The way companies need to report on finances is changing. An engineer-turned-lawyer breaks down what engineers should know about upcoming policy requirements.
What is changing?
Starting from the 2024–2025 financial year, large proprietary companies, publicly listed entities and financial institutions must adhere to the mandatory climate-related financial disclosure (MCFD) scheme, assuming the draft legislation is implemented in its current form.
The table below outlines the different phases of the scheme:
| Corporations Act (Cth) chapter 2M entities – at least two of: | 1st Group: FY 2024-25 onwards | 2nd Group: FY 2026-27 onwards | 3rd Group: FY 2027-28 onwards |
| – Consolidated revenue | ≥ $500 million | ≥ $200 million | ≥ $50 million |
| – Consolidated gross asset | ≥ $1 billion | ≥ $500 million | ≥ $25 million |
| – Employees at the end of financial year | ≥ 500 | ≥ 250 | ≥ 100 |
| National Greenhouse and Energy Reporting Act 2007 (Cth) reporting entities | Above NGER publication threshold | All other NGER reporting entities | N/A |
| Asset owners (such as registrable superannuation entities and registered schemes) | N/A | ≥ $500 million | N/A |
What is the content of the disclosure?
Based on the Exposure Drafts for SR1 and SR2, released by the Australian Accounting Standards Board (AASB) in October 2023, reporting entities must disclose in their sustainability report information relating to:
- Governance, strategy, risk management and metrics and targets (including Scope 1 and Scope 2 GHG emissions) from year one
- Scope 3 emissions (indirect GHG emissions that occur in the reporting entity’s value chain) from year two
Are SME contractors, engineering firms and the like off the hook?
Probably not. While small and medium enterprises (SMEs) might be spared complex disclosure obligations for now, early impacts will likely be felt through contractual relationships with their upstream larger corporation counterparts.
As part of their Scope 3 sustainability records, which they must keep for seven years, reporting entities can require their SME counterparts to disclose their energy bills (i.e. electric and petrol).
Now is a good time to check your reporting and Change in Law provisions.
What are the opportunities for companies?
Despite the SMEs’ risks of increased operational costs for tracking and reporting emissions data, the MCFD scheme also presents opportunities.
Let’s begin with the big picture. Australia has enshrined its emission reduction target to achieve its Paris Agreement targets under the Climate Change Act 2022, with an interim goal of cutting GHG emissions to 43 per cent below 2005 levels by 2030.
Some states have more ambitious targets. For instance, Queensland is pushing for an emissions reduction target of 75 per cent by 2035.
Under the MCFD scheme, the impetus for reporting entities to reduce their Scope 3 emissions will arguably be more compelling than ever due to pressures from investors, consumers and regulatory bodies.
Eco-conscious procurement would likely continue to surge. Downstream SMEs can find opportunities to adapt their products and services to meet the sustainability criteria of their larger partners. SMEs that have their environmental, social and corporate governance (ESG) initiatives in place are arguably ahead of the game.
What’s in it for engineers?
Suppose your company operates a battery energy or data storage system. How would escalating climate change-induced heat waves affect it? What are the costs associated with maintaining operating temperatures for optimal performance? What are the alternatives?
Such climate resilience analysis, along with a climate-related transition plan, are among the strategy disclosures entities will have to report.
Whether it involves interpreting data, ensuring the accuracy of models, or applying engineering principles to support decision-making processes in both qualitative and quantitative aspects of climate scenario analysis, engineering expertise is essential.
The required skill set is not new; the question is whether they are enough. It will not be a surprise if the MFCD scheme exacerbates the green skills gap as companies grapple for green talent.
This creates opportunities for engineers of all ages not only to broaden their knowledge base, particularly in ESG, but also to pivot towards sustainability-focused roles.
How does ESG integrate with engineering principles?
ESG is often mistakenly considered a boardroom issue, but engineers are instrumental in driving sustainability.
For instance, by thoughtfully specifying sustainable materials or low-carbon energy sources, engineers directly impact GHG emissions – no ‘Sustainability Engineer’ title or groundbreaking inventions required.
While up-front costs are sometimes higher, life cycle analysis consistently demonstrates long-term savings and emissions reductions that outweigh those costs.
On the other hand, the common practice of over-specifying, while sometimes justified by safety concerns, frequently results in excessive resource use. Even seemingly small choices by engineers can have a profound, cumulative impact on sustainability when amplified across the industry.
What are the practical ways to prepare for the MCFD scheme?
There is no one size fits all, but here are some suggestions:
- Educate your team on the reporting requirements and also on broader ESG issues, and the earlier the better.
- Establish a cross-functional group to assess relevant data and collaborate on the disclosure process.
- Recognise data collection and analysis process gaps, and implement improvements to meet the disclosure requirements.
- Assess vulnerabilities in the firm’s supply chain due to climate-related risks and explore sustainability improvements with suppliers.
- Utilise technology tools that can aid efficient collection, analysis and reporting processes.
For more from RJ Serrano and Suzy Cairney, read what engineers need to know about changes to laws governing contract terms.