Making sense of sustainability regulation

Navigating sustainability compliance is an evolving beast, characterised by a complex environmental, social and governance (ESG) regulatory landscape.

The mix of local and international sustainability policies, including Australia’s Safeguard Mechanism, Europe’s Carbon Border Adjustment Mechanism (CBAM) and the International Sustainability Standards Board (ISSB) are just a few of the policies that business leaders need to consider when it comes to setting their own business strategies.

Safeguard Mechanism

Australia’s Safeguard Mechanism sets greenhouse gas (GHG) ‘baselines’ limiting emissions for the industrial sector in mining, oil and gas production, manufacturing, transport, and waste facilities, that emit more than 100,000 tonnes of carbon dioxide equivalent (CO₂-e) emissions per year.

In order to meet the Australian Government’s emissions reduction targets of 43 percent below 2005 levels by 2030, and net zero by 2050, these baselines will gradually decline over time.

This policy only accounts for scope one emissions, being the direct emissions taking place within the facility, and does not consider scope two emissions associated with consumed electricity or scope three emissions occurring upstream and downstream in the supply chain.  

At Rockwell Automation’s recent executive event 'Management Perspectives' in Melbourne, Tennant Reed, director, Climate Change & Energy at The Australian Industry Group examined this local policy.

He told audiences, “[The Safeguard Mechanism] is the most ambitious, and has got the most hard impacts and costs associated with it.”

However, Reed described the Safeguard Mechanism as “quite a narrow policy”, with “a lot of flexibility” for preventing excess emissions, especially through the use of offsets.

“You can buy domestic carbon offsets that are issued under the Carbon Farming Initiative, Australian Carbon Credit Units (ACCUs). There are a lot of arguments and controversies about those units, but you can use them. If you overuse them, you have to explain why. If you rely on them for more than 30 percent of your abatement needs in a given year, you've got to state why that was,” said Reed.

While emitting above baseline incurs a cost, taking yourself below baseline can earn you a credit.

Reed said, “You can also use Safeguard Mechanism Credits that are issued to safeguard facilities that have a baseline and beat that baseline. And that's very important part of ensuring that even though you're only liable for emissions above your baseline, there's actually value that you can unlock from all the emissions reductions available to you.”

The future evolution of the Safeguard Mechanism is likely to broaden according to Reed, with the Government having committed to review the policy and consider dropping the threshold, and potentially extending emissions to include electricity and liquid fuels.

Carbon Border Adjustment Mechanism (CBAM)

Carbon leakage refers to a loss of industry to other regions, due to costs associated with climate policies onshore.

While the Safeguard Mechanism does account for carbon leakage by declining baselines at a slower rate for facilities that are exposed to a cost that their overseas competitors are not, another potential legislation that the Australian Government is set to consider is long term carbon leakage prevention measures, equivalent to Europe’s CBAM.

Rockwell Automation’s global business development manager for customer sustainability, Tadeo Rodriguez told audiences “The CBAM is a mechanism to put a fair price on the carbon emitted on countries outside the European Union.”

He described the policy as a means to level the playing field for imported goods that are not covered by the emissions trading system already implemented within the EU. 

According to the European Commission, the CBAM will enter into a transitional phase on 1 October 2023, and will apply to cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. The transition will act as a pilot, before extending to further sectors.

“Currently, the emission trading system in the European Union covers about 18 sectors, and they're imputing only six in the CBAM, which are the most prominent to carbon leakage,” said Rodriguez.

“By 2030 the intention is to integrate [the other] sectors into the CBAM policy.”

A permanent system for the CBAM in Europe will begin on 1 January 2026.

According to Australian Industry Group’s Reed, there will be plenty of debate around implementing a CBAM in Australia – a policy he describes as a “major reform”.

“People will have very strong feelings about what some would call a ‘carbon tariff’, or ‘protectionism’, or maybe ‘the pot calling the kettle black’ in international climate terms – Australia, worrying about carbon leakage to others,” said Reed.

“The government is serious about looking at this. They have been very careful in the commitments that they've made so far, but I think that they actually will wind up doing a CBAM.

“But the issues to be considered include being very clear about why we are doing it, and a level playing field on climate policy – to provide a basis for the large investments in domestic decarbonisation – that is really the central factor here.”

Sustainability reporting

When it comes to sustainability reporting, the Global Reporting Initiative (GRI) is considered the go-to body for preparing sustainability reports, according to Brad Potter, head of the Department of Accounting at The University of Melbourne.

These reports are currently voluntary in nature, though according to Potter, between 80 and 90 percent of the world’s largest organisations produce them.

“Not only that, but they will get [sustainability reports] assured at cost. And they go to great lengths like subsequent restatements if the need arises, so they are pseudo-voluntary for the top end of town,” he said.

International Sustainability Standards Board (ISSB)

For sustainability related financial reporting, International Financial Reporting Standards’ ISSB, established at COP26, was developed to provide a global baseline of sustainability disclosures for capital markets.

Potter told audiences, “This is essentially focusing on the larger end of town. So, listed companies, companies with public accountability, which essentially means government departments and governments, banks, major insurers, et cetera.,” said Potter.

“Organisations reporting under ISSB standards, which essentially will be adopted in some form or another in Australia, will be required to report climate related risk or make climate related risk disclosures upstream and downstream. So, if you are dealing with some of these big boys, that includes you.”

According to a recent KPMG report, the first standards developed by ISSB are expected to be finalised in June 2023.

“Individual jurisdictions, including Australia, will decide whether and when to adopt. Some companies may choose to adopt the proposals voluntarily before they are finalised, for instance those responding to investor or societal pressure. Therefore, reporting could be as soon as 2023 for those companies with a 30 June or 31 December year end,” the report states.

“The Australian Accounting Standards Board is actively considering the release of these standards in Australia, and has separately sought feedback on the ISSB Exposure Drafts to inform the AASB as to the appropriateness of and support for its proposed approach to sustainability-related financial reporting in Australia.”

According to Potter, “If you hold yourself out to be producing general purpose financial reports, you will have to make sustainability standards in line with the ISSB standards.”

Editor's Note: Velvet-Belle Templeman travelled to Melbourne as a guest of Rockwell Automation to report on the executive event 'Management Perspectives'.