How companies - including small caps - could be impacted by the incoming climate disclosure rules

The Australian and US governments are soon expected to announce new rules for how companies should disclose risks and issues related to climate change, and which companies will be mandated to report such information.

Similar rules for what has become known as ‘climate-related financial disclosure’ are already in force in the UK, the European Union, New Zealand and in many other parts of the world.

Like the roll-out in other jurisdictions, the Australian and US governments are proposing a phased approach to introducing the new rules. In Australia, although the new legislation will at first impact only very large listed and unlisted businesses and financial institutions that meet certain requirements, the thresholds for turnover and employee headcount will lower annually until 2028, at which point it is estimated to impact around 20,000 organisations.

‘So what’ for small caps?

The mandating of reporting on large businesses is likely to impact all businesses because climate change data and risk management considers not just the activities of the company, but activities of all companies along its entire value chain. The value chain of small cap asset managers includes the companies they’re invested in, which could be yours. We explain how the mandating of reporting for large investment funds is likely to trickle down to small cap companies here.

Small caps should also be aware that their emissions data could be requested by larger institutional investors as part of their process for determining whether or not to invest.

How the new legislation will impact your company depends on:

1. How it will impact companies you have a business or supplier relationship with, and
2. Whether or not your company directly owns or controls any buildings and/or vehicles such as a company car.

To prepare, we suggest that:

• All companies should determine whether their asset managers will be mandated to disclose, and when, in order to develop their own roadmap for supporting those asset managers to meet their requirements
• Companies that directly own or control any buildings, and / or who have company vehicles, (i.e companies with scope 1 and 2 emissions) should plan to begin emissions accounting within the next 12 months because these companies will be contributing to their asset managers’ emissions totals, and could be asked to provide emissions data
• Companies who do not directly own or control any buildings or vehicles (i.e. companies with scope 3 emissions only), should plan to start emissions accounting over the next 3-4 years to meet changing stakeholder expectations
• All companies should consider conducting a basic supply chain assessment to determine the ESG maturity of their suppliers and, at a high level, any risks.

We can help you determine how the new legislation might impact you, and how to respond.

Please get in touch if you’d like to discuss.

If you liked this information, you might also like:

• How Australian small caps are likely to be impacted by the new ISSB sustainability disclosure standards
• What small caps can take away from Amazon’s move to write emissions data into its supplier standards