Legislation, Regulation and Compliance for ESG.
In Australia, understanding the differences between legislation, regulation, and compliance—especially in the context of Environmental, Social, and Governance #ESG practices—is essential for small businesses to navigate their legal and ethical responsibilities effectively.
Here's a simple breakdown:
Legislation: This refers to laws passed by the federal, state, or territory parliaments. Legislation sets out the broad legal rules that everyone in the jurisdiction must follow. For example, the Australian Corporations Act 2001 is a piece of legislation that governs how companies operate in Australia.
Regulations: These are specific rules or directives made under the authority of legislation. They provide detailed instructions on how the general guidelines of the legislation are to be applied and enforced. Regulations are often updated more frequently than legislation to respond to new information or changing circumstances. An example might be the regulations under the Corporations Act that specify reporting requirements for corporate entities.
Compliance: This refers to the act of adhering to the rules set out in both legislation and regulations. Compliance ensures that businesses operate legally and ethically within the framework set by the authorities.
How This Relates to ESG for Small Business:
For small businesses in Australia, ESG considerations integrate into this legislative and regulatory framework as follows:
Environmental compliance might involve adhering to specific regulations related to waste management, emissions, and resource usage, as outlined by environmental protection laws.
Social governance can relate to compliance with laws and regulations regarding fair labour practices, community engagement, and ethical supply chain management.
Governance involves ensuring that the business operates transparently and ethically, adhering to regulations that enforce good business practices, such as those concerning bribery and corruption, as well as financial disclosures.
For small businesses, navigating ESG effectively means understanding and implementing practices that meet the standards set by legislation and regulations, ensuring they not only comply with the law but also operate sustainably and ethically, which can lead to better business outcomes and a stronger reputation.
Understanding these aspects of law and governance can help small businesses align their operations with broader societal goals and regulatory expectations, enhancing their competitiveness and sustainability in the market.
Australian Sustainability Reporting Standards (ASRS)
The upcoming changes to Australia's sustainability reporting standards, set to begin from January 2025, mark a significant shift towards enhanced transparency and accountability in environmental responsibility.
Here's a breakdown of what to expect:
Mandatory Climate Reporting: Larger Australian corporations and asset managers are to start making mandatory climate-related financial disclosures in their annual reports. The implementation will occur through amendments to the Corporations Act, with disclosures complying with sustainability standards developed by the Australian Accounting Standards Board (AASB).
Phased Approach: There's a phased approach to these new reporting requirements. Entities will be categorised into three groups, with the largest ones (over 500 employees, over $500 million in revenue, and over $1 billion in assets) being required to comply from 2025. Mid-tier entities follow the next year, and smaller entities will have until 2027-2028 to comply.
Reporting Content: Companies are expected to report on governance, strategy, risk and opportunity management, and specific metrics and targets related to climate, including their Scope 1, 2, and (from the second year onwards) Scope 3 greenhouse gas emissions. The legislation will introduce a 3-year transitional period for enforcement on areas including scenario analysis, transition planning, and Scope 3 emissions.
International Alignment: The aim is to harmonise Australian standards as much as possible with international standards to meet the needs of cross-border investors and ensure global consistency.
Assurance and Accreditation: The credibility of these disclosures will be crucial, with expectations that assurance processes will play a significant role in enhancing disclosure reliability and minimising greenwashing.
Industry Impact: Currently, around 900 businesses disclose their carbon emissions under the National Greenhouse and Energy Reporting (NGER) Act. The broader climate reporting regime will expand this significantly, with larger entities also having to ensure that their suppliers, customers, and service providers have similar sustainability commitments.
External Verification: It's anticipated that there may be requirements for the sustainability reports to be externally verified or assured to improve their reliability.
Support for SMEs: The phased approach is designed to allow smaller and less resourced companies ample time to build capacity and comply with the new standards. There's a call for coordinated government assistance to support these companies through the transition.
This transition represents a concerted effort to embed sustainability deeply within corporate reporting and decision-making frameworks, echoing global trends towards more responsible business practices and investments.
More Information
For more detailed information and guidance on how these changes may affect your business or your clients, you can refer to the policy statement provided by the Australian Treasury (Treasury.gov.au), the consultation papers, and updates from professional services firms (Clayton Utz) (ESG Today) (KPMG) (GT Australia) (Ashurst) (Our Footprint).
For support in preparing to meet existing and future legislation, regulation and compliance reach out to the team @ESG&I. hello@esgandi.com.au