Speaker 1: 0:04

Welcome to the Energetics Exchange podcast, conversations with Energy and Climate Experts. Please note that the information and commentary in this podcast is of a general nature only, and does not take into account the objectives, financial situation, or needs of any particular individual or business. Listeners should not rely upon the content in this podcast without first seeking advice from a professional.

Speaker 2: 0:29

Hello everyone and welcome to the Energetics Exchange podcast series. I'm Dr. Nick Wood, climate risk expert at Energetics, and I'm the host of today's podcast. Before we start today's podcast, I would like to acknowledge the traditional owners of country throughout Australia and recognize their continuing connection to the lands, waters, and communities. We pay our respects to the Aboriginal and Torres Strait Islander cultures and elders. Past and present. I'd particularly like to acknowledge the Camaret people of the OR nation as the traditional owners of the country from which I'm broadcasting today. Energetics have recorded podcast for every year. However, there is a large challenge looming over Australia's businesses, namely the introduction of reporting under the requirements of the International Sustainability Standards Board, a challenge that was recently described by ASIC Joe Longo as presenting the biggest challenges to financial reporting and disclosure standards in a generation that has been much written and muster discuss. So to kickstart discussions, I'm joined today by energetic C E O Dr. Mary Stewart , who has already written a number of articles about the I S S B and Rob Fowler partner in the energy transition practice at Partners in Performance and Sustainable Finance Expert. Welcome to you both. Mary, if I could start with you, the I S S B has been described as the biggest financial reporting change for business since G S T. On the other hand, Australian businesses have been reporting about energy and greenhouse gas emissions now for some 20 years. So what is I S S B and how should companies be viewing it?

Speaker 3: 1:59

Thank you, Nick . And before I start, I'd like to acknowledge that today I'm joining you from the land of the Gadigal people, also of the a Aurora nation. And I acknowledge elders past, present in emerging I W S SB is is a profound change and a very different to what companies have typically seen as E S G or , or climate disclosures. Previously, companies spent a lot of time understanding their scope one and scope two emissions, so the emissions associated directly with what they do, and to some extent, scope three emissions for the ambitious ones that looked at something like A S P T I A science-based target. But I w SB requires a lot more than just disclosing your inventory and paying attention to your scope threes, it requires you to unpack and understand in some detail the financial implications of climate risk to your business. You need to be able to link your scope one, your scope two, your scope three, your transition plan, so your net zero plan , um, and your climate resilience to the financial outcomes that these represent to your company. Looking up to 20 30, 20 40, and 2050. So it's not just an inventory, it's not only risks, it's also opportunities and it's integrating what was typically a sustainability data set into your financial report, which is due three months after your financial year end . So it's gonna be a big change and hopefully not only a barrier, but also a support for opportunities identification, which is part of the reporting requirements.

Speaker 2: 3:28

So that's real big picture thinking, but um , we're just over half a year before companies make disclosures. What are the , what is the practical reality that businesses are facing? Um , could you set the scene perhaps by reflecting on reporting capabilities across businesses in Australia currently?

Speaker 3: 3:44

I think it's very mixed. I mean, the mandatory reporting we are gonna see coming into Australia covers both public and private companies. It covers companies that have been reporting on a mandatory basis to N G R A voluntary basis to things like C D P and gresb and then companies who haven't reported at all. So the ability of companies to address this challenge is extremely mixed and very varied. Everyone needs to understand from the outset what their inventory is and then build on from that your scope through your transition pathway and what your physical risk is, all of which requires to be disclosed to some extent in your first year. So what's the capability? I , I am concerned, I think that there's probably capability and capacity in the market, both in inside companies and in the consulting space to address 30 or 40% of what's gonna have to be reported. I think we have a huge gap both inside companies and in, in the consulting sphere.

Speaker 2: 4:38

Thank you, Rob. Um, over to you, when we got together to discuss the podcast opportunity, we spoke about the challenge of the non-financial reporting items that now require financial valuation. Can you describe the challenges that presents and the opportunities that go along with those?

Speaker 4: 4:54

Yeah, thanks very much Nick and , and lovely to be would be with you. Um, I just wanna acknowledge that I'm recording from the , uh, judge Rung country in Victoria. Acknowledge elder's past and present. Uh, it's a really interesting time right now for a lot of our clients. Um, if you haven't heard of Partners in Performance and not many have, we are a fairly small firm, but we're based in Australia and we have a bit of a global reach and we essentially help clients with very high value problems that they need to be solved quite quickly. A lot of the work we do is around enhancing the performance of organizations given what they already have or what they already have in place. And a lot of that is based on non-financial information. We sort of move into companies and help them unwrap that non-financial data and understand how it drives the value of their business. And that sort of productivity lens that we take is essentially what people wanna see from this sort of reporting. They want people who are putting these reports together to reflect on how numbers could be changed or what drives the numbers up and down. So it's an interesting time for, for companies if, if they've already done a sort of thorough understanding of what drives them , the value of their business, then they're probably pretty well prepared with knowing what to report, having those information flows coming through. But if that's not part of their journey, then there's a big gap in most companies and quite a long way to go to fill that gap in the coming, you know, six months and 12 months and 18 months depending on where you are in the scale of, of adoption. So it's an interesting time right now for companies and, and , and we're sure that there's gonna be , uh, some high, high risk issues that the board are gonna have to deal with as this all comes to fruition.

Speaker 2: 6:34

Yeah , thank you. Um, previously in discussions you've framed the issues in terms of three css capability, capacity, and credibility. Can you talk us through these elements and what you've seen in the market?

Speaker 4: 6:45

Yeah , certainly. So it's important to understand that the basis of this shift from looking at financial information mainly to incorporating and integrating this non-financial climate related information, the real driver of that is the investor perspective. Investors are very used to receiving financial data, financial updates, market updates, all these sorts of things. That's part of the way Australia's corporate and investment community works. This is trying to unravel all these other risks and of course big opportunities that come from this transition. So it's an interesting time. Investors are driving this shift into non-financial reporting. Um, but companies are the ones that have to get their skates on and actually do the data and push it all through and , and they're the ones who need to sign off at it , um, at the senior levels. So in terms of getting ready for these things, there's, there's a company that focused an internal focus on what do I need to report? Can I do it? What are my capabilities that first see , do I have the capabilities already ? What am I already reporting and how does that flow? What capabilities do I need and how can I fill those? Then there's the actual capacity within the organization. And this is something that's quite interesting because the annual reporting cycle for financials is something that sort of ebbs and flows across the financial year. I think people involved in that can understand when's a good time to have holidays and when, when's a good time to be flat out doing this stuff. So , um, this is gonna add a lot of information to those sort of lumps in the the year. So if you are stretched during that financial reporting season, then if you layer in a whole nother range of non-financial data that needs to be flushed through and quality controlled and someone has to be accountable for it, then it just really tests a bit the capacity of the organization at that time. So again, something to think about, do you have capacity now? Is there spare? What do you need to actually do more of this reporting and processing? Um, and one interesting thing of that is about how the resolution of this reporting, you know, we've seen in the financial world annual reporting shift into quarterly reporting. Now we're getting monthly updates from some firms. And of course when a company goes to their investors and talks about what's going on, a a , a recent update's really useful for the people having that conversation and that really leads us to credibility. So the credibility question is really one that the regulators in Australia and around the world are really getting involved in, and that's where we get this concept of greenwashing coming through.

Speaker 2: 9:19

Thank you Rob. Uh , very insightful. Mary, if I can just go back to you. So we know that the majority of the economy is not in transition and many , uh, entities that we deal with have not even begun the response to the physical risks of climate change. Will the I S S B provide insights that will help investors? Will we see companies increase their emissions reduction initiatives or better manage climate related risks? What strategic changes will we see?

Speaker 3: 9:44

I think one of my concerns about seeing this mandatory framework coming in on such a large scale is it does have the potential to slow down the action that we've seen with policy certainty in Australia commitment to a net zero Australia under 2030 target, we saw a significant uptick in corporate activity companies really committed to their net zero activities and , and we saw a lot of emissions reduction taking place and now we're seeing a very, very big reporting requirement coming in. And I'm concerned that we're gonna see a diversion of skills and people and time to just building a data set . I think that might wash out through the system in the first year or two, but with this coming in, we might see a slowdown in action on emissions reduction in the medium term . So give it two or three years to settle in. We absolutely will see improved outcomes with respect to both mitigation, so emissions reduction and adaptation and resilience. So as companies get a better data set , and I I W SS B requires you to both understand the risk of climate related exposure, but it also requires you to look at your opportunities and as companies come to grasp these or , or come to better understand these data sets , they will see the opportunities and those risks that they will be defining if they apply their physical risk scenarios correctly are gonna be so significant that they can't ignore them. So we may see a slowdown in, in on the ground activity for about 18 months or two years, but then I think we will see this galloping , um, increase in activity with, in companies as they both decarbonize and they work out what they need to do with their assets under a significantly changed exterior environments. And I know that with your background Nick, you see a lot of companies who already now are having to change their business model 'cause of the impact of climate change on their activities.

Speaker 4: 11:41

I think Mary's suggestion that it's gonna be a bit of a tough time for the next couple of years, but then stimulate a bit of a galloping change. I , I thoroughly agree with that. To me, one of the interesting aspects of this whole shift and as the requirements, you know, trickle down through organizations, there's gonna be a whole lot more conversation around scope three. And that to me is an interesting conversation we've been doing quite a lot of work with, with very large companies in Australia on how do they think about scope three, what's the quality of their information and what levers can they pull to actually improve that performance? And so the conversations between suppliers and customers around, you know, what's your emissions profile? How, how is that gonna change over time? That conversation hasn't happened before and I think that is gonna stimulate quite an interesting discussion, particularly 'cause business is very focused on delivering products to their customers, you know, and purchasing from their supply chains in an efficient way. So I feel like that's gonna filter through and, and probably create a bit more awareness and a bit more weight in the efforts to improve emissions by everybody along those chains.

Speaker 2: 12:51

Thank you. So just to the last, the last few questions now. So essentially I get to ask the hard ones to each of you. So essentially , uh, what are your top three pieces of advice for business seeking to understand the implications of the I S S B on future reporting requirements and the wider implications for business decision makers? Please

Speaker 3: 13:09

Start doing something now. Um, so really this isn't something you can put on the back burner. It absolutely is something that you need to address immediately. Look at it from a holistic perspective. Don't try and unpack or , or focus in on areas too quickly. Take two steps back, review the framework, see what you've got already in place and how you can leverage what you already do to deliver the outcomes that you need. Um, look at this as the opportunity. It's not just something where you tick a box and walk away. Understand how this can help you set a course to a company that survives in a net zero economy and that is resilient to the extreme weather effects that we've got coming at us. And yeah , I I think in this case, fortune favors the brave. You've gotta grab this opportunity to bring about significant change with both hands and lean into it. Don't back away from it.

Speaker 2: 14:08

Thank you. And I'll have a go at the same , um, question myself. So I think my , my take on it would be , um, there's some very big things coming down the pipeline here. This is just literally the , the tip of the iceberg rapidly melting iceberg. Um , I think the I S S B at some point the near future is gonna need to grapple with the need for disclosure on some quite significant physical risks. Uh, and then all of that taken together really adds up to Ara Australian sovereign sovereign risk level. So it's an interesting space itself . Um , I'd just like to hand back to Rob, do it , see what he has to add to that .

Speaker 4: 14:41

Yeah, thanks very much Nick. Um , I , I agree with Mary that this is , uh, something you can't wait <laugh> to look at. It is gonna come pretty quickly in the reporting cycle and it's probably worthwhile improving the understanding of your leadership team with, with some sort of education around what this actually means. I think it's an excellent first step, but to me, first three things that, that you should do as a, as a corporation or organization is to understand what you're actually doing already in terms of gathering non-financial information. And, and many companies do this in a very systematic way. It might be safety information or performance, it might be , um, supplier certifications. So making sure your suppliers have all the right, you know, paperwork in place, or it might be energy use, you know , these are, these are non-financial data sets that need to be brought together under this new regime. So understand how it works for you already in your organization as a first step. The second step then is to do a short sharp gap analysis and try and create a roadmap for how to get to where you wanna be. And that could be external advice, that could be a special sort of working group internally to try and do that, but that's a really important step to understand where you are, understand how far you have to go or what you need to do to get there. And the third part is, is I think really focusing on building your internal capabilities. Your internal capabilities need to be developed and built and, and that includes the people, the processes, the systems. And that's essentially because this task is not gonna go away. It's new, it's difficult at first, but , um, I think we're gonna see an expansion of the scope of this beyond climate related into nature related . We've already got , uh, modern slavery, you know , there's all sorts of other levers that are gonna be , uh, pushed through this sort of non-financial reporting. So yeah, I , I think internal capability and, and building that over time with a bit of a , a plan to build that over time I think is really important.

Speaker 3: 16:36

Can I just add something to, to what Robs there said there about getting expert advice? I think you need to look very closely at the experts that you ask for advice on this. Uh , many companies might go to their typical providers of information, particularly at board level to advise them on some of the aspects of I sb and those might not be the right people to be talking to about the complexity of some of this program. So don't always go to your typical advisor, scan the market and understand that your response will be informed by the quality of experts you get in on this problem and canvas more than one opinion because this is not an easy program to address. It's not gonna be a one size fits all . Each company is gonna have to have its own tailored response to I W S B reporting requirements. So look at your experts closely and make sure that you are getting best in class support and not just what you usually go for.

Speaker 4: 17:33

Yeah, I think that's a really important point to make. I mean, this is new for everybody, even the advisors. And so , um, I think it's, it's important to also unpack a little bit what companies need to provide here. We've got a little bit of tradition in Australia with scope one and scope two reporting. That's something that's been captured by the government in a systematic way for quite a long time now. That's great. More and more companies are looking at scope three and more and more data sets are being made available to try and help that. But there are two other components to this requirement, which I think might be worth exploring. One is this , uh, scenario analysis, climate scenario analysis, and the other one is transition plan. And maybe we could just sort of look into each of those and and understand a bit more what they actually mean. I'm not sure many people will be familiar with what that actually includes.

Speaker 3: 18:20

Well , I think that as an expert in the area, we can ask Nick what he thinks about what the, the requirements will be of particularly the scenarios and the climate trust aspect of I w ssb .

Speaker 2: 18:31

Interesting. I think the, I SB is gonna have a real challenge on its hands or , or the , the implementation of it's gonna have a challenge on its hands just through the lack of skills. I also think it's gonna have a challenge on its hands because they sort of recede wisdom that a lot of the, the boards have been listening to is that, you know, the economic consequences of climate change are not that bad. So if you were to pick up reports and, you know , economic modeling reports and say, you know , three degree world is, you know, 5% of G D P , um, you know, if you say that to a group of climate scientists, the time they pick themselves off the floor from laughing, they'll say, well, a three degree world is where the Atlantic , um, Gulf Stream shuts off and we lose half of the northern hemisphere's arable land. That's not a 5% G D P impact. So I think there's a , there's a very big challenge here to break through a lot of the assumed knowledge and comfortable, comfortable language that's been used around the boards in the last 10 years and to really challenge what you really understand as a board, what do you really understand? Have you really got this right? So I I think, but that's not gonna happen in the first two or three years. I think that's a five , that's a five to eight year process, but it has to happen.

Speaker 4: 19:40

Yeah , there's been a lot of crystallizing of those risks lately. It's been quite interesting to see how companies have reacted, especially with, I mean the , the covid sort of constraints on everybody that was interesting. But then in Australia we've had all sorts of extreme weather as well. Um, so there's, I think in a better understanding that supply chains and common infrastructure are actually pretty fragile. Um, we've been doing some interesting work with , uh, some of the rail network owners and their job is to keep that railway line open because if it shuts down anywhere on the line, no one goes anywhere. So it's an interesting value challenge. What's the most valuable piece of line to reinforce where are you gonna lose the most time and therefore value from delivering on customer expectations? And how can you be ready, how can you put equipment or supplies in the places where you're gonna need them? And I think that's a really interesting complexity as well. So I think companies are looking a bit differently at this climate vulnerability question. And I suppose the reporting requirements are, are trying to help people unpack that. Now scenario analysis is a pretty blunt tool <laugh> , um, and I think the, the analysis that goes into that side of it will probably focus more on asset vulnerability or asset resilience. You know, how quickly can you recover from event A , B , or C? So it'll be interesting to see how that unfolds in in , in that aspect of it. Absolutely.

Speaker 2: 21:10

Yep . Agreed .

Speaker 3: 21:12

And , but I think just speaking to that infrastructure challenge, it depends who you are as to how you view that infrastructure challenge. Because if you're not the owner of the railway lines , if you're the user of the railway lines, one of your responses might just be to diversify your transport route. And that's could be an opportunity or a risk to both yourself and the owner of the lines . And that's where we're gonna see some really interesting responses to this mandatory reporting, which is we might find some interesting partnerships and coalitions who look to a sustainable 2050 and come up with some really interesting solutions.

Speaker 4: 21:51

I think that the transition planning side of this is, is also gonna be really interesting and , uh, challenging. I think this is where the potential for greenwash is gonna be much more highlighted than the other parts of this reporting requirement. And we've seen so far the transition plans that have been provided by companies big and small have been quite variable. Um, some are in integrated and comprehensive and clearly dynamic and moving ahead. Others are a more of a corporate responsibility sort of statement and a long-term statement of intent. Um, so I think the detail around those plans is gonna be quite interesting and , and how that comes to some sort of common level of granularity and credibility.

Speaker 2: 22:39

Yeah , that's a good , good point, Robin . The credibility aspect of transition plans is problematic. I think one of the issues here is that you'll get a company that says we can fix our, our transition plan consists of prefer preferential access to world's biofuel. And you go, well, why would you get preferential access to it? So there'll be another company next door who claim make the same claim. So you start to get a situation where a , all of these claims, when you actually put 'em on the same table, they , they don't add up. They're not, they're not, they're not self-consistent. And I'm not quite sure how investors are gonna handle that challenge where the , the same claim is being made , but there's only one, there's only one, one resource to fix it and five people are claiming it. I don't , I dunno how we'll impact that. So can you get thoughts on that?

Speaker 3: 23:24

And for me, the other challenge there is what is the role of the auditor in that and and how much of, of the competition for those resources does the auditor need to be across when they're verifying or assuring those statements?

Speaker 4: 23:36

Yeah, we've been helping companies to develop these decarbonization plans and transition plans and one of the , we find is that the function here is to try and inform investors or potential investors or other partners about what you're trying to do and therefore how , how do the risks re reflect your intention. What we find is that the detail you need to create one is basically not the detail you'd like to reveal to the market <laugh>. Um, and so there's sort of two documents that we're seeing companies produce. One is a transition plan for disclosure and that provides some broad brush but maybe provides some assurance that, or assurance and confidence that there is a detailed plan behind it. And then of course there's the more detailed picture, which is often shared with the potential investors or regulators as required. So I think it's important that when we think about mandatory disclosure, what you actually disclose as a company is always a subset of the information you have and what you pick to disclose, how often you do it, who you disclose to, I think is a really sort of , uh, complex part of this, but will come to the fore as people get into the, the teeth of it. Agreed .

Speaker 2: 24:49

Thanks Rob and thanks Mary for your time today. They're very, very insightful comments and very , uh, interesting topic of conversation. And finally, thank you for listening. Uh , if you have any questions or comments related to our discussion today, please don't hesitate to contact us through the website or your energetics account manager. Thank you very much .