The industry is entering a new era of sustainability disclosure which relates to changing stakeholder expectations in the mining sector and beyond.
On 26 June 2023, the International Sustainability Standards Board (ISSB) issued its finalised sustainability and climate change disclosure standards, the International Financial Reporting Standards (IFRS) S1 and S2. The ISSB standards are intended to set a global standard on disclosures to the market related to sustainability and climate reporting.
On 27 June 2023, the Treasury released the government’s proposed position on mandatory climate reporting for consultation, summarising how the IFRS S2 climate change disclosures standard will be applied to the Australian context. On 23 October 2023, the Australian Accounting Standards Board (AASB) released the Exposure Draft ED SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information to propose climate-related financial disclosure requirements, with an invitation for feedback.
To align with the ISSB’s disclosure expectations and definition of materiality, each entity will have to determine what information could be reasonably expected to influence decisions by potential investors, lenders, creditors and other such key stakeholders. This may mean providing additional disclosures in financial statements and sustainability reports.
When and how will the standards affect you?
The Treasury proposal would see the largest Australian companies and financial institutions making climate disclosures commencing in the 2024/25 reporting period, extending to smaller companies for the 2027/28 Reporting Period. It captures entities required to report under Chapter 2M of the Corporations Act and that fulfill two of the below three thresholds:
If your company is directly captured, then it requires some vigilance to understand and plan for the disclosure requirements.
Even if your business is not captured, it will be part of a broader ‘value chain’ where captured customers and business partners may need to consider risks associated with your business. For instance, your business emissions are likely to be a source of ‘scope 3 GHG emissions’ for your customers, investors and banks. It will be prudent to be aware of such stakeholders who are likely to be captured.
It is those impacted as part of groups two and three (earnings $50-$200 million) who are most at risk of not being compliant. With most not having begun what is generally a three-to-four-year process, these businesses must act now to meet their FY27 and FY28 deadlines respectively. It is therefore critical for reporting entities to familiarise themselves with all aspects of these standards and conduct gap analyses of any current reporting.
The opportunity for mining equipment, technology and services companies
There are estimated to be up to 4,000 mining equipment, technology and services (METS) businesses employing 390,000 workers in Australia. Many of them import products from countries that include China – where environment, social and governance (ESG) is still a distant whisper amongst manufacturers, compared to Australian miners’ board rooms. This divide will narrow with the ISSB’s scope 3 GHG emissions disclosure requirements. Alongside it, there are growing state-based scope 3 GHG regulations; and ESG standards such as the Science Based Targets Initiative’s Net Zero standard and new Steel sector standard.
Savvy METS businesses are seeing a limited window of opportunity over the next year to differentiate themselves ahead of their competitors with an ESG framework; a simple sustainability report; and decarbonisation targets that rely on reputable, customer-aligned ESG standards.
Alignment with existing standards
With the IFRS S1 and S2 standards set to replace the Taskforce on Climate-related Financial Disclosures (TCFD), it can be expected that entities already reporting in line with the TCFD have made a good start to their journey.
The IFRS S1 standard appendix also refers to the Global Reporting Initiative (GRI) and CDP (formerly Carbon Disclosure Project) standards, which can be used in the absence of an IFRS Sustainability Disclosure Standard that specifically applies to a sustainability related risk or opportunity. There is a window here for hitting two birds with one stone, in terms of GRI and ISSB aligned reporting.
The new GRI Mining Sector Standard (being finalised in coming months) is the most comprehensive and current ESG-focussed mining sector standard out there – which can serve to complement the IFRS S1 and S2 standards.
It is expected that the GRI will continue to be a dominant ESG standard in the mining sector, with its focus on sustainability ‘impact materiality’. The ISSB/SASB standards will, on the other hand, address ‘financial materiality’. Both groups of standards can therefore work well together, to begin to address ‘double materiality’ (impact and financial materiality) which has become a requirement in Europe under the Corporate Sustainability Reporting Directive. It is foreseeable that such a regulation will in future find its way to other developed OECD countries like Australia.
Transition risks and opportunities
Within operational mining companies, ‘transition risks’ and related mitigations are typically measured and assessed through GHG emissions, decarbonisation projects and targets (including renewable energy, fuel switching, energy efficiency and carbon offsets), and other risk/resilience strategies such as the application of internal carbon pricing to minimise carbon-risk exposure.
However, such initiatives are less common within exploration companies and OEMs/suppliers. As a result there will tend to be a larger gap for these companies that are caught by the requirements.
Decarbonisation of mine site power supply has been made easier with improved economics of renewable energy, in particular wind, solar PV and battery systems. However there remain a number of harder-to-abate emissions sources for miners – including switching away from diesel vehicles and equipment.
The IFRS S2 standard strives for companies to begin to frame ‘opportunity’ in terms like ‘business model’, ‘value chain’, ‘strategy’ and ‘financial performance’. In an industry which has traditionally been fossil-fuel intensive, there are few better examples of economic sectors that can capture climate change and sustainability related financial opportunities like the critical minerals sector, along with other metals miners seeking to supply ‘green’ metals.
Physical climate risks
Physical climate risks have been a newer entrant on the agendas of mining companies and suppliers – but are potentially significant considering the potential scale of impacts of climate change on mining related activities (upstream and downstream) – such as from water supply shortages, and extreme weather events. Accessing reliable climate change data, and drawing on expertise to assess the risks, will be important.
Transitional climate reporting liability relief
The government will afford some protection from false or misleading representation claims in relation to forward-looking statements for the first three years (e.g. transition plans, scenario analysis). The aim is to address liability concerns and encourage companies to make best efforts in making disclosures.
Where can you start?
Preparing to disclose against the Standards can be seen as an opportunity for entities to strengthen existing processes. This features a gap assessment against the Standards and development of a roadmap for future climate change and sustainability reporting. Key stages include:
1. Conduct a gap assessment to understand:
- When and how the changes will impact your company
- How your current internal and external reporting and practices compare with the new standards
- Is training required to bring your executives and Board up to speed?
2. Assess materiality:
- Is your materiality up to date? Have you identified the correct climate-related risks and opportunities?
- For entities that already undertake materiality assessments for sustainability reporting, how can the ISSB’s definition of materiality be used to enhance the current process to bring financial considerations more explicitly into the approach to determining materiality?
- What value, trade-offs and interrelationship dynamics exist between risks and opportunities?
- What information is required for ‘primary users’ of general-purpose financial reporting i.e. existing/potential investors and lenders, to assess the effects of risks and opportunities? For example, the effect of climate change on their financial position, financial performance and cash flows, etc
- How can you leverage materiality assessment results to challenge and enhance the business strategy, including validation of the appropriateness of climate-related risks and opportunities?
3. Scenario analysis and strategy will help to further identify, assess and address climate-related risks and opportunities. This includes assessing what are the current and anticipated effects of risks and opportunities in relation to:
- The short, medium and long term – considering your life of mine plan, acquisitions/disposals etc
- The business model and value chain
- This category of the IFRS S2 standard was self-assessed with the lowest level of preparation by eleven leading ASX listed mining companies (at around 60 per cent level of preparation) in the free questionnaire set-up by Decarbonate (www.decarbonate.com.au). If larger mining companies have such gaps, then gaps are likely to be even greater for smaller mining/service/OEM companies
- The business strategy and decision-making (including any transition plan)
- The financial position, financial performance and cash flows
- Scenario analysis of climate resilience, transition risks and physical risks
- Qualitative scenario analysis is initially acceptable to inform disclosures, moving to quantitative scenario analysis by the end of the transition period
- Assessing the likelihood and severity of impacts
Other questions include:
- Do you have a transition plan that can be disclosed, and any climate-related targets? (required from commencement)
- Do you have a plan to prepare scope 3 GHG emissions? (required from the second reporting year)
- What sector/industry based metrics would you report against? (required by 2027/28)
4. Assess data requirements and identify gaps:
- An issue for many companies is likely to be collecting data. Are there effective processes in place for gathering data and for integrated reporting?
- What systems and processes must be created and implemented to ensure effective data monitoring and reporting? For example, an existing procurement system could be modified to add data fields/categories and emissions factors that enable automated scope 3 GHG emissions reporting
- Do you have a dedicated and (ideally) experienced team for oversight and collection?
- Have you performed a gap analysis to identify where this data exists and is currently reported on, where the data is collected for other business activities but not reported on, and where there are absolute gaps in source data?
5. Map processes, controls and systems:
- Have you mapped current processes and systems (including key controls) to enable identification of data/quality/reporting gaps, improvements and capability requirements?
- Less mature entities tend to collect data manually in spreadsheets owned by a wide set of data owners, with a high-level of manual entry and increased likelihood of errors
- More mature entities, on the other hand, tend to have automated processes that are supported by systems and relevant controls around data accuracy, completeness and reporting. Are you aware of the options available?
6. Build a roadmap and take action:
- Have you built a roadmap (and taken action) to close any potential sustainability and climate related data gaps, optimise processes and governance structures (with suitable roles and responsibilities), identify new control processes and develop plans to uplift systems?
- Data integrity – is data complete, relevant, reliable and verifiable? This can help to prepare for eventual assurance over the information
- Have you socialised ISSB requirements within the business, and with relevant value chain partners?
- Have communications been planned/diarised? Disclosing against the Standards requires a shift in mindset from financial reporting of transactions, to sustainability/climate related information encompassing the entire value chain. This will require increased collaboration in order to understand and respond to material risks and opportunities appropriately. Entities will need to ensure active engagement and buy-in exists across the Board, management, asset level, business partners and the value chain
8. Improve: Achieving all of this will take time and a continuous improvement mindset. Entities need to adopt an iterative approach that evolves by incorporating lessons learnt. The above stages should be periodically revisited as required, and in line with annual reporting processes
Whether your business falls under the IFRS S2 requirements or not, now is the time to have an ESG and climate change framework, in particular for those companies seeking to grow or cement their relationships with customers, investors, lenders, communities and other key stakeholders.
The standard provides an opportunity to strengthen existing processes and to further align to changing stakeholder needs within the emerging low-carbon economy. Disclosing such forward-looking information is new for many entities in the mining sector, and it may require hiring experts to support you. The good news is that once you have gone through the preparation process the first time, with a roadmap for action, then subsequent reporting should become much more streamlined.
Brendan Tapley is Managing Director for Decarbonate, an ESG and climate change consultancy specialising in the mining and energy sectors. He is also one of four people in Australia to sit on the Global Reporting Initiative (GRI) Mining Sector Standard Working Group.