Australian finance sector tells government ‘prioritise’ transition plan guidance

The Australian financial sector has called on its government to develop guidance on net-zero transition plans as a priority this year.

Industry-led sustainability body, the Australian Sustainable Finance Institute (ASFI) made the recommendation in its response to the government’s consultation on mandatory climate disclosures, which closed on Friday. 

It was one of three areas that ASFI urged the Australian government to develop “bespoke or supplementary guidance” around. Such guidance would be in addition to Australia aligning with the corporate sustainability standards being developed by the International Sustainability Standards Board (ISSB), the initiative wrote. 

“Given the critical role that transition plans play in supporting and channelling investment for the net-zero transition, this guidance should be developed by [the] government as a priority in 2023,” ASFI stated, adding that the effort should build on the work of the UK’s Transition Plan Taskforce and Glasgow Financial Alliance for Net Zero (GFANZ).  

In addition, the development of sectoral transition pathways by a credible agency would also support “entities to produce high quality transition plans, and facilitate assessment of those transition plans by investors, financiers and others”.  

ACSI recommended that the government task Australia’s independent Climate Change Authority with the responsibility for developing “science-based sector pathways by the end of 2023”.

When launching its consultation in December, the Australian government revealed that it would launch a wider sustainable finance strategy early this year. 

ASFI is currently consulting on its creation of a sustainable finance taxonomy. The sustainable finance body also asked the Australian government to provide guidance on how its planned disclosure regime would “interact” with the taxonomy.  

The absence of government involvement in the work of ASFI had previously set it apart from initiatives in many other jurisdictions. But following the election of prime minster Anthony Albanese in May, Kristy Graham, executive director of the initiative, told Responsible Investor in September that the Treasury has become more active in the efforts around the taxonomy, as well as being engaged in ASFI’s work more broadly.

The Australian Council of Superannuation Investors (ACSI), the ESG-focused body representing 26 super funds, separately called on the government and regulators to work with the market to “develop standards, auditable data and scenarios for the disclosure of climate risks by Australian reporters” in its consultation response. 

ISSB alignment 

ACSI also supported Australia aligning its disclosure regime with the ISSB standards, the first two of which were signed off last Thursday at a board meeting in Montreal. 

“ISSB Draft Standards represent minimum standards on which an Australian approach to mandatory climate reporting can be built,” ASCI wrote.  

It added that it also supports the ISSB approach to materiality, which unlike the one being developed by the EU does not refer to the sustainability impacts of the company on the world but more narrowly the financial impacts on the company created by its activities.  

Some European asset owners have pushed back against ISSB’s approach to materiality. For example, HSBC Bank’s £36 billion pension fund stated that universal owners “need a double materiality lens to inform critical, long-term decision making” in its response to the ISSB’s consultation.

ACSI, however, cautioned against creating a false distinction between investors and the interests of other stakeholders. “Over the long-term, where entities have effective and mutually beneficial relationships with their stakeholders, they are more likely to be successful,” it wrote.

Australia’s sustainable finance body, the Responsible Investment Association Australasia (RIAA), whose membership represent $29 trillion in assets under management, agreed that Australia should “adopt the ISSB materiality definition and guidance”. But added that Australia should also “embed in our market a broad definition of materiality which includes the external impacts of the company, which overtime become impacts on the company”. 

Echoing this, influential Australian shareholder advocacy group, Australasian Centre for Corporate Responsibility (ACCR) encouraged the government to implement a “double materiality assessment in line with standards being introduced in the EU”.

Scope 3 reporting 

Consistent with the ISSB’s approach, super fund group ASCI stated that “mandatory reporting should incorporate Scope 3 emissions”. The challenges in reporting full value chain emissions it added, “should be managed through the appropriate disclosure of data gaps and the methodology used, and with updates as methodologies progress”.

ACSI has called on the Australian government to work with industry in order “to better define and address Scope 3 reporting challenges over time”. It added that this work should “should address and provide guidance on the challenges in defining clear value chain boundaries for Scope 3 emissions”.

Offsets 

The disclosure of offset use was described by ACSI as “a key element in understanding a company’s transition plan”, and added that their use should be part of mandatory reporting under Australia’s corporate reporting standard.

“[D]isclosure should start from the principle that offsets should only be used when emissions cannot be avoided and explain why the company is using offsets,” ACSI wrote.  

Moreover, the investor body said that data on the offsets should be provided to allow an assessment of their credibility, “including whether they actually represent a reduction in emissions”.

Australia’s largest super fund, AustralianSuper, also agreed that the use of offsets in transition plans should be disclosed. 

Financial statements  

When it comes to where climate reporting should be disclosed, ACSI stated that it should be included in annual reports and “integrated into the financials, whether by cross referencing or other methods.”   

During the US Securities and Exchange Commission’s (SEC) consultation its climate disclosure rule some big US firms expressed concerns that reporting ESG information in financial filings might leave them open to lawsuits if that information is found to be incorrect.       

ACCR stated in its response that “material financial issues belong in the financial statements”. The non-profit added “where climate related disclosures are made outside of the audited financial statements, they should be subject to the same governance and assurance as the financial report”.

AustralianSuper wrote that it supports inclusion of climate reporting in an “alternative separate report forming part of the annual report”.

Conceptually, the fund stated, “we support climate reporting being included in financial and operating reviews so that climate data and disclosures are as integrated as possible”. However, it added that its stance was based on “practical considerations”, such as issues with assurance.

Timeline and coverage 

Investor body, the Investor Group on Climate Change (IGCC), called for the commencement of reporting to take place no later than the 2024-25 financial year, with economy-wide coverage within three years at the latest.  

ASX 300-listed companies should be the first to report, said the IGCC, in addition to listed and unlisted firms with annual revenues of A$100 million and large financial institutions with revenue or total assets under management of at least $5 billion.