The Australian Government recently completed (21st July 2023) the second Treasury Consultation Paper focused on mandatory reporting standards for Australian Businesses. The impact on the Australian Small and Medium-sized Enterprises (SME) space will be significant as key components of large businesses supply chain. Sustainability reporting for SMEs is the practice of openly communicating their environmental, social, and governance (ESG) efforts and performance. While often associated with larger corporations, SMEs also play a crucial role in fostering sustainability and influencing change. Through ESG reporting, SMEs demonstrate their commitment to responsible business practices, engaging ethical supply chains, reducing their environmental impact, and fair treatment of employees. This transparency helps attract socially conscious customers, meaningful engagement with their value chain, fostering trust within their community, and positions SMEs as contributors to a more sustainable future. ESG reporting is a strategic tool that aligns their performance with stakeholder expectations and enhances the overall credibility of these businesses.
Global ESG Reporting
The ‘Climate-related financial disclosure’ expectations by the Australian government highlights the global recognition of climate-related financial risks and the importance of managing these risks through disclosure. It mentions the establishment of the International Sustainability Standards Board (ISSB) to develop global standards for climate disclosure and sustainability reporting based on Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations. According to the International Financial Reporting Standards (IFRS) the ISSB is developing standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. The TCFD's climate-related disclosure recommendations enable stakeholders to understand carbon-related assets and their exposures to climate-related risks. The Australian government is committed to introducing standardised reporting requirements for businesses, including SMEs, to disclose climate-related risks and opportunities. Treasury sought input on this initiative, with strong support from stakeholders, although governance and oversight arrangements received mixed feedback.
Mandatory reporting depending on entity size
The Australian Government's recent Treasury Consultation Paper (introduces a significant shift towards mandatory sustainability reporting, with substantial implications for small and medium-sized enterprises (SMEs). The proposal outlines a structured three-year implementation plan for large entities to develop sustainability reports, encompassing climate-related financial disclosures. By 2027-2028, all substantial Australian entities, including those lodging financial reports with ASIC under Chapter 2M of the Corporations Act 2001, will be mandated to disclose sustainability-related financial data. The reporting requirements are categorized into three groups of entities: Group 1 entities starting from 2024-2025, Group 2 entities from 2026-2027, and Group 3 entities from 2027-2028 onwards.
Australian ESG Reporting Mandatory Requirements
The three entity groups are based on different thresholds depending on company size according to the Climate-related financial disclosure;
Reporting entities (2/3 thresholds must be fulfilled)
Group 1: 2024-25 onwards
Has over 500 employees;
The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $1 billion or more;
The consolidated revenue for the financial year of the company and any entities it controls is $500 million or more.
AND
Entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold.
Group 2: 2026-27 onwards
Has over 250 employees;
The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $500 million or more;
The consolidated revenue for the financial year of the company and any entities it controls is $200 million or more.
AND
Entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold.
Group 3: 2027-28 onwards
Has over 100 employees;
The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $25 million or more;
The consolidated revenue for the financial year of the company and any entities it controls is $50 million or more.
AND
Entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act.
Additionally, SMEs that are part of larger Australian or global groups may also need to measure their carbon footprint and provide sustainability disclosures, especially if their parent entities fall under compulsory reporting obligations. This mandatory reporting drive is motivated by the global push for sustainability. Notably, it emphasizes the importance of measuring the carbon footprint, consisting of Scope 1 emissions (entity-controlled), Scope 2 emissions (purchased electricity), and Scope 3 emissions (indirect emissions from suppliers and customers). These Scope 3 emissions, often constituting a substantial portion of emissions for most entities, highlight the need for emissions reduction efforts throughout the value chain. Consequently, SMEs, like all organizations, will be compelled to measure and manage their carbon footprint as transparency and decarbonization commitments become integral to business operations and collaboration across value chains. In essence, the message is unequivocal: SMEs will soon be required to participate in sustainability reporting as an essential aspect of their business landscape.
TCFD recommendation: How to approach reporting as a SME
SMEs can follow the TCFD recommendation consisting of governance, strategy, risk management, and metrics & targets. Governance is about disclosing the organisation’s approach to governance around climate-related issues and opportunities. Recommended disclosures are:
Describe the board’s oversight of climate-related risks and opportunities
Describe the management’s role in assessing and managing climate-related risks and management
Strategy is centered around actual and potential impacts of climate-related risks and opportunities on the organization’s business, strategy, and financial planning where such information is material:
Describe the climate-related risks and opportunities identified on short, medium, and long term.
Describe the impact of climate-related risks and opportunities on the organization’s business, strategy, and financial planning.
Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2 degree Celsius or lower scenario.
Risk management is about how the organization identifies, assesses, and manages climate-related risks:
Describe the organization’s processes for identifying and assessing climate-related risks.
Describe the organization’s processes for managing climate-related risks.
Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management.
Metrics and targets are used to assess and manage relevant climate-related risks and opportunities where such information is material:
Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process.
Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 GHG emissions, and the related risks.
Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets.
Need for transparent communication of ESG efforts
Sustainability reporting for Small and Medium-sized Enterprises (SMEs) involves transparently communicating their environmental, social, and governance (ESG) efforts. This practice not only demonstrates commitment to responsible business practices but also attracts socially conscious investors and customers. The Australian government is moving towards mandatory sustainability reporting, with different deadlines for organizations based on their size. This shift underscores the global push for sustainability and emphasizes the need for measuring and managing carbon footprints, including Scope 3 emissions. SMEs will soon be required to participate in sustainability reporting, following the TCFD recommendations for governance, strategy, risk management, and metrics & targets to ensure transparency and decarbonization across value chains.