Carbon planning is a big issue for the construction industry. Here’s why.

Feb 2023 | written by Murray Baker

On 12 December 2022, the Australian Government issued a consultation paper seeking initial views on its intention to implement “…standardised, internationally‑aligned requirements for disclosure of climate‑related financial risks and opportunities in Australia.”  [1]

Below, is a rundown of the global drivers that led to the Government’s announcement and the implications for the construction industry.

Background

In today’s global corporate environment, businesses and governments are facing the impact of climate change and its related financial risks.

To mitigate these risks governments and committees are working to create legislation aimed at slowing climate change. A global leader in this space is the Financial Stability Board (FSB) who monitors and makes recommendations about the global financial system.

This article explores the key global forces likely to drive environmental disclosures through lenders, investors, and insurers working with the construction sector.

The TCFD

Created in 2017 by The Financial Stability Board, the task force on Climate-Related Financial Disclosures (TCFD) was founded to encourage greater transparency in the reporting of potential risks and to allow for informed decisions related to climate change and emissions.

The TCFD subsequently created standards for business to disclose critical information about climate change to lenders, insurers, and investors. Globally, an increasing number of organisations are adopting TCFD’s standards. [2]

The ISSB

Following the TCFD’s recommendations, the International Sustainability Standards Board (ISSB), was founded by the IFRS Foundation Trustees in late 2021. The ISSB set about establishing standards and criteria through which precise, transparent, and reliable environmental reporting can be administered.

“The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.”

With carbon emissions resulting from businesses and corporations representing a key environmental hazard, the ISSB have classified Carbon Scope Accounting, outlined by the most widespread international accounting tool, The Greenhouse Gas (GHG) Protocol, which identifies three Scopes:

  • Scope 1 covers direct emissions from company owned and operated buildings and vehicles

  • Scope 2 covers indirect emissions from the generation of energy, heat, electricity and steam as used in the value chain

  • Scope 3 covers further indirect emissions from by products such as waste disposal, transportation and distribution and employee commutes.

International response

With a growing number of private and government organisations identifying financial risks associated with climate change, both New Zealand and the United Kingdom have passed legislation mandating climate-related disclosures for a subset of businesses with reporting obligations commencing 2023. Canada and Switzerland have identified reporting obligations in 2024.[3][4]

These changes indicate a shift in the world financial systems and the corporate arena with a growing demand for accurate, reliable, and transparent reporting for climate-related costs and risks within business.

Australian Government’s response

The Australian Government Treasury has issued a consultation paper aiming to establish mandatory climate-related financial disclosure within Australia. The proposal allows for any material risk or financial costs to be mitigated through proper understanding of the financial costs and transition risks related to a shift towards the mitigation of climate change.

Australia appears to be following New Zealand, the UK and European Union by making disclosures mandatory for large, listed businesses and financial institutions. Treasury have proposed the first report for these businesses being financial year 2024-25.[5]

How will this impact the construction sector?

In a little over two years, corporate Australia, including lenders, insurers and investors are likely to face mandatory environmental reporting. The burning question for the construction sector is what level of disclosures will be pushed down to fund managers, developers, and builders?

The answer will depend on the project size and funding sources and will likely vary from the cursory to the provision of detailed embodied carbon calculations based on as-built drawings.

As we inevitably shift towards the need for greater reporting transparency as identified in the ISSB standards, the requirement to have documented carbon design decisions and transparent carbon calculations is now imminent.

Carbon planning in construction provides both capital costs and embodied carbon comparisons for each design option during the early design phases, when decisions will have the greatest influence on the level of embodied carbon.

Carbon planning is good governance, provides for informed decisions and will become an
increasingly important requirement to attract project funding in the construction industry.

For more information, please get in touch with murray.baker@costgroup.com.au

Expertise: carbon planning, cost planning, bills of quantities.

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