WA government agencies: Climate-related risk disclosures in financial reporting

The old adage “sunlight is the best disinfectant” is very apt when it comes to the growing need for more complete and consistent disclosure of climate-related risks in the financial reports of Western Australian (WA) Government agencies, and government trading enterprises (GTEs). 

In other words, publicity and disclosure of climate-related risks are justly commended as a key remedy for managing and monitoring climate risk.

In Australia, climate-related risk should be considered by entities when preparing their financial statements.

Both the Australian Accounting Standards Board and the Auditing and Assurance Standards Board have expressed their support for enhanced climate-related risk reporting in financial statements (see Practice Statement 2).

Why are climate-related risk disclosures in WA government financial reports important?

The global finance sector is now demanding more regular and reliable information on how governments are contributing to the transition towards achieving low carbon and climate-resilient targets. 

The private sector has already taken big strides in meeting this demand through the establishment of the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 and the release of the TCFD Framework.

In addition, the International Financial Reporting Standards Foundation is currently reshaping itself to accommodate a proposed International Sustainability Standards Board (ISSB) to set sustainability-related standards.

These aim to meet the growing demand from stakeholders (including investors, banks, regulators, public policy makers, insurers, and auditors) to improve the consistency and comparability in sustainability reporting.

In early 2021, the Australian Securities and Investments Commission reported that voluntary adoption of TCFD reporting by some larger listed companies has materially improved standards of climate-related governance and disclosure in the market.

It has also resulted in a significant and meaningful increase in the level of engagement on climate-related matters.

The same benefits and opportunities can come from the adoption of similar disclosures by WA government agencies.

Further, the International Federation of Accountants is calling for the public sector to require the application of the proposed ISSB standards and associated risk-related disclosures in public sector financial reports.

Key challenges facing the WA government when reporting climate-related risk in agency’s financial reports

The 3 key challenges are: 

ENGAGEMENT:

There needs to be a sufficient level of support from parliament, public authorities, and regulators to embed climate-related risk disclosures in the financial reports of WA government agencies.

The development of a single framework and methodology to accurately measure and report on the outcomes of each agency’s climate-related risk initiatives will enable reliable and meaningful assessment of the progress being made towards achieving their stated sustainability objectives.

EXPERTISE:

The proper understanding, measurement and disclosure of climate-related risks will require appropriate technical expertise for the financial report preparers and auditors. 

VALUE:

The climate-related risk disclosures will need to be robust, reliable and transparent – able to be readily used by the WA government and other stakeholders as input for decisions about the reporting agency’s alignment with the WA Government’s policy on climate change.

How the WA government is responding

The WA Government released its Western Australian Climate Policy in November 2020.

The policy underscores the WA Government’s commitment to adapting to climate change and working with all sectors of the economy to achieve net-zero greenhouse gas emissions by 2050. 

The policy sets out a number of initiatives that the WA Government is rolling out.

It also requires WA Government agencies, including GTEs, to develop and implement plans to transition toward net-zero emissions by 2050.

How these agencies will record, monitor and report on their transition plans has not yet been settled. 

The 2020-21 annual report on WA State Finances does not mention climate change.

However, it’s pleasing to note that things are changing for the good.

The 2021-22 WA State Budget mentions that Treasury and the Department of Water and Environmental Regulation are developing a framework to monitor, assess and report on the implications of climate change on the state’s finances, infrastructure and service delivery.

In addition, budget papers disclose that current effort is focused on developing guidance material to build climate risk competency in the public sector, and incorporating climate risk as part of the financial management framework.

The WA Climate Policy goal of achieving net-zero by 2050 aligns with the recently announced Federal Government’s plan for Australia to commit to net-zero by 2050 at the United Nations climate conference in Glasgow in November 2021.

How RSM can help?

RSM is in a strong position to assist agencies and GTE’s with implementing the methodologies required to accurately record and properly disclose climate-related risks in annual financial reports. 

The initial step is to complete a climate-related risk management plan where we:

• Identify and rank climate-related risks and high exposure areas
• Design and implement metrics to monitor climate-related risks
• Consider and analyse customised climate change scenarios
• Layout climate-related risk mitigation plans and actions through engagement with stakeholders
• Report and disclose climate-related risks and opportunities in financial reports

Although the standard content and format of climate-related risk disclosures in financial reports are still being debated, it’s important that a start is made by the WA public sector.

As your agency’s knowledge and understanding of climate-related risk management and reporting matures, you will be better placed to expand and enhance your climate-related risk disclosures in your financial statements.

To learn more about our expertise in climate-related risk management and reporting, and how we can assist across the full spectrum of government financial reporting, contact your local RSM office.