Authored by Michael Mazengarb
With Australia’s mandatory climate reporting regime expected to commence on 1 January 2025, many Australian businesses have already started preparing voluntary climate reports and reviewing their approaches to developing long-term climate strategies.
Preparing early, voluntary, climate reports will allow companies to build an understanding of their potential climate-related risks and opportunities, while also strengthening their climate reporting capabilities and identify any capability gaps before the mandatory regime comes into force.
As was highlighted by the 2023 edition of King & Wood Mallesons’ ASX50 Sustainability Reporting Governance report, the overwhelming majority of Australia’s largest publicly listed companies have already preparing voluntary climate reports consistent with the TCFD recommendations.
The report found that 90 per cent of ASX50 companies had accepted the TCFD recommendations, with 80 per cent of that group producing stand-alone voluntary climate reports. More than three-quarters (76%) of the ASX50 have begun undertaking scenario analysis to assess the long-term impacts of physical or transitional climate risks.
Mirroring the call of ASIC Chair Joe Longo in an April speech, companies have increasingly recognised that preparing voluntary climate reports in line with the TCFD recommendations will ensure they well prepared for the future mandatory reporting regime.
With passage of Australia’s first mandatory climate reporting regime through parliament on the not-to-distant horizon, it is a timely moment to consider the emerging trends in corporate engagement with climate change as a business challenge and as a feature of future business strategies.
Integrating the mitigation hierarchy into climate strategies
A key content requirement of climate change reports is the inclusion of detail of the company’s climate change-related strategies, that reflect both a need to ensure the business remains resilient to future potential climate risks and is well-positioned to seize upon positive opportunities – and to demonstrate its plan to achieve the targets it has set to reduce the company’s greenhouse gas emissions footprint.
There is increasing expectation amongst key investor and stakeholder groups that the a company’s strategies for meeting its emissions reduction targets will prioritise investments and interventions that achieve systemic and long-term reductions in emissions.
A key conceptual framework that companies can draw upon when beginning to design climate risk mitigation strategies is the ‘mitigation hierarchy’, which provides an order of priority for how they can account for their greenhouse gas emissions.
The mitigation hierarchy looks like this:
The hierarchy highlights the importance of measures that achieve those systemic changes to company operations, prioritising efforts to avoid or reduce a company’s greenhouse gas emissions, or other sources of climate impact. For example, prioritises investment in operations that are not reliant on the use of emission intensive fuels, supports investment in the use of renewable energy, or the deployment of energy efficiency measures.
Measures like the use of carbon offsets are deprioritised, to be used only as an absolute last resort and limited to those difficult to abate residual emissions.
While there is broad recognition of the importance of following the mitigation hierarchy, growth in demand for voluntary carbon markets has been driven by early corporate commitments to short-term carbon neutral or net zero emissions targets.
Recent investigations into the environmental integrity of some sources of carbon credits, as well as scrutiny of the extent to which many environmental claims are primarily backed by carbon offsets, has led to increased scrutiny of carbon neutral or net zero claims and certifications.
The European Union is set to restrict the ability to make ‘climate neutral’ claims that are primarily backed by offsetting, and the Australian Climate Active scheme is expected to announce potential reforms to the ‘carbon neutral’ certification scheme later in 2024.
The increased attention on the role of carbon credits has contributed to an emerging trend of companies essentially re-committing to the principles of the ‘mitigation hierarchy’ and deciding to reduce or cease the use of offsets to instead prioritise investments in reducing their own emissions.
A recent example is Telstra’s announcement that it will end its use of carbon offsets, and to cease seeking accreditation under the Climate Active certification scheme.
Announcing its new approach to its climate commitments in June, Telstra outlined that it instead of continuing to make annual expenditures on carbon credits to offset its emissions, it will instead redirect those funds towards deeper and more permanent reductions in its emissions. While Telstra will no longer claim ‘carbon neutral’ certification, it has strengthened its 2030 target to reduce Scope 1 and 2 emissions.
Similar announcements have been made by food company Nestle, resources company Fortescue, and airline EasyJet.
There will be certainly be a continued role for high-quality carbon credits into the future – particularly to support those hard-to-abate sectors for which cost-competitive technologies for reducing emissions are not yet readily available - to account for their emissions.
But as mandatory climate reporting becomes common practice across a larger number of jurisdictions, there will be increased expectations that companies set robust and meaningful climate strategies. Key to this will be embracing the principles that underpin the ‘climate mitigation hierarchy’ and the importance of investing in long-term systemic reductions in greenhouse gas emissions.
Owl Advisory has the expertise and capabilities to support reporting entities comply with the new mandatory climate reporting regime, and to begin the process of preparing their first and future climate disclosures.
This publication is a joint publication from King & Wood Mallesons, and KWM Compliance Pty Ltd (ACN 672 547 027) trading as Owl Advisory by KWM. KWM Compliance Pty Ltd is a company wholly owned by the King & Wood Mallesons Australian partnership. KWM Compliance Pty Ltd provides non-legal compliance and governance risk advisory services for businesses. KWM Compliance Pty Ltd is not an incorporated legal practice and does not provide legal services. Laws concerning the provision of legal services do not apply to KWM Compliance Pty Ltd.