ERM Energetics Exchange

What must you disclose in mandatory climate reporting? What is ‘material’?

• Energetics • Season 3 • Episode 1

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In this episode, we'll speak to the crucial topic of materiality and the challenge of determining the climate impacts that are, and are not, financially material to ASRS disclosures. 

Speaker 1:

Welcome to the ERM Energetics Exchange podcast, conversations with climate risk and energy transition experts. Please note that the information and commentary in this podcast is of a general nature only, and listeners should not rely upon the content without first seeking advice from a professional.

Speaker 2:

Welcome

Speaker 3:

To a new series of podcasts that we are now running under the umbrella of ERM Energetics, offering Australian business, both local and global insights. Before we start today's podcast, I'd like to acknowledge the traditional owners of country and recognize their continuing connection to lands, waters, and communities. We pay respect to our Aboriginal and Torres Strait Islander cultures and to elders past and present. I'd particularly like to acknowledge the Camal people of the AOR nation as the country from where I'm broadcasting today. Today we're gonna discuss preparations for the Australian Sustainability Reporting Standard or the A SRS as it's widely known, the biggest change to financial reporting in Australia since the introduction of the GST . In this first episode, we'll speak to the crucial topic of materiality and the challenge on determining what climate impacts are and are not financially material to our A SRS disclosures. I'm Mary Stewart, CEO of energetics, and today I'm delighted to be joined by my ERM colleagues, Victoria Cross and Matti Lund Victoria is an ERM partner in corporate sustainability and climate change. She's new to Australia. We are very grateful that she's moved here and has recently arrived from the uk. Where we are very fortunate is that Victoria's expertise and experiences grounded in the disclosure regime in Europe, the corporate sustainability Reporting directive, or the CSRD as we know in our alphabet soup world, under which an estimated 50,000 companies worldwide will have to report on their ESG activities. It's great to have you here to share your insights from your experience in Europe and welcome to Australia Victoria. Thank you. Matti is a partner and Asia specific lead for assurance and certification at ERM certification and verification services or E-R-M-C-V-S . With the introduction of the A SRS , we know we need transparent and assured ESG data and throughout reporting organizations a commitment to clear and accountable sustainability practices. Today I'm grateful that Matti can join us and share his expertise and insights. Hello and welcome Matti .

Speaker 4:

Hey Mary. Look, really great to be here. Thank you very much.

Speaker 3:

Before we start, I want to remind you why the A SRS is being cited as the most significant change to financial reporting since the introduction of the GST. These reports are included in your financial reports. They're due within three months of your financial year, and you don't have the luxury of time to prepare these disclosures. This is a big change to how companies pull together these planets and and energy information sets . And you need to speak to how climate change and addressing emissions reduction will in fact the financial performance of your company. You need to articulate these in dollar terms as well. This is a whole of business effort. You can't just assign it to your sustainability people or your finance people. If you're gonna deliver adequate disclosures that can be assured. You need the input of the entire management team and the board. So it's not something you can just leave to the sustainability department. I'm grateful to have Matty and Victoria here because they have deep expertise across their areas. And I'm gonna start with a question for Victoria. So Victoria, like a SRS here in Australia, reporting under CSID is rigorous. In fact, CSID is even more rigorous. From your experience of implementing CSID for some of the UK's largest FMCG clients, what are the non-negotiable first steps for companies to take? What do you have to do to ensure success?

Speaker 5:

What a great first question, Mary, to kick off with and I think it's absolutely the right question to ask right now is what are those things that an organization really needs to think about before they delve deeply into the, the red tape of what's involved in the regulation? One of the first things we're getting them to really start to think about is their appetite. It's not fair to say that every company has the same appetite for disclosure. Right now. We've got some clients that are just saying to us, please just help us nudge our chin over the bar. And we've got other organizations that are saying they want to be an all out leader as far as their sustainability disclosures are concerned. So for each individual organization to have that level setting conversation to understand their own why, how they might wish to use the three year phasing period, for example, and to decide what is the most pragmatic approach that makes sense for their business and not just their auditor who's gonna be looking at this disclosure in due course . So understanding the appetite and then building from that understanding whether or not the organization has the right level of literacy of the topic in question. In the case of ESRS, that's very much about climate change. So we are seeing , um, with CSRD that the finance and the sustainability communities are coming together to solve the disclosure and the reporting questions that need solving, and they need a really common understanding. They need to both be literate in the topics. And then from that point, you can have all the right building blocks in place to make sure that everyone else in the business understands their role in the disclosure, as you said in your intro, we're really passionate. That done well. A SRS or CSRD needs to involve lots of different people in the organization, not just the, the people who are charged with creating the report. And the other thing to think about really early on is about starting with the end in mind. Of course, you do need a compliant disclosure. Um , that absolutely goes without saying, but really the disclosure is just a tool to drive your business's own response to climate change and its work to achieving net zero emissions and viewing the disclosure as exactly that. A tool to engage your customers, your investors, your suppliers in the change that you want to see an owner as an organization is really important right from the outset, rather than this just being a , a tick box exercise for an organization.

Speaker 3:

Thank you, Victoria. The learnings from someone who's actually done this are hugely valuable and and I've enjoyed every conversation I've had with Vic since she moved to Australia. Just unpacking that and understanding to not just the tick boxes , it's the opportunity and it's the potential for growth. So there's a lot for us to learn here too. Turning to you, Matti Victoria has talked about the importance of starting the journey to reporting with the end in mind and assurance is a big part of that end as an assurance expert. What advice would you give to companies as they prepare to report under a SRS ?

Speaker 4:

Thanks, Mary . That's, that's a really interesting question. It's a very big question and I think it reflects as you highlighted in your , your introduction, how big a change this is to reporting in Australia. So I think I'd tack it in a couple of ways. Um, uh, in terms of answering that question, so firstly, the information that companies need to report under the new as RS standards is very different to the information that companies are used to reporting. And having assured , um, this is primarily because much of that information and, and Vic's talked a bit about it , um, under as SRS is not financial information. Like if we think about, for example, the requirement to disclose the overall governance in place , uh, the strategy, the risks and opportunities, transition plans and and risk management, we can see the depth and breadth of non-financial information that's required to be disclosed. Now, that's really important because as an auditor, auditing of non-financial information is very different to looking at historical financial information , uh, in that regard. It's also gonna be a new concept to most audit firms and they'll be developing their approaches right now, which are likely to change over time as they, they learn more, they start looking , uh, in depth at at more disclosures and it will differ between audit firms. So thinking also about historical information, it's much easier to provide assurance over events that have occurred in the past compared to events that are yet to happen. So for greenhouse gas emissions, the assurance provider can use accepted frameworks such as the GSG protocol and examine historical supporting information for the disclosures made. But , but think about, for example, one of the requirements , uh, of the new standards to disclose climate resilience assessments and scenario analysis. This is all forward looking and it's gonna gonna require a whole different basis of supporting information for the disclosures made. Uh , and , and again, the auditors are gonna be work out how do I actually , uh, get enough evidence to be able to sign off on an assurance report. So, so I think here it's really important to engage with your assurance provider early to understand the level of support and where their thinking's at in relation to what they need to provide assurance of the disclosure you're required to make. Um, if you're prepared now or as you start producing those disclosures with the support your assurance provider needs , um, then you're actually going to have a much quicker assurance period, right? And so you won't put it jeopardy the timeliness as you put it at Mary of the reporting. Uh, and honestly, the best thing you wanna avoid is receiving a modified opinion from your insurance provider. 'cause they're saying you don't have the support for the disclosures made.

Speaker 3:

Thank you, Matti . And I've always found some of what insurers do a , a black art , and it's interesting to understand how the conversation early on can remove some of the, what apparent subjectivity from the assurance process and , and making sure that , that both the reporter and the insurer are on the right page, is a very good place to start as as you move forward into this, this renewed disclosure environment. Victoria, I know that materiality is a significant conversation under CSRD and A SRS , though does differ from CSRD does have certain considerations around materiality. What work do you think needs to happen around quantifying the impacts to work out , um, what is material and, and what is not?

Speaker 5:

I think if , uh, we had one question that we were getting asked the most from organizations right now. It was exactly this one, Mary. So being more specific on the concept of double materiality, which is , um, very much a central plank of the eus corporate sustainability reporting directive. The first thing we do is encourage clients not to think of this as a completely new concept through their long established enterprise risk management approaches. Their organization will have already been looking at different things that might derail their commercial flight path, but what they might not have done is look quite so much at the ESG opportunity lens here. So where might different environments, social governance topics really lend themselves to driving corporate value, whether that's through access to new markets and customers access to new sources of green finance, perhaps, or about ensuring a more sustainable and secure supply chain, some of which may have much, much longer time horizons than a typical enterprise risk management approach. Because of course, those impacts will be much longer than the typical short-term business planning cycle. But also what's really important for double materiality is that an organization looks at their impact on the outside world as well, whether that's on society or the environment. And clearly those impacts are very well understood when you are looking at your domestic market in , for example, the Australian context. But if your value chain chain stretches more broadly into other markets that might not have quite such mature ESG criteria attached to them, then sometimes what's going on deep up the value chain can be a bit less understood. And the concept of double materiality under CSRD, unlike other previous reporting regimes like GRI really does dictate that the company looks right up that value chain and makes sure that any risks or opportunities to have an impact up those value chains are well understood. And in fact, since I've been here in the Australia market, I've been having some fascinating conversations with Australian businesses who are supplying customers in Europe and need, therefore to make sure that they've got their own CSRD compliant disclosures as well as preparing for A SRS at the same time. So really taking that double materiality lens to their financial materiality planning and making sure that they're able to properly quantify those risks as well as those important opportunities has been a really key topic of conversation.

Speaker 3:

Thank you, Victoria. Both your answer and, and Matt's answer previously highlights it just how different financial disclosures are from , from ESG disclosures and , and how complex the audit of these reports will be. Matt , given this as a background, what are the key differences you see between financial reporting, sustainability reporting, and now what will be required under as RS ?

Speaker 4:

Wow, I , I think , um, both you and Vic have have really highlighted one of the, the big challenges that are gonna face companies that are reporting under A SRS and that is materiality. I , I've spoken already about the supporting evidence that's required for, for A SRS disclosures versus financial reporting disclosures. And as you and Vic have pointed out, another big difference between as SRS standards and traditional financial reporting assurance is materiality. So for financial reporting, there's actually a specific auditing standard that covers financial materiality and how an auditor should think about it. We don't yet have a similar auditing standard for sustainability disclosures. So , so this is a big difference in and of itself further when , when we think about the audit of financial report, with that auditing standard in mind, materiality is set by the auditor of the information being assured, the company being audited has little, or in fact has no input into what that materiality was gonna be. 'cause the auditor is deciding that as they set materiality as part of the , the audit procedures they design . In the case of as SRS disclosures, just as Vics pointed out, it's a big question that the company itself has to answer. They have to choose what's material and what's not when they're thinking about what disclosures they're making under as SRS . But here's the challenge, right? Even though the company's setting it, the auditor will then have their own view over what's material in that context. And this may or may not align with the company's view. So , so I think it's important to remember when you're setting it the underlying principle that an auditor will apply 'cause they don't have a specific auditing standard for sustainability disclosures. The underlying principle of what's material that they will apply, which is analogous to that financial statement, auditing materiality , uh, is that basically a disclosure, be it financial or non-financial is material, if it's a mission or misstatement, could alter the decisions of users of the climate report prepared in accordance with the as SRS standards. So you need to think about that, what's gonna change potentially, right? And a mission or a misstatement , the decisions of users of your climate report. So I think in that regard, it's important to, to think like the order's gonna think, and again, as I said before, engage early with your assurance provider to make sure you understand what they're thinking about in terms of materiality and what level of support they're gonna require, right. From a materiality perspective of how you've chosen materiality.

Speaker 3:

It's fascinating, and I could speak to both of you for the rest of the day, but unfortunately , um, we do have to bring this to the close , uh, close . And , and Vic , I was wondering if you had one or two comments or , or specific pieces of advice that you'd like to give our listeners?

Speaker 5:

Yeah, sure. It can be really tempting to just get lost in the red tape when you are faced with a new disclosure for, for any organization. And I would just want to remind people that the disclosure is merely an output. The outcome is the opportunity to really drive value from a different level of conversation and action on climate change in your organization. So I've heard it said that every dollar spent on disclosure is a dollar that can't be spent on progress. And I think that's nonsense. The two should never be mutually exclusive. You know, of course it does cost money to , um, meet the needs of a new disclosure requirement in terms of internal resources and auditing , um, phases that Matt's already alluded to. But use that opportunity to drive real change, see how you can galvanize action within your organization to get budget allocated and get resources allocated towards the outcomes that are gonna drive the most meaningful impact for you and your stakeholders as far as your climate change strategy is concerned.

Speaker 3:

Thank you. Victoria, do you have any final pieces of advice or , or words for , for our audience, Matthew ?

Speaker 4:

Yeah, mayor , I , I think you said it very correctly. We could talk about this for a <laugh> a long while, but we don't have time on , on this particular podcast. Just a couple of of final points , um, as you can imagine, I'm talking to lots of different companies, many large listed of companies about A SRS and even the largest ones who've been reporting climate and sustainable information for many years, acknowledge they've still got a lot of work to do to meet the requirements of the new standards. So I , I think we need to keep that in mind and actually get started now , um, to make sure that we're gonna be prepared. And , and I think the second point is that when we think about, and we've talked, I've talked a bit about financial reporting versus a SRS reporting, the systems , processes, procedures and controls for gathering the information that is gonna be required for as SRS standards is very different to the ones that are in place already for financial reporting. So a company may have spent years getting all of those systems process controls ready so that they report that financial information accurately and in a timely manner. But when we think about what's required by the A SRS standards, they, those systems may not work. In fact, we , we know they won't. And you'll need new systems. A lot of work's gonna be needed to get these into shape , to , to ensure that accurate and timely reporting. And this may require quite a bit of investment in both people and IT systems themselves.

Speaker 3:

That's fair. But as we've heard from Flex , if you articulate the opportunity, those investments will help you drive your company forward. And I think what we've learned in, in this podcast today is we need to start with the end in mind. We need to be clear about what our aims are, what our ambitions are, because that way money will be invested to best effect. And that's starting with the end in mind. Includes starting with the conversation with your auditor and your assessor. How is this data gonna be assured and how do you make sure that , that you're spending money well on your assurance exercise? The other part that that really came out for me today is the opportunity. Yes, you have to do this, it's mandated, but you have to do this because your investors are asking you for this information and prepare , prepare the information well, you will understand your opportunity and where you need your company to be, to survive in a carbon free , much different climate world. So there's a huge opportunity here, and it is about the long term investability and sustainability of your company. So that's the end that I start with in mind when I'm talking to clients. As we've said, there's a lot more that we could discuss today and I'm sure that there will be additional , um, podcasts coming up where we will unpack some of those pieces of information. But for today, we are gonna call it to an end. Thank you very much for listening. And if you would like , um, more information or have a more tailored briefing or look at additional topics, please reach out to us at ERM Energetics or E-R-M-C-V-S and , and we'll work out who it's best to speak to

Speaker 1:

ERM Energetics Exchange podcast, conversations with energy and climate experts.