comparative periods. All of those things are worth ventilating with the board quite early to make sure that in the later stages when things are hard to change, that there are not changes coming up from the board table. By that stage, they have a good understanding for what's going to be reported and the approaches which are going to be taken, including some of the key areas of uncertainty and assumption as well, which will ultimately inform them, being the people who are required to approve the report.

SPEAKER_01 8:39

And Tim, just on that board timeline, how early were some of these decisions being made in practice? And I guess if things were popping up, how do you bring that to the board's agenda where you've actually got quite a set agenda the year in advance?

SPEAKER_00 8:56

So across different clients, we saw at different stages. Often there would be some sort of skeleton or outline of what the report would cover going quite early. So even up to six months before the report was going to be approved. Realize that might be a bit triggering for some who are listening into this and in group one and don't have six months left anymore. But ventilating what will the report look like and what will it cover early so the board can understand the scope of the exercise. That was something we saw a number of clients do and do quite successfully. Where it came to some of the judgments, so some of the decisions around whether relief will be applied, uh, the approaches to calculating some of the financial impacts, those sorts of issues, even the crows themselves, oftentimes we would see those probably bubble up to either an audit and risk committee or a sustainability committee meeting, maybe three months in advance, something like that. So there's enough time to be able to do some pretty heavy-duty further analysis if required. Realistically, I think actually, with a bit of workshopping and discussion, most companies were able to get their initial analysis and approaches through the board and the committees fairly uneventfully. I think there was quite a lot of questions, though, from the committees testing the basis on which information is going to be formulated and disclosed. So trying to understand what are the data sources like, trying to understand what process was followed in arriving at the crows, what are others doing in the market, is there sufficient space being given to opportunities as well, recognizing that the regime has quite a lot more disclosure around climate-related opportunities than a lot of companies have historically done. So I think working through those issues in a sort of workshop, pretty open-ended way with board committees was something that a lot did pretty successfully at about that sort of three months before type stage. And then when it gets to closer to approval time, that's where we saw a lot of compliance reviews, verification reviews, all of those sorts of things didn't necessarily require a lot of board input, but the outputs of those processes formed part of the compliance packs going to the board. So they would get a copy of the report, but they would also get an understanding of what processes were followed, a reminder about some of the key judgments taken on the way through. There might have been an explanation of how compliance was tracked and ticked off, explanation verification processes, how record keeping was going to be conducted or was conducted, and management attestations as well. So when they're coming to approve the report, they have this sort of full suite of things that they can get comfortable in terms of process followed and also get comfortable in terms of the declaration that they have to give.

SPEAKER_01 11:52

The other thing I've been thinking about while we've been having this conversation is that year one was always going to be a learning year for a lot of companies. It's a new regime. As we've sort of seen with annual reporting in general, there's always an opportunity afterwards to sort of take stock on what happened, what worked well, and sort of reflect and then build that into year two and beyond.

ASIC’s Initial Guidance For Reporters

SPEAKER_01 12:13

So, question for Izzy. I know that we've recently had some ASIC guidance around the sustainability reports that were released. Can you maybe tell me a little bit about the important points that the companies that are about to do their reporting should keep in mind?

SPEAKER_02 12:32

Yeah, of course. So, for context, earlier in May, ASIC came out with their initial observations from the December year-end sustainability reports. And essentially the purpose of this release was to provide early guidance for those junior endur-year-end sustainability reports based on ASIC's reflections and their reviews of that first wave of sustainability reports that came through. I won't run through each of the observations, just as I imagine that a lot of our listeners have read through the guidance that ASIC provided, but I'll run through some of the key takeaways that are most relevant to a lot of our clients.

Disclaimers And Scope 3 Cautions

SPEAKER_02 13:13

And the first one is around the use of disclaimers. So essentially, ASIC identified instances in the reports that they reviewed, that certain type of disclaimer language was inconsistent with some of the WSBS2 principles of fair representation and faithful representation. And so basically, that's the requirements under the standard that the information disclosed in the reports are to be accurate. And they also found that some of the disclaimer language was inconsistent with the mandatory scope three emissions measurement approach, particularly where disclaimer language suggested that third-party data had not been verified or could not be relied upon. ASTIEAC basically noted concern that this type of language suggested that users couldn't rely on that information and that it basically disclaimed responsibility for the accuracy and completeness of the information within the climate report. And in our view, disclaimers remain important for legal protection. And in a lot of cases, we're working with clients where their auditors have raised concerns on some of this disclaimer language. And basically, we have been revising or reframing the wording of the disclaimer to better align with ASIC's concern and then also of the concern of the auditors to ensure that there is still appropriate legal protection with those disclaimers. So that's the first point that was raised by ASIC.

Separating Mandatory From Voluntary

SPEAKER_02 14:41

Another one that I'll run through is on the clarity of additional or voluntary information. So ASIC essentially noted that where companies are including additional or voluntary information, in some cases, they're not clearly signposted, which is a requirement of the ASB and the Regulatory Guide 280. And the risk is in ASIC's observation, is that where you're including voluntary information alongside the mandatory climate-related disclosures, it could obscure that mandatory information. And essentially, for companies going forward, where you are including voluntary information to be in accordance with the Reg Guidance and the standard, you need to ensure that information that is mandatory is clearly identifiable and that the voluntary information is clearly signposted. And how we are seeing that in practice is a lot of companies are either using an index table to note where those requirements or where that mandatory information is located throughout the report. And so then it means that users are able to identify what information is mandatory and what information is voluntary, or alternatively, where case studies or scope free emissions where they're included voluntarily, where a company is applying the transitional relief, it's just clearly signposting that information that is additional or supplementary or voluntary.

Cross Referencing Without Breaking Rules

SPEAKER_02 16:11

And the next one that ASIC spoke to is around the cross-referencing requirements. And this is something that's come up a lot with a lot of the reports we've reviewed, both from the December year ends and also with our current junior end clients. And essentially, ASIC noted that they observed inconsistent application of cross-referencing to information outside of the sustainability report. It is allowed. Companies are allowed to cross-reference to other reports or documentation that they have prepared. But where they do that to meet a requirement of the standard, there are particular requirements that need to be met. And to list them out, they need to ensure that the cross-reference material is available on the same terms and at the same time as the climate-related financial disclosures. The climate-related financial disclosures need to clearly identify where that cross-referenced information is located and also how that information can be accessed. So that may be through a hyperlink. And lastly, the disclosures must be to a specified part of that other report. So that might be pinpointing the exact page number so that users can easily and readily access that cross-reference information. Another thing that I will just add on that cross-referencing observation by ASIC is that on the requirement to lodge the cross-reference material on the same time and the same terms, in our view, that implies that that document also needs to be lodged either with ASX or ASIC. And so in a lot of cases, that can be challenging for organizations practically. And so in some cases, it is more practical to just include a summary where it meets the requirements of the standard within the sustainability report to avoid having to have that lodgement of the cross-reference material.

Safeguard Mechanism As A Target

SPEAKER_02 18:12

The last thing I'll run through today is on ASIC's observation around the safeguard mechanism as a target under the AASB. Similarly to the point raised before, this is another issue that's come up with quite a few of our clients where they haven't regarded the safeguard mechanism target as a target for the purposes of ASB. But in ASIC's observations, they're basically reminded companies that climate-related targets are mandated by law or regulation, which is what the ASB requires. And so, in that way, a safeguard mechanism target would sit underneath that requirement. So we share the same view as ASIC. Essentially, we do view the safeguard mechanism target as a target for the purposes of AASB. And in practice, how we are seeing companies navigate this in their disclosure is varied. In some cases, companies are including their target and their progress against their safeguard mechanism target within the same table that they are with their other voluntary emissions reduction targets. And they're stepping through each of the relevant requirements underneath paragraph 33 that relate to the safeguard mechanism target. And so in some cases, it's just a common sense approach as they track through each of the requirements where something doesn't make sense for this type of mandatory target. For example, process for reviewing and setting the target. We see that companies are disregarding these requirements and just applying the disclosure requirements. That makes sense. Alternatively, we're also seeing companies just include the target through narrative. And instead of including it within the table, it's more so touching off on the relevant reporting requirements through more high-level narrative, which in our view still meets compliance and captures the relevant information that the standard needs. Tim or Anna, anything else to add?

What To Watch Next

SPEAKER_00 20:25

Maybe just to wrap up on a few of those observations, I think the clarity around the safeguard mechanism is actually very welcome. While from our perspective, it was a fairly bright line as something which would be caught by the requirement to disclose targets set by law or regulation. There was a real angst about it in the market because companies didn't have control over it. They didn't have processes for setting or reviewing it. And in some cases, actually having it described as a target was probably a little bit different to the way that they might set and define targets for the purposes of their reporting as well. So some companies draw distinctions between aspirations and ambitions versus targets and have set definitions that they apply around what they mean by a target and what level of certainty that imparts. So in that context, it was a little uncomfortable to have an externally set target described in that way. I think the ASIC observation on it has made it very clear, which is helpful. And there's ways through the rest of the issues by being quite clear, you know, that it is disclosures for the purposes of ASB S2 in relation to a target set by regulation. There were some examples of companies in that 31 December cohort where they had sort of said, oh, it's externally set, so we don't have to disclose it against ASB S2. And that's probably not very consistent with the way in which the standard talks about targets set by law or regulation, which are always going to be externally set. So I think that was a helpful clarification on their part. I I think the item around disclaimers is a bit more of a watch this space. I don't think there was a lot of companies thinking that a really broad brush disclaimer would ever get them out of legal liability for misleading disclosures. I just don't think that's what they intended by that wording. I think a lot of companies had sort of repackaged existing wording that they had for their annual reporting suite more broadly. In some cases, language probably is overly broad around no undue reliance or things like that. I think the bit which is a little bit more difficult is the scope three point that you raised, Izzy, because the reality is companies are unlikely to be in a position to do proper verification of scope three emissions information. And I'm not sure that's particularly realistic to expect. There is an understanding or there is a recognition in the standard itself that a lot of that information might be estimated as well. So I think the wording that a lot of companies had adopted there around when we don't take responsibility for third-party information, blah, blah, blah, blah, blah. That was again a type of language which was pretty normal previously. Here, I think it it does require a bit of reframing, but I I'm not sure the core concept is really that objectionable from a regulatory perspective, because I don't think it was ever intended to be companies being overly speculative or anything like that. I think it was intended to make the point that given it is third-party information, their ability to actually verify it is limited. So I think that one is probably a little bit more challenging. Although going through disclaimers, while some abroad of the 31 December cohort, there's many which I think are quite tailored and quite helpfully framed, calling out care areas of uncertainty with a good amount of detail. So I think maybe some were issues in in Asic's mind, but certainly there's some which we look at and we think they're pretty comprehensive and helpful.

SPEAKER_01 24:14

So I think that brings us to the end of our podcast for today. Uh Tim and Izzy, thanks for joining and sharing those insights. And thank you to everyone for listening. We'll see you next time.