February 2024 newsletter

Read our news: Mandatory Climate Reporting (MCR) is coming

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A message from Managing Director, Iain Smale

Getting prepared for Mandatory Climate Reporting (MCR)

Iain Smale, Pangolin Associates Managing Director
Iain Smale, Pangolin Associates Managing Director

I am pleased to introduce Pangolin’s newest service: Mandatory Climate Reporting (MCR) and to present two of our MCR specialists, Manny Vassal and Steve Tighe. In this newsletter Manny and Steve provide insight into the obligations and benefits of scenario planning for MCR which comes into effect in July 2024. To help reporting organisations, we are also presenting a webinar on 14 March: Understanding MCR: How to prepare your business for mandatory climate reporting. I invite you to join us.

Climate reporting will soon be business-as-usual for many Australian organisations. At the end of FY2023 the Australian Government announced mandatory climate-related financial disclosures for mid to large corporations and financial institutions – the business community is now hastily seeking guidance.

With more than 100 disclosures, MCR is indeed extensive and covers a broader cross section of the economy. Unlike the National Greenhouse and Energy Reporting Act (NGER) which applies to GHG emissions and energy only, MCR threshold triggers include factors such as staff numbers, assets, and revenue. And much like Modern Slavery laws, MCR impacts organisations below the reporting threshold but that are part of the value chain of a reporting entity. Put simply, in July 2024 more organisations will need to address the risks and responsibilities arising from climate change and Australia’s transition to a low carbon economy.

Ultimately MCR will increase transparency and accountability and reduce the risk of greenwashing penalties. Reporting will also contribute to economy-wide metrics and models for net zero. We see this as an invaluable benefit for the entire business community.

As always, our team is here to help.

Mandatory climate scenario planning

How to make it pragmatic, engaging, and strategic from Year 1

Photo of industry: Pangolin Associates provides mandatory climate-related financial reporting (MCR Services)

Climate scenario planning will soon become a standard feature for many Australian organisations. In this article, Pangolin Associates Principal Consultant Manny Vassal and Associate Steve Tighe explore why and how the process can be implemented pragmatically and generate strategic value from Year 1.

Key Points:

  • Mandatory climate scenario planning becomes effective from July 2024 for many companies as part of the Australian Government’s mandatory climate-related financial disclosures.
  • Treasury is mandating climate scenario planning to inform Australians and investors about an organisation’s ability to respond to climate risks and opportunities.
  • Beyond risk mitigation and adaptation, Treasury is calling for organisations to reflect and to articulate the opportunities and strategic uplifts that climate change may offer.
  • Scenario analysis comes in a variety of formats, including a shorter, online-based, participatory approach prevalent during the pandemic, well-suited for the Treasury’s accommodating guidance during Year 1 ‘capability building’.

From July 2024, many Australian organisations will be subject to a new climate-related financial disclosure regulatory regime that will require increased levels of detail in reporting and new activities to analyse the risks and opportunities associated with climate change.

Historically, scenario analysis has been the domain of large organisations or government departments. The perception of scenario analysis can be of a convoluted process, based on data clouded by uncertainty, and producing hard to implement outcomes. But it needn’t be so. When implemented pragmatically and in an engaging manner with committed executives, the process can be expeditious, focused on relevant parameters, surface strategic opportunities, and generate actionable outcomes.

The Australian Government has recognised that building scenario planning processes and skills takes time. As a result, the draft standard allows and encourages exploration, experimentation, capacity, and capability ramp-up over the first three years, initially with qualitative over quantitative freedom. Levels of scrutiny and assurance will start from Year 2, possibly later if Treasury’s “Option 1b” is adopted. The Australian Accounting Standards Board (AASB) suggests that organisations should develop and refine their approach and skills over multiple planning cycles, minimising costs and effort when possible.

Importantly, the government is introducing legislated protection over the first three years to ensure that no action, suit, or proceeding can be brought against a person or entity in relation to statements about scenario analysis.

We recommend that organisations not exposed to previous scenario analysis take advantage of Treasury and the AASB’s accommodating guidance

For those entities, we recommend establishing solid foundations for scenario planning through the equivalent of a pilot program in Year 1. The goal of this is to build exposure, capability, and skills, and to focus scope on areas of revenue, costs, or profit materiality sensitive to climate-related socio-economic shifts and on assets already subject to physical hazards and climate stressors (e.g., flooding, bushfire, or heat).

Shorter, online-based, and participatory forms of scenario planning became prevalent during the pandemic when executives needed to work remotely and find pathways through increasingly unpredictable futures. This time- and cost-effective format allows for the right people across the organisation to engage and to build skills, capability, and deliver strategic value and actionable outcomes for both risks and opportunities even in the initial stages of the Treasury and AASB rollout.

A practical yet effective and compliant approach is to move gradually from qualitative to quantitative inputs to scenarios over the first two years, progressively extending scope and depth as skills, models, and approach strengthen. Organisations should then introduce quantitative outputs from Year 2 and 3 into Year 4 when reasonable assurance commences.

Beyond a reputation for risk mitigation, scenarios have also provided insight into future industry dynamics and the discovery of strategic opportunities. Risks and opportunities uncovered during scenario planning exercises result in strategies that build resilience or competitive advantage through anticipating sector and systems shifts; impacts on assets, operations, and value chain dynamics; surfacing innovative practices; and envisioning new or adjusted products and services. This ultimately results in changes affecting revenue, costs, valuations, capital investment schedules, and strategic plans to capture opportunities or mitigate against risks.

How are these insights identified?

Engaging and immersive facilitated sessions enable participants to navigate through future climate scenarios articulation, industry and organisational implications, and optimal strategic responses identification. These sessions include questions such as the following:

Climate risks:

  • How will climate futures affect demand for our main products or services?
  • What is the climate resilience of our production, assets, and logistics, and how can we adapt our business model and transport for future scenarios?
  • Where could climate legislation impact our business most?

Climate opportunities:

  • What new behaviours and attitudes might arise as climate impacts worsen?
  • Which industries will thrive, and how can we adapt strategically?
  • What new entrants and partnership options could emerge for future success?

Mandatory climate scenario planning in Australia represents both a regulatory requirement and a strategic opportunity. From July 2024, Treasury and the AASB urge organisations to pragmatically embrace this process. Early stages should prioritise the scrutiny of business areas most affected by climate change, enhancing internal capabilities, and adopting collaborative methods. A methodical shift from qualitative to quantitative analysis will then enable leadership to guide their organisations towards improved resilience in the face of a range of increasing climate-related challenges.

Find out more

Free Mandatory Climate Reporting webinar

One of the biggest changes to corporate reporting in a generation

Pangolin Associates webinar 14 March 2024: Mandatory Climate Reporting
This webinar will provide a summary of the new mandatory climate reporting (MCR) laws, explain the disclosures that businesses will need to make, and outline how to implement the changes across your organisation to ensure that you are compliant when they come into effect and protected from any indirect consequences.

Join Pangolin’s Managing Director Iain Smale and MCR specialists Manny Vassal and Nimisha Ulliyada at 11:00am AEDT on 14 March 2024 for an in-depth discussion on Australia’s newest corporate reporting requirements.