Breaking down the latest in ESG reporting and disclosure

Australia's mandatory climate reporting officially began on 1 January 2025, joining a growing number of jurisdictions adopting ISSB Frameworks

The recent federal election result has provided welcome certainty for Australia's sustainability reporting landscape, ending months of uncertainty about the future of mandatory climate disclosures. Despite opposition promises to roll back reporting requirements, the momentum behind ESG reporting appears unstoppable.

"The outcome of the election has given us all some certainty, some welcome certainty," said Justin Williams, Managing Director of the Australian Accounting Standards Board. "When we think about S2 and the first round of reporting, Group 1 entities, certainty is the absolute bedrock of where we want to be."

Speaking at the Impact X Summit for ESG Reporting & Disclosure, Williams revealed that businesses had not slowed their ESG reporting preparations during the election period, with even Group 2 and Group 3 entities continuing to advance their readiness despite the political uncertainty.

Global Convergence Despite Headlines

While political headwinds grab attention, the technical reality points to increasing global alignment on sustainability reporting standards. Australia's mandatory climate reporting officially began on 1 January 2025, joining a growing number of jurisdictions adopting International Sustainability Standards Board (ISSB) frameworks.

"Despite some of the headlines, many jurisdictions are progressing towards ISSB adoption and account for about over 60% of global GDP," explained Jeanne Stampe, Lead Policy Advisor at Norges Bank Investment Management, participating virtually from Norway.

Stampe highlighted that even Europe is moving closer to ISSB alignment, with proposed reforms set to reduce the number of EU companies in scope by 80% while maintaining requirements for large corporations. Similarly, California has passed laws requiring large companies to report climate risks using TCFD frameworks or equivalent ISSB standards.

Data Quality The Critical Challenge

The biggest hurdle facing Australian companies isn't regulatory uncertainty but the practical challenge of accessing reliable data. Williams shared his organisation's own reporting experience, revealing how dramatically different data sources can produce conflicting results.

"We had a very large shift in difference between two different sources of reporting that showed us we had reduced our CO2e on a dramatic level. My accountant said I couldn't use that because clearly the data was wrong," Williams admitted, noting their travel had actually increased despite the apparent emissions reduction.

This data quality issue extends beyond individual companies. While Australia's mandatory internationally-aligned climate-related financial disclosures became reality from financial years beginning in 2025, preparers face significant challenges in building internal capabilities.

"There will be a critical need to build the competencies within companies," Stampe observed. "Understanding how climate considerations flow through strategy, finance, business planning, and other core business processes. These are areas which are new."

Investment Implications Drive Adoption

For global investors managing trillions in assets, Australia's early adoption of ISSB standards presents a competitive advantage. Norges Bank Investment Management, which manages the world's largest sovereign wealth fund, has been using climate disclosures to make divestment decisions since 2012.

"We've divested from almost 200 companies due to climate-related financial risk, and this has led to an improvement in our cumulative return on equity of 0.3 percentage points," Stampe revealed, emphasising how better disclosure quality directly impacts investment decisions.

The materiality threshold for climate information represents a fundamental shift from previous voluntary frameworks. "Companies have to determine what information would reasonably influence investors' decisions to buy, sell, hold securities, provide credit, and vote," Stampe explained.

Physical Risk Underestimated

While transition risks receive significant attention, physical climate risks may be severely underestimated in current scenario planning. Stampe's organisation has developed proprietary models showing much higher potential losses than commonly used approaches.

"We calculated the present value of average expected losses from physical climate risk on our US equities portfolio under a current policy scenario to be 19%. This compares to 2% with the bottom-up approach using MSCI's climate value at risk model," she said.

This disconnect has serious implications for businesses operating on tight margins. "If your margins are tight, you have far less room for error. All the more reason to look into resilience, particularly when you don't have that headroom," Stampe warned.

Strategic Implications for Business Leaders

The discussion revealed several critical strategic considerations for Australian executives:

First, mandatory reporting represents an evolution rather than revolution. "If you had material climate risk in your business, financial climate risk, you should have already been disclosing it," Williams emphasised. "This is not new. It's just being brought out from the dark and put front and centre."

Second, proportionality will be key to successful implementation. Companies must apply professional judgement to determine appropriate disclosure levels, with regulators expecting evolution over time rather than perfection from day one.

Third, the competitive advantage of early adoption extends beyond compliance. Australian companies integrated into global value chains will be well-positioned to meet information requests from US and EU partners already subject to reporting requirements.

Future Scope and Timing

While pressure exists to expand reporting beyond climate to include nature and biodiversity, both speakers advocated for getting climate reporting right first. "Climate first, not climate only," Williams noted, emphasising the need to avoid creating additional "noise in the marketplace."

Stampe agreed, pointing out that "climate actually is a rather wide umbrella" that already encompasses deforestation, water stress, and other environmental factors critical to business operations.