Rise of climate disclosure rules underscores the need for action

The publication of a Sustainable Finance Strategy Consultation Paper¹ in early November is the latest sign that Australia is accelerating the transition to a net-zero economy. Together with forthcoming changes to corporate climate reporting², it aims to establish a solid foundation for Australian companies to access the capital they need to meet their sustainability objectives.

The government’s plans will mean a fundamental shift for thousands of Australian companies in the years ahead. The proposed reporting regime will be phased in over three stages: for larger corporates from the financial year starting 1 July 2024, mid-market businesses from 1 July 2026, and smaller companies from 2027. Reporting of scope 3 emissions – those generated upstream or downstream in a company’s value chain – will become mandatory in each group’s second year of reporting.

While it may be tempting for many to worry about their emissions closer to when the requirements kick in, delay would expose companies to other risks and result in missed opportunities. Taking tangible action on sustainability today is a more prudent approach.

Australia’s consultations on a framework for mandatory climate reporting – based on that of the International Sustainability Standards Board (ISSB) – come as similar initiatives are increasingly being adopted elsewhere. There are calls for Europe to align its existing European Sustainability Reporting Standards with the global disclosure standards the ISSB launched in June. The latter are also set to be adopted by markets including Singapore, Taiwan and the UK. These ISSB standards are designed to improve alignment of global ESG reporting, focusing on sustainability-related risks, opportunities and climate related disclosures.

The proposed rules will require a huge amount of granular data, including climate-related targets and actual greenhouse gas emissions. When combining the phased approach of the reporting regime and the interlinking nature of economic activity, practical reality will mean that all firms will need to be able to satisfy demands for information throughout a supply chain, even if their own reporting requirements are yet to be triggered.

First mover advantage

The risks of failing to meet statutory obligations need no explanation. But action on emissions is not just about meeting local disclosure requirements. Australian businesses also need to protect their access to export markets, where supply chain monitoring is becoming increasingly commonplace.

We know from HSBC’s own client base that international companies have been looking much more closely at the sustainability of their business partners for some time now, with a growing number making commitments to reduce emissions in their value chain given the scope 3 considerations.

The European Green Deal legislation will soon require importers of carbon-intensive products, including steel, cement and fertiliser, to pay carbon tariffs based on the emissions embedded in their imports. And in Germany, a supply chain due diligence law came into force in January 2023, making it mandatory for large corporations to scrutinise the impact of their activities on the environment and human rights.

As carbon-intensity becomes a bigger competitive factor for suppliers, Australian companies that fail to get up to speed with the demands of their European buyers are at risk of losing market access.

This is not just an issue for exports to Europe. In HSBC’s latest annual survey, Global Supply Chains – Networks of Tomorrow, ESG integration ranked among the top factors influencing which suppliers corporates want to work with. We can clearly see that leading multinational corporations increasingly expect their suppliers to adopt more sustainable practices.

HSBC works with companies such as Walmart, Puma and PVH on sustainable supply chain financing programmes that offer preferential terms to suppliers that hit defined sustainability metrics. At a more local level, the bank has worked with companies like Australia’s Fox & Lillie in helping to finance their Genesys programme. This supports Australian woolgrowers in certifying their wool under the Responsible Wool Standard and to sell accredited product to global processors, which is then ultimately sold into global fashion houses.

Capturing new opportunities

As global brands respond to changing consumer preferences, there is an opportunity for Australian firms to use their ESG credentials to unlock growth opportunities.

This applies to Australia as well as international markets. In Monash Business School’s latest survey of Australian consumers, 51% said minimal carbon emissions was an important factor in purchasing decisions.³

With shifts in reporting requirements, public opinion and the growing enthusiasm around sustainability representing a major commercial opportunity, there is increased interest in using green and sustainable finance to support decarbonisation. In line with the planned rollout of the new sustainability reporting standards, we have seen some of Australia’s largest companies, such as South32, Worley, Orica, Treasury Wine Estates and a range of others, taking proactive steps.

These names highlight the opportunities for Australian companies to lead global transition efforts in critical sectors such as resources and agriculture. Minerals like copper, nickel and lithium are essential for the global energy transition and abundant in Australia. This presents a significant opportunity for companies in the resources value chain: according to a recent report from the Energy Transitions Commission, as many as 250 new mines may be needed globally to meet demand for clean energy materials by 2030.⁴

Australia is also at the cutting edge of food and agricultural technology, with a network of 488 agritech startups in 2022.⁵ Advances in bioscience, farming practices and irrigation are important in global efforts to conserve resources and protect biodiversity.

HSBC will continue to support the development of these exciting areas, which will leverage Australian strengths and see companies of all sizes engaged as the transition permeates the economy.

Focusing on the future

Australia’s emissions disclosure requirements will enhance access to markets and capital for many businesses, and the rollout will impact many businesses faster than the mandatory reporting timelines suggest. Companies will need to establish new governance frameworks, enact new strategies and approaches to risk management and be able to monitor, measure and report impacts across their value chains.

Sure, deadlines are important. They ensure business leaders will focus on sustainability and prevent Australia from being left behind. But the smart decision, and the commercial imperative, is for companies to take action now.