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In October 2023, The Australian Accounting Standards Board (AASB) released an exposure draft for mandatory sustainability disclosures for Australian businesses. Our factsheet provides an overview of the disclosure requirements, and the proposed mandates cover both public and private companies, requiring the rapid implementation of climate reporting aligned with international frameworks (TCFD, ISSB).
There are four key areas of disclosure that form the pillars of the new mandate requirements, which we think are the most challenging for companies to address:
In this blog we will take a closer look at the climate-scenario analysis requirements proposed in the ASRS exposure draft.
Climate scenario analysis (CSA) is a tool by which companies can assess potential exposure to climate change risks and opportunities by examining potential futures where the extent of climate change, and the global response to climate change, varies.
As climate impact and responses are so uncertain, CSA is not intended to predict the future, but by building plausible, internally consistent scenarios it can enable companies to examine the possible impacts, and develop mitigation options where they are exposed. Companies will often explore “end-cases”, including a high warming scenario, where physical risks are high, and a rapid transition scenario where the regulatory and market impacts of the transition to a low carbon economy are particularly acute.
According to the Taskforce of Climate Related Disclosures, scenarios should be:
By examining multiple scenarios companies can understand the range of potential risks they could face in future.
The exposure draft stipulates:
Our understanding is that the AASB require at least a qualitative scenario analysis by reporting entities in the first year. AASB expectations on the quality of content are proportionate with the experience of the reporting entity. If a company is already reporting a quantitative scenario analysis, it is expected to continue. The exposure draft mandates at least one scenario being consistent with a 1.5°C warming future and the temperature goal set out in the Climate Change Act 2022. We suggest that companies should juxtapose the 1.5°C future with a high-temperature future to assess both the transition and physical risks associated with significant temperature increase.
Our understanding is that quantitative climate risk assessments remain optional for all entities preparing climate-related financial disclosures. However, if during the qualitative scenario analysis, entities uncover material financial risks, they likely have a duty to their shareholders to quantify and assess the impact of the risk. This may require high quality climate models to assess physical risk exposure and potential damage to assets, or future carbon/energy pricing to assess risks in the transitional futures. Understanding of the cost, and impact, of adaptation and mitigation measures will also be key to demonstrating preparedness and resilience against material risks.
By end-state companies will be expected to have reasonable assurance of climate disclosures, including scenario analysis. The draft consultation has said companies will be required to assure their key assumptions made in the analysis including assumptions about:
Companies will be required to publish forward-looking statements and assessments that address how they are positioned in different climate scenarios. To help ease disclosures and transparency, Treasury has said “companies will be afforded protection from false or misleading representation claims from private litigants in relation to forward looking statements for the first three years”.
The first companies will be required to disclose from as early as FY24/25, although smaller entities will have 2-3 years longer to prepare. Regardless of initial disclosure year, each company will follow the same sequential reporting and assurance requirements. Companies are expected to report with full, reasonable assured disclosures from the fourth year onwards.
To begin addressing the impending climate-related scenario analysis requirements from Treasury, companies can follow the following process:
To effectively quantify the impacts of climate-related scenario analysis, companies will need to ensure robust data gathering that captures the resilience of assets and the business model to physical and transition-related shocks.
Together with our decided climate risk management partners CLIMsystems, whose ‘Climate Insights’ platform allow our team to support clients to assess and quantify the financial impact from both physical and transition climate impacts, SLR is at the forefront of enhancing climate resilience. We have expertise across the range of scenario analysis requirements, including:
Contact James, Luke or Josh for further information.
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