Australia will see significant developments in Environmental, Social and Governance (ESG) regulations, with proposed mandatory climate-related financial disclosure requirements expected to commence from next financial year.

What is ESG?

ESG performance is now an essential metric for evaluating a company’s overall performance. It focuses on non-financial criteria and looks beyond shareholder returns, taking into account stakeholders other than the business owner. Common factors under each pillar include, but are not limited to:

  • Environmental: waste management, biodiversity, climate change, net zero emissions, water / energy use
  • Social: labour rights, health and safety, diversity and inclusion, human rights including modern slavery, charity partnerships, social procurement and supply chain
  • Governance: remuneration, risk management, ethics, regulatory compliance, fraud and corruption, Board structure, composition and skills

The ESG journey and benefits

ESG is now firmly on the business agendas of many organisations, with an increasing number reporting on their ESG performance programs. A lot of these developments have been prompted by a recalibration of expectations from stakeholders including consumers, employees, investors and governments, with the goal of holding businesses more accountable and responsible for ESG performance. Stakeholders are also increasingly demanding the integration of ESG related matters with the business mission, values and strategy. Over the years, there has been a transition from ESG compliance being a “tick box” exercise to more of a value creation and standardised businesses function.

Effective ESG practices can have a number of benefits including, but not limited to, sustainable growth, lower waste management costs, higher employee attraction, retention and engagement, increased customer loyalty, and decreased supply chain costs. Furthermore, businesses can attain competitive advantage by seeking out new market opportunities and increasing stakeholder trust in their brand.

ESG standards and frameworks

Organisations must uplift themselves in their knowledge and understanding of ESG, including the usage of effective frameworks and standards . Some of these include the Global Reporting Initiative (“GRI”) framework which focuses on reporting sustainability impacts and performance, the Taskforce on Climate-related Financial Disclosure (“TCFD”) standards which provides a comprehensive framework for companies to disclose financially material climate-related risks and opportunities, the Sustainability Accounting Standards Board (“SASB”) standards which focuses on disclosure of financially material sustainability information, the Greenhouse Gas (“GHG”) Protocol Standards which provide a framework for reporting on greenhouse gas emissions. More recently in 2023, the International Sustainability Standards Board (“ISSB”) released the International Financial Reporting Standards (“IFRS”) S1 on General Requirements for Disclosure of Sustainability-related Financial Information and IFRS 2 on climate-related disclosures which build upon the TCFD standards.

The Australian government has drafted a legislation (the Treasury Laws Amendment – Financial Market Infrastructure and Other Measures Bill) with respect to mandatory climate-related financial disclosures. A key announcement recently made by government relates to the new requirements commencing on 1 January 2025 rather than 1 July 2024. However, this date may vary depending on when the bill passes through both Houses of Parliament. The new legislation would apply to all public companies and large proprietary companies required to provide audited annual financial reports to the Australian Securities and Investments Commission (“ASIC”) under the Chapter 2M of the Corporations Act 2001, and that meet specific size thresholds, starting with companies with over 500 employees, revenues over $500 million or assets over $1 billion, as well as asset owners with more than $5 billion in assets, which would begin reporting for fiscal years starting in the next financial year. Medium-sized companies (250+ employees, $200 million+ revenue, $500 million assets) would be required to begin reporting for years beginning from July 2026, while smaller companies (100+ employees, $50 million+ revenue, $25 million+ assets) would begin the following year. To support Treasury’s proposals, the Australian Accounting Standards Board (“AASB”) released an Exposure Draft (“ED”) for disclosure of climate-related financial information. The ED includes proposed Australian Sustainability Reporting Standards (“ASRS”) that are based on the ISSB’s IFRS S1 and IFRS S2, but with Australian-specific adaptations, including a climate-first approach.

Where to begin?

  • Vision / strategy: Boards and executive management must define an ESG vision, strategy, culture, and tone to guide the organisation’s approach.
  • Control framework: Organisational departments / teams should establish, manage, monitor, and report on ESG policies, procedures, controls, risk management activities, and systems through the Control Framework. As part of this, such systems must meet regulatory or industry standards, where applicable. Furthermore, ESG performance measures produced should be practical, measurable, and realistic in order for the benefits to be realised.

How can we help?

Internal audit can play a critical role in providing objective assurance and advice on ESG reporting and sustainability matters more broadly. Our Risk, Assurance and Consulting team provides ESG related assurance services helping clients meet their regulatory requirements, and achieve sustainable growth by meeting organisational goals and objectives.

Co-authored by Kundai Mtsambiwa, Senior Manager Audit & Assurance Melbourne.