It is now clear that not only is climate change one of the greatest threats to the environment of the planet, but its adverse impacts are also increasing in their frequency, severity, and distribution.
The UN IPCC released a report on 20 March 2023 warning that the climate impacts now being experienced are likely to become critical within the next 10-15 years. Some, such as the rise in the height of the oceans being caused by the melting of the ice at both poles, will be irreversible.
The threat is largely being driven by the release of carbon dioxide from the burning of coal, natural gas, and oil (the ‘fossil fuels’). Although an enormous financial investment is being made around the world to substitute renewable energy sources for each, the expectation is that the full conversion to a carbon emissions-free world is unlikely to occur before late in the century.
The United Nations position is that these emissions need to be halved before 2030 if the worst impacts are to be avoided. To achieve this, the 41 billion tonnes emitted in 2022 would need to drop to 20 billion tonnes annually by 2030. Unfortunately, they are still growing.
The scale of the transition required is underpinning a rapidly growing international body of technical standards, laws, and financial instruments describing how carbon-intensive activities should progressively be minimised. One of these, the climate-related disclosure standard published in June 2023 by the new International Sustainability Standards Board (ISSB), is expected to be adopted widely as the benchmark (IFRS S2).
Carbon disclosure in Australia
The crisis has immediate implications for business in Australia.
Firms with significant carbon emissions have been required to report their emissions since 2007, but the new Federal legislation that came into effect in April 2023 also requires Australia’s 215 top emitters to develop and then disclose the reductions they will achieve by 2030.
Disclosure of the emissions profile of firms not caught by this legislation is largely a voluntary exercise, but this is also changing. Regulatory bodies such as the Australian Securities & Investment Commission and the Australian Prudential Regulation Authority have both made statements in 2023 emphasising the obligation on executives and Board Directors to ‘disclose and address ‘foreseeable and observable’ climate-related risks.
The Australian Treasury is also progressing the development of a policy that proposes the introduction of national mandatory disclosure rules for carbon emissions to apply from 2024.
Supply chain emissions profiles
There is increasing interest in the carbon emissions of organisations in the supply chain of reporting entities(known as their Scope 3 emissions). In some cases, these can be much higher than from the internal processes of the primary reporting entity, but considerable effort may be required to trace these in a credible and formalised manner.
Australian exporters of goods and services can automatically find themselves classified as Scope 3 emitters for compliance with the regulations imposed on their overseas customers. The type of obligation that this may place on Australian exporters to disclose their status varies considerably across industry sectors, and with the location of the overseas importer.
For example, the European Union has legislated a Carbon Border Adjustment Mechanism that comes into effect in 2025. This will impose a carbon tax on imports of electricity, cement, aluminium, fertilizer, and iron and steel products across the EU.
The level of tax applied will depend on the emissions embodied in each group, plus the difference between the prevailing EU price and any carbon price paid in the production country. (The current price of one tonne of carbon dioxide in the Australian voluntary market is about $30; the EU CBAM levy is expected to reach AUD 150).
The business case for disclosure
Australian businesses therefore not only need to understand their carbon emissions, but also to publish their plans for reducing them over the next 7 years. This data is increasingly being sought by large investment funds that operate across the globe.
International guidelines and standards such as the GRI, CDP, Task Force on Climate Finance Disclosure, and the Greenhouse Gas Protocol Corporate Standard can be helpful, and The Middle Way has extensive experience assisting organisations to prepare their carbon strategies and disclosure, both domestically and internationally.