ASRS Thresholds Have Changed. What this means for CFOs

The Federal Budget changed mandatory climate reporting (ASRS S2) thresholds. If your first reaction was relief, that’s understandable. But relief is not a strategy.

The Group 3 thresholds are now planned to be:

✻ $100 million of consolidated revenue 
✻ $50 million of consolidated gross assets 
✻ 100 employees (no change).

Companies meeting 2 of 3 criteria will be captured.

Escaping the reporting obligation is one thing. Escaping the underlying commercial reality is another. The businesses that understand what climate means for them will outperform the ones that don’t, regardless of whether they ever file a formal report.

What is a climate related financial disclosure?

Climate related financial disclosures are general purpose financial reports on climate related risks and opportunities which could reasonably be expected to affect an entity’s cash flows, access to finance or cost of capital over the short, medium or long term.

The disclosure is structured under four key pillars:

Governance: Who and how the organisation monitors, manages and oversees climate risks and opportunities.

Strategy: Business model and value chain considerations, strategy and decision making, financial performance and cash flows and resilience in managing climate risks and opportunities.

Risk Management: The processes used to identify, assess, prioritise, monitor and manage the physical and transition climate risks associated with climate change.

Metrics & Targets: Data on greenhouse gas emissions of an entity, as well as any target setting and progress toward climate-related goals.

Instead of engineering to scrape below the thresholds for mandatory reporting, what could understanding the commercial and competitive elements of climate change and decarbonisation mean for your business?

What don’t you know.

CFOs who haven’t engaged meaningfully with climate change often work from what they read in the media. That’s mostly political commentary. It doesn’t tell you much about the intersection of climate considerations with business.

Too often climate change as a source of commercial innovation is overlooked. The interplay between emissions, cost and waste isn’t mapped. Product mix isn’t assessed through a transition lens, and customers aren’t examined to ascertain whether they are enduring. These aren’t sustainability questions, they’re business questions and have commercial consequences regardless of assurance requirements.

As a matter of resource planning, you need to start building internal capability for the world you’re operating in.

Who are your customers?

Larger businesses are already on a climate journey. They need suppliers and partners who are operationally compatible. Will you be one of them?

Governments are embedding climate considerations into procurement requirements to meet net zero commitments. Consumers are making purchasing decisions based on criteria that didn’t drive behaviour a decade ago.

Many business leaders haven’t examined how their product sits in that shifting marketplace. A logistics company that isn’t yet providing activity-based emissions data on customer invoices is behind best practice. A retailer that hasn’t connected their product offering to the circular economy is missing commercial conversations customers are already having.

Businesses understanding customers’ goals and positioning products accordingly, will find themselves with relationships that are genuinely hard to displace. Businesses that don’t will be usurped by others positioning themselves to solve customer problems.

Are you operationally resilient?

The physical impacts of climate change are not a future risk. They are already disrupting operations, supply chains and capital plans, and are expected to amplify.

Media reports during summer suggest construction activity for the Brisbane 2032 Olympics is behind schedule owing to hot days where physical labour cannot safely proceed. This is not an isolated example. Any business reliant on outdoor or physical labour, such as construction, road infrastructure, agriculture, or logistics, has an exposure which translates into operational planning and OHS frameworks.

Supply chain concentration is another area where businesses carry more risk than they recognise. Retail and logistics networks built around a small number of distribution centres are efficient in stable conditions. In extreme weather events, that efficiency becomes fragility.

Roads flood. Rail buckles. An ambient warehouse overheating can take an entire product line offline in a single heatwave. A single facility offline can disrupt an entire network. The underlying risk hasn’t diminished.

The question for CFOs is specific. Have you mapped physical exposure in where your operations, suppliers and distribution networks? Are those exposures factored into your capital allocation and business continuity planning?

Where does your financial support come from?

Even if your business sits outside mandatory climate reporting, there is a good chance your financial service providers don’t. Banks, superannuation funds, asset managers, private equity and insurers are all working through climate obligations, and is changing how they assess and price businesses they work with. Under scope 3 calculations they are required to account for financed emissions as a unique category.

Large enterprises are already negotiating sustainability-linked loans with institutional banks, receiving discounted rates tied to performance against metrics including emissions reduction, diversity and supply chain integrity. That pricing advantage is not available to businesses not engaged with the underlying work.

Insurers are pricing climate risk into their premiums. Superannuation funds, the majority of which are signatories to the Principles for Responsible Investment, are actively engaging with the businesses they invest in to improve climate performance. The valuation implications are also becoming clearer, with a Deloitte Belgium study finding companies with a higher ESG rating are valued by the market at a higher earnings multiple.

These are not peripheral pressures. They are mainstream financial relationships. The question is whether your business is being rewarded by these relationships right now.

Will you be relevant?

Five months ago, I bought my first electric vehicle. A friend called it “controversial.” Shortly after, petrol prices in Australia exceeded $3 a litre. While not necessarily climate related, that exchange captures something important about where we are. A lot of capable business leaders are so caught up in the political narrative they’re missing the commercial reality playing out in front of them. Nobody argues in favour of pollution. But people will argue against the transition away from what’s causing it.

For business, being relevant means continuing to solve problems that people will pay to have solved. The transition to a lower-carbon economy and the impacts of climate change are creating new problems and making old solutions obsolete. That’s not a political statement; it’s a description of how markets work.

The horse and cart didn’t disappear because of a government mandate. It disappeared because the car solved the same problem better. Oil lamps gave way to electric light. Film gave way to digital. Fax machines gave way to email. The smartphone, mainstream for only fifteen years, has reshaped entire industries and social constructs.

Transition risks in the economy follow the same logic. Market sentiment shifts. Assets become stranded. Business models become obsolete. The businesses that examine purpose and priorities through this lens now, and allocate for shifts they need to make, are the ones that will still be solving relevant problems in ten years. The ones that don’t will find themselves on the wrong side of a transition that, in hindsight, was entirely predictable.

Why it matters…

The threshold change will give some businesses relief from the immediate reporting obligation. It doesn’t change the operating environment those businesses are competing in.

The smartest businesses position for where the market is going. Where will you play?

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About the Author

Kate McHugh brings ASX level climate and sustainability expertise to Australian businesses who can’t afford Big 4 pricing but refuse to settle. She helps businesses align climate considerations (and broader sustainability) with the company’s purpose and priorities.

LinkedIn: https://www.linkedin.com/in/katemchughh/

Website: www.KateMcHugh.net