Government must right-size climate disclosure laws for SMEs or risk costly debacle: CA ANZ
CA ANZ has long advocated for climate reporting standards, but compliance under the government’s proposed legislation will cost small and medium-sized businesses and accounting practices dearly.
In the just transition to a low carbon economy, Chartered Accountants Australia and New Zealand (CA ANZ) has been a fierce advocate for transparent reporting and assurance on sustainability issues including climate risks and opportunities.
The government’s recently introduced bill on climate reporting, now proceeding through parliament, will transform how this works in Australia for generations to come. It is important to make sure it is optimised for all parts of the economy.
For decades, CA ANZ has been an active voice at the forefront as this new frontier in corporate reporting has developed internationally supporting the government’s objective to develop a globally harmonised climate disclosure regime over the past few years.
We want to ensure the package is effective, and that the funding and goodwill put towards this isn’t poured into the leaking cup of poorly targeted compliance and box ticking.
So, it takes a big issue for us to stand up and say: ‘Stop the music.’
But there is a several-hundred-million dollar ticking timebomb at the heart of the government’s recently introduced Climate Reporting Bill for thousands of smaller and medium entities (SMEs) and chartered accountants running small and medium sized accounting practices (SMPs).
The bill has clearly benefited from input and ‘sculpting’ when it comes to the needs and context of the big end of town – big business, listed companies, and big investment, with billions in market cap or trillions in funds under management (classed as Groups 1 and 2 in the Bill).
They have been – rightly – consulted in the policy making process and, accordingly, are now looking for the legislation to be passed to move onto implementation, and to access benefits such as a moratorium on liability.
However, it’s clear there has not been the same level of courtship or exertion about the impacts of the bill on SMEs like private companies and not-for-profits (classed as Group 3).
The bill’s attempt at proportionality for Group 3 is a workaround to a workaround that simply won’t work, and here’s why.
The current Group 3 scope will capture thousands of entities that the government’s own analysis has concluded will mostly (95 per cent) have no material climate risks and opportunities.
Rather than a better targeted threshold or scope which many have called for, the work around put forward is for these entities to prepare a statement of ‘no material risks/opportunities’ instead of a full climate report.
A new requirement included in the latest bill is for these entities to have this statement ‘audited’ or – in other words – a reasonable assurance engagement.
This is hugely significant.
Under existing assurance frameworks, affirming completeness is a multi-week exercise, potentially costing almost as much as the financial audit, estimated at around $30 - $50k by practitioners for the average in-scope private company.
Across an estimated 7,000 Group 3 entities, the costs quickly mount.
Making matters worse, entities are unlikely to be enthusiastic about paying for an audit, let alone to support an audit with the assessment and evidence needed, that is from the outset anticipated to relate to immaterial matters.
We’ve seen auditing used as a proxy for policy design before when there’s been a lack of political will to make a firm, often difficult decision about what entities will be captured. Auditors should not be left to have to “thrash it out.”
Recognising that this is a very tough cookie for auditors – a recent survey of CA ANZ members involved in reporting and audit found that 84 per cent don’t believe these entities will be ready in time, and 90 per cent don’t believe the entities will be willing to support or even pay for these audits.
Unsurprisingly, 88 per cent do not support the introduction of these requirements for Group 3 entities.
The untenable notion of ‘wait and see’ has been put forward by some – "wait for the standards to be finalised,” “wait for a few years, it’s not until 2027-2030”.
But this is cold comfort given there’s really no way around an ‘audit’ without legislative amendment.
It is unlikely and undesirable for that standard to be weakened or diluted by regulatory contortion – the workaround to the workaround – to make a poorly targeted policy somehow seem less costly.
To deal with climate risk (or any other sustainability or economic issue) through reporting and assurance, it’s essential to get the scope and settings right to ensure the information generated is reliable and relevant for those making key business decisions, including resource allocation and investment.
That is the fulcrum in this policy lever.
Get this wrong, or direct it poorly, and the outcome ineffectively addresses the problem. It not only wastes limited financial resources, it also stymies critical will-to-participate.
This is not just an ‘audit issue, or a ‘technical’ issue, but a matter of carefully framing policy so that scarce SME resources and buy-in are put to the most effective use, which is mission critical in the transition to a low carbon economy.
Regulation and reporting must be right sized for the SME sector, and this demands a holistic rethink on the scoping and requirements for Group 3 at a legislative level.
By Amir Ghandar, reporting and assurance leader for Chartered Accountants ANZ.
