Mandatory climate-related financial disclosures (CRFD) - How to ensure a complete and robust value chain emissions inventory

The Australian Treasury concluded the final consultation on mandatory climate-related financial disclosures (CRFD) for Australian businesses in July 2023. Our factsheet provides an overview of the disclosure requirements, and the proposed mandates covering both public and private companies, requiring the rapid implementation of climate reporting aligned with international frameworks (TCFD[1], ISSB[2]).

The requirements are comprehensive and will require a step-change in climate reporting for many Australian businesses. There are four key areas of disclosure which we think will be the most challenging for companies to address:

• Scope 3;
• Climate Scenario Analysis;
• Transition Planning, and
• Assurance Readiness.

In this blog we will take a closer look into the first topic, Scope 3.

What does the consultation mention about Scope 3 requirements?

The final consultation paper proposes:

The treasury also states that disclosure of Scope 3 emissions should encompass material emissions both upstream and downstream from the reporting entity, following a recognised emissions accounting framework such as the Greenhouse Gas (GHG) Protocol. Disclosures should also incorporate Australia-specific emissions factors where relevant, such as the National Greenhouse Accounts Factors. In the context of defining 'materiality,' the Treasury notes that materiality would consider the relative size of the emissions sources.

Moreover, reporting entities would need to provide information about how they determined the boundaries for estimating material Scope 3 emissions, including the components of the upstream and downstream value chain that are included or excluded from the calculation. Additionally, the Treasury emphasises the need to disclose the guidance used for such estimations.

The Treasury anticipates that initial Scope 3 disclosures would be based on available information and represent estimates. As companies become more adept at estimating Scope 3 emissions and data quality improves, the quality of disclosures is expected to increase. Furthermore, the Treasury mentions that Scope 3 disclosures can pertain to any one-year period preceding the current reporting period. This acknowledges that, particularly concerning financed emissions, reporting entities might rely on emissions data from other entities.

When do you have to start disclosing Scope 3 emissions?

In our factsheet, we discussed about the categorisation of all incorporated companies in Australia to three distinct groups for reporting purposes. To be included in a particular group, companies must meet at least two out of three size criteria related to employees, consolidated gross assets, and consolidated revenue. Additionally, any company already required to report under the National Greenhouse and Energy Reporting (NGER) Act 2007 (Cth) will be captured irrespective of size.

The first companies will start disclosures from FY24/25, with Scope 3 mandatory from FY25/26.

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 fourth year onwards.

What are the implications of these mandates?

It is clear from the consultation paper these mandates will require a large number of businesses to rapidly improve their climate reporting.

From a Scope 3 perspective, organisations will have to start a journey towards the development of a robust emissions inventory that could be externally assured and verified. Many companies are currently only reporting where they have easily accessible data, if they are reporting at all, the requirement to report all material emissions will mean it is essential to start gathering more comprehensive data and calculate a complete footprint.

There are a few key elements companies need to consider:

• Relevancy: Decide focus areas and unpack the complexities across your organisation’s value chain activities, an initial screening would be required to develop a high-level inventory in line with international guidance such as the GHG Protocol.
• Completion: Convert your activity data from value chain activities into an emissions inventory using globally recognised emissions calculation methodologies. It's essential to have a clear understanding of your overall Scope 3 emissions inventory to assess your environmental impact. This may involve significant estimations and assumptions in the first years, but this will help companies identify priority areas to focus data improvements.
• Continuous improvement: Companies must work towards complete and auditable data sets, that can stand up to the same level of scrutiny as their financial data. Companies will need to be actively working with suppliers & customers to obtain higher-quality data sets, thus enhancing your Scope 3 inventory for reasonable assurance and verification in line with the proposed mandates.
  

How can SLR support you?

We understand that every company is at different levels of maturity in terms of Scope 3 inventory development. However, our team brings together a wealth of local and global expertise in supporting organisations to calculate, communicate and ultimately manage Scope 3 (value chain emissions). Our 4-stage approach that SLR can support companies with includes:

1. Relevance: Support and understand Scope 3 categories that are relevant and material for your company.
2. Materiality: Estimate emissions for each of relevant categories and determine which require more in-depth analysis.
3. Refinement: For relevant categories, SLR will identify potential improvements to data and calculations to ensure robustness.
4. Roadmap: Consolidated findings and report on next steps to continually improve data fidelity and ensure actionable outputs.

Over the coming weeks, we will focus on three other key disclosure areas that we think will be the most challenging for companies to address:

• Climate Scenario Analysis – From qualitative to quantitative, where to start on climate scenario analysis
• Transition Planning – How to align your business with a 1.5C world, and what you need to report
• Assurance Readiness – How to ensure your disclosures are ready for assurance and verification

Following our series of blogs, stay tuned for a webinar that will bring all this together, case studies of best practice and Q&A opportunities.

Contact James, Luke or Leslie for further information.

[1] https://www.fsb-tcfd.org/

[2] https://www.ifrs.org/