Investors globally are signalling a rising interest in sustainability performance and disclosures. Large, listed companies have been including such disclosures in their annual and sustainability reports for decades.

The 2020 KPMG Global Survey of Sustainability Report shows 80% of the biggest 100 companies in 52 countries and 96% of the largest 250 companies globally produced a separate sustainability report.

In addition, 61% of the largest 100 companies in 52 countries included sustainability information in their annual report – a growing trend.

Much of the disclosure, however, is in the ‘front half’ of annual reports, where the information disclosed is voluntary, rather than mandated as financial statements are.

EU shifts to mandatory sustainability reporting

In contrast, the European Union (EU) has recently [March 2021] brought into company law across its 27 member states the requirements of the 2014 EU Commission’s Non-Financial Reporting Directive, which mandates that certain large EU companies include sustainability disclosure under the following categories in their management report: environmental, social and employee, respect for human rights, anti-corruption and bribery, and diversity.

This marks an important move from voluntary to mandatory sustainability reporting requirements in corporate reports in this region.

Compare that to the current sustainability reporting landscape in Australia, where one of the only sustainability requirements for annual reports under the Australian Corporations Act is including a statement as to whether or not a company has broken an environmental law.

Climate-related disclosures

Sustainability reporting is mostly considered under the umbrella of environmental, social and governance (ESG) reporting or corporate social responsibility (CSR) reporting. One of the many aspects included under the ‘sustainability reporting’ banner is the issue of climate change.

For decades, international organisations such as UN Climate Change Conference committees, governments, companies and other stakeholders have been considering the effect of their activities on the environment, in particular carbon emissions and climate change.

Many companies have followed guidelines for sustainability reporting, notably the GRI Standards from the Global Reporting Initiative, and reported on their impacts on the environment, including scope 1, 2 and 3 carbon emissions.

In December 2018, the AASB and Australian Auditing Standards Board (AUASB) published a report titled “Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB Practice Statement 2”.

This report suggested that applying the materiality definition and the principles in IFRS Practice Statement 2: Making Materiality Judgements would result in some climate-related information that is currently disclosed in directors’ reports and corporate governance statements being reflected within the financial statements.

It further stated that the potential financial implications arising from climate-related and other emerging risks may include:

• asset impairment
• changes in the useful life of assets
• changes in the fair valuation of assets due to climate-related and emerging risks
• increased costs and/or reduced demand for products and services affecting impairment calculations and/or requiring recognition of provisions for onerous contracts
• potential provisions and contingent liabilities arising from fines and penaltieschanges in expected credit losses for loans and other financial assets.

The International Accounting Standards Board (IASB) has expanded on this Australian report and in 2019 issued its own publication, “IFRS Standards and climate-related disclosures”. It emphasised that although the IFRS Standards do not explicitly mention climate change, their requirements do apply to issues related to climate change and that “qualitative external factors, such as the industry in which a company operates, and investor expectations may make some risks ‘material’ and may warrant disclosures in financial statements, regardless of numerical impact.”

Because of this, climate-related risks may need to be considered “in the context of … financial statements rather than solely as a matter of corporate-social-responsibility reporting,” concluded IASB board member Nick Anderson.

“Climate-related risks may need to be considered ‘in the context of … financial statements rather than solely as a matter of corporate-social-responsibility reporting’.”

Different approaches to sustainability standards

In 2020, the Trustees of the IFRS Foundation (related but distinct from the IASB) joined the host of organisations putting up their hands to lead the development of global sustainability standards, starting with a focus on climate change disclosures.

Their apparent narrow focus on the inward and financial impact of social and environmental issues on a company from a shareholder perspective is much different to the current most frequently used sustainability reporting standards, the GRI Standards, which instead focus predominantly on the external impact of a company on society and the environment using a multi-stakeholder perspective.

In the wake of the Trustees of the IFRS Foundation’s move into the sustainability reporting arena there has been a flurry of alliances formed between existing organisations with sustainability reporting guidelines.

In July 2020, the Sustainability Accounting Standards Board (SASB) and GRI announced a collaborative workplan. In September 2020, five organisations – the GRI, SASB, CDP, Climate Disclosure Standards Board (CDSB) and International Integrated Reporting Council (IIRC) – stated an intent to work together. In June 2021, the IIRC and SASB merged into the Value Reporting Foundation.

While many support the lead of the Trustees of the IFRS Foundation, there are vehement critics, who suggest that we already have a set of global sustainability reporting standards, those of the GRI.

Fundamental conceptual differences arise between the two main groups – those focusing on inward financial impacts on a company from a shareholder perspective versus those interested on the outward impact of a company on society and the environment from a multi-stakeholder perspective.

What are companies using?

To date, many Australian (and other) companies have followed the GRI approach with outward, external oriented sustainability reporting. This was shown by the widespread reference to GRI in the 2020 KPMG Global Survey of Sustainability Reporting.

However, the inward financial impact of sustainability issues on the company, such as climate change in accordance with the Task Force for Climate-related Financial Disclosures (TCFD), is beginning to be reflected in annual and sustainability reports.

The 2019 and 2020 annual reports of Woolworths Ltd and BHP Group Ltd, for example, both have climate change sections and refer to the TCFD.

Interestingly, both companies significantly increased the amount of climate change disclosure between 2019 and 2020 and have included more disclosure in the notes to the financial statements, in addition to traditional disclosure in the ‘front half’ of their annual reports.

Director decisions

Directors and others need to consider whether they can/should keep reporting on sustainability and climate change issues using an outward impact focus and/or an inward impact focus by reporting the impacts of sustainability issues on the company in financial numbers as well as qualitative disclosures.

Decisions will need to be made about whether climate-related disclosures should be disclosed in the ‘front half’ of annual reports and/or in the ‘back half’. The placement of such disclosures is significant in light of the different levels of audit assurance required for the financial statements versus the ‘front half’ of annual reports.

“Decisions will need to be made about whether climate-related disclosures should be disclosed in the ‘front half’ of annual reports and/or in the ‘back half’.”

The IASB warned in 2019 that: “Disclosures in other documents (including presentations, management commentary and sustainability reports) will not compensate for the omission of disclosures that are required to be made in the financial statements and are therefore subject to audit in most jurisdictions”.

We await to see further developments towards mandatory global sustainability reporting standards.

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