New ISSB standards for environmental claims and the big shift in financial and Scope 3 reporting.

It’s becoming increasingly important for Australian resource companies to understand sustainability disclosures, marketing, and opportunities. This article reviews the new International Sustainability Standards Board (ISSB) standards (IFRS S1 & IFRS S2) and provides insights into European (EU) legislation (battery passport regulations and the Green Claims Directive) that may affect Australian companies. ISSB, International Council on Mining and Metals (ICMM), EU as well as US standards will all require Scope 3 emissions reporting.

Sustainability issues and global business issues are intimately linked in the current economy. Environmental and social governance (ESG) reporting in Australia, and globally, is becoming stricter. It’s now important for Australian companies to understand how IFRS S1 and IFRS S2 will drive ESG reporting. Large companies, in particular, will need to modify their ESG approaches to ensure compliance. Whilst the acronyms, let alone the requirements, can be confusing, this article will help businesses make sense of the changes, and suggests ways to capitalise on the opportunity.

The ISSB’s four pillars of governance strategy, risk management, metrics and targets provide comprehensive coverage and will be challenging for companies that haven’t previously followed a similar framework. Companies are already strongly influenced by the pressure from investors to reduce climate risks that can impact upon financial performance. Now, in addition to reporting their financial performance, companies will need to demonstrate that they have appropriate governance structures and strategies in place to manage risks and organisational change.

Whilst historically the EU has been viewed as being at the forefront of sustainability regulations, Australia is now among the leaders of financial climate-related disclosures.

Crucially, the new IFRS standards have a particular focus on reducing greenwashing and expanding carbon emission reporting to include Scope 3. In response, companies must increase transparency, robustness and completeness - which is where Life Cycle Assessment (LCA) becomes vital.

What is the role of ISSB in Sustainability Standards?

A complicated history and evolution has led to the International Sustainability Standards Board (ISSB) taking over responsibility from the Sustainability Accounting Standards Board (SASB) to develop sustainability disclosure standards. The good news: the standards are based on existing standards (including Task Force on Climate-related Financial Disclosures (TCFD) and SASB), and are intended to work with other mandatory reporting frameworks such as EFRAG in the EU and the SEC in the United States.

What are the new IFRS standards?

The SASB standards “identify the sustainability-related risks and opportunities most likely to affect an entity’s cash flows, access to finance and cost of capital over the short, medium or long term and the disclosure topics and metrics that are most likely to be useful to investors.” They are expected to be disclosed in the same package together with financial reporting.

• IFRS S1 – is the General Requirements for Disclosure of Sustainability-related Financial Information, issued in June 2023.
• IFRS S2 – is the standard specifically for Climate-related Disclosures to be used with IFRS S1.

When should I take notice?

Reporting and disclosures of climate-related risks and opportunities as per the IFRS S2 becomes effective from 1 January 2024 for large companies. Smaller companies, or those previously reporting to another standard, should evaluate the needs of stakeholders to choose the best format. In particular, those companies exposed to capital markets should look to adopt reporting so that it is in line with the ISSB.

What will it require?

It requires an entity to disclose climate-related risks and opportunities that may affect cash flows. Specifically, these are climate-related physical or transition risks, and opportunities, which also now include Scope 3 emissions quantification and disclosure.

The IFRS S2 requires companies to provide information on the following areas that will allow readers of general purpose financial reports to understand the companies:

• Governance: the governance processes, controls and procedures the entity uses to monitor, manage and oversee climate-related risks and opportunities;
• Strategy: the entity’s strategy for managing climate-related risks and opportunities;
• Risk management: the processes the entity uses to identify, assess, prioritise and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and
• Metrics and targets: the entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.

What about Australia?

The standards will be adopted globally, and the Australian Treasury has indicated that mandatory climate-related disclosures for large Australian companies and financial institutions will likely align with ISSB standards.

What other regulations in the energy transition should be considered?

For energy transition raw material producers and manufacturers, the EU Battery Regulations come into effect in February 2024. From February 2025, any electric vehicle battery sold in the EU must report the climate change impact of producing the battery. Life Cycle Assessment is the only methodology recognised in these regulations to account for the total climate change footprint, covering scope 1, scope 2 and upstream scope 3 emissions.

In addition, the EU Green Claims Directive was adopted in March 2023 that will require products not covered by other legislation to obtain LCA’s to support any performance claims on their product’s environmental sustainability credentials.

The message is that - no longer will raw materials be placed in a market mixing pot. Accountability and opportunity for suppliers of low-carbon materials and products is here.

How can Minviro’s life cycle services help you?

Minviro specialises in ISO (14040/14044:2006) compliant life cycle assessments (LCAs) in the critical raw material sector, focusing on battery and other decarbonisation technology raw materials. With a team built of mining engineers, geologists, chemical engineers and environmental scientists, Minviro can not only conduct LCA, but also provide expert insights into environmental hotspots of the extraction and production processes, comparisons to current or alternative supply chains and feasible mitigation strategies to support mining companies in reaching their sustainability goals.

Another tool being increasingly used to complement LCA is environmental life cycle costing (LCC). This uses the same framework as LCA but provides an additional perspective to compare environmental impacts and costs. That way, trade-offs between environmental-based improvements can be directly compared against the cost implications. This provides valuable insights into processes, value chain stages, input changes, by-product recovery, treatment systems or energy supply options.

Life Cycle Management as a critical tool for sustainability

Different regulations apply to companies at different stages. For example, OEMs are affected by battery regulations, whilst junior mining companies will be impacted by the new IFRS sustainability disclosures and so forth. At Minviro, it’s important to empower the companies we work with to maximise the use of their environmental impact results for meeting strict regulation standards, financial investment strategies and marketing campaigns. LCA enables a holistic quantification of the environmental impact along a product’s life - from raw mineral extraction, to processing, transport, use and end of life treatment, for a range of environmental aspects. This includes, but is not limited to carbon emissions, water quality, soil quality and impacts on human health that other approaches do not account for.

The LCA approach can also function as a stepping stone or platform for many other aspects of sustainability. Minviro’s team have extensive experience using the life cycle approach in many areas such as climate change reporting, material flow analysis, and industrial symbiosis, to name a few. Contact us to find out more.

How to reach us?

Minviro has offices in London, UK, Shanghai, China and Perth, Australia. Reach out via our website or directly contact Phoebe Whattoff or Steve Harris to find out more about how we can support you with your sustainability journey.

Acronyms

IASB - International Accounting Standards Board

ICMM - International Council on Mining and Metals

IFRS - International Financial Reporting Standards

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, issued in June 2023; and

IFRS S2 Climate-related Disclosures, issued in June 2023.

(IIRC - International Integrated Reporting Council

ISSB - International Sustainability Standards Board

SASB - Sustainability Accounting Standards Board

Notes:

The International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) announced their intention to merge into the Value Reporting Foundation, which was officially formed in June 2021.

The International Sustainability Standards Board (ISSB) is an independent, private-sector body that develops and approves IFRS Sustainability Disclosure Standards (IFRS SDS). The ISSB operates under the oversight of the IFRS Foundation. The ISSB was formed in 2021 following two consultations on the demand for global sustainability standards and what role the Foundation might play in the development of such standards and on proposed amendments to the IFRS Foundation Constitution that would enable the creation of a new sustainability standards board under the governance of the Foundation.