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Supply Chain Financing (SCF) has become a valuable tool for businesses looking to optimise working capital and strengthen supplier relationships. However, its impact on financial statements and potential misuse have sparked debate. In this article, John Saunders, Chartwell Consulting's Director - Structured Finance, examines the mechanics of payables and receivables financing, clarifying why, when disclosed correctly, SCF does not obscure a company’s true financial position. While fraudulent practices - such as double-counting receivables or misclassifying liabilities - can mislead stakeholders, experienced analysts can readily detect inconsistencies. Transparency and adherence to accounting standards remain key to ensuring SCF remains a legitimate financial instrument rather than a vehicle for misrepresentation.
Read the full article to explore the financial implications of SCF and how businesses can use it responsibly.

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The Australian job market is tighter than ever, and retaining top talent is no longer optional—it's essential.

Unlock the power of retention by combining competitive salaries, meaningful recognition, and true work-life balance to keep your workforce thriving.

Ready to build a team that stays? Read the below, and get in touch with Chartwell for a conversation.

1. Executive Summary
The Australian Government has introduced new legislation requiring large companies to disclose climate-related risks and other uncertainties in their financial statements, which has passed through the Senate. This paper provides a summary of the new legislation (which will be effective from January 1st, 2025), outlines the proposed AASB and IFRS accounting standards, and analyses how these changes will impact reporting practices at companies like Origin Energy Limited and BHP. Finally, the paper offers our practical recommendations for businesses to align with these new requirements.
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2. Overview of the New Legislation
The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 mandates climate-related financial disclosures for Australia’s largest companies in compliance with the new IFRS accounting standards on climate related financial risk, beginning January 1, 2025. The key components of the legislation include:

   1. Mandatory Climate Reporting:

• The legislation requires large listed and unlisted companies, financial institutions, and other significant businesses to disclose climate-related financial risks in a standardised format.
• The framework aligns with international standards to ensure consistent and comparable disclosures.

   2. Scenario Analysis Requirement:

• Companies must conduct scenario analyses under various climate conditions, specifically a high global warming scenario (above 2°C) and a low global warming scenario (around 1.5°C), to assess the resilience of their strategies and operations.

This legislation aims to enhance transparency in how companies manage climate risks, supporting the transition to a net-zero economy and bolstering investor confidence.

3. Summary of IFRS Draft Standards on Climate-Related Disclosures
The International Financial Reporting Standards (IFRS) Board has developed draft standards, which are expected to be adopted by the Australian Accounting Standards Board (AASB), detailing how companies should report climate-related risks in their financial statements:

   1. Disclosure Requirements:

• Companies must assess the materiality of climate-related risks to their financial statements and disclose these risks’ impacts on assets, liabilities, income, and expenses.
• The IFRS provides examples to guide companies in making materiality judgments and determining the necessary disclosures.

   2. Integration with Financial Reporting:

• The standards emphasize integrating climate-related disclosures into general financial reporting to present a comprehensive view of a company's financial health.

4. Case Studies: Impact on Origin Energy Limited and BHP
4.1. Origin Energy Limited

   Current Practice:

• Origin Energy has a comprehensive Climate Transition Action Plan (CTAP) and sustainability reporting framework. The company reports on its progress toward reducing Scope 1, 2, and 3 emissions and achieving net-zero emissions by 2050.
• Origin’s reporting aligns with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, including scenario analysis based on a 1.5°C scenario.
• The company’s disclosures are primarily included in its sustainability reports and are supplemented by climate-related financial disclosures in its annual reports.

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   New Requirements:

• Expanded Scenario Analysis: Under the new legislation, Origin will need to expand its scenario analysis to include additional climate scenarios, particularly those predicting higher levels of global warming (above 2°C). This will require more detailed modelling and comprehensive disclosure of how various climate scenarios could affect Origin’s financial performance and strategic direction.
• Integration with Financial Statements: Origin will need to integrate its climate-related risks directly into its core financial statements, ensuring these risks are reflected in key financial metrics, such as asset valuations, impairments, and cash flow projections.
• Enhanced Governance and Risk Management Disclosures: The new accounting standards will require Origin to provide more detailed disclosures on governance and risk management practices related to climate risks. This includes documenting how climate-related risks are identified, assessed, and managed within the organization, and how these risks are incorporated into broader enterprise risk management frameworks.

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   Conclusion:
Origin Energy’s existing practices provide a solid foundation, but the company will need to enhance its scenario analysis, integrate climate risks more thoroughly into financial statements, and provide more detailed governance disclosures to comply fully with the new requirements.

4.2. BHP
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   Current Practice:

• BHP has a robust approach to managing climate-related risks, with a focus on reducing operational GHG emissions by 30% by FY2030 and achieving net-zero emissions by 2050.
• The company employs scenario analysis to assess the resilience of its strategy under different climate outcomes and integrates climate-related risks into its broader risk management framework.
• BHP’s climate-related disclosures are included in its sustainability reports and are aligned with international frameworks such as the TCFD.

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   New Requirements:

• Expanded Scenario Analysis: BHP will need to include additional scenario analyses, particularly focusing on scenarios that predict higher global warming levels (above 2°C). This will involve more comprehensive assessment and disclosure of the financial impacts of various climate outcomes on the company’s operations and long-term strategy.
• Financial Impact Integration: The new legislation requires BHP to integrate climate-related financial risks directly into its core financial statements. This will necessitate more explicit disclosures on how these risks affect asset valuations, potential impairments, and other financial metrics.
• Detailed Physical and Transition Risk Disclosures: BHP will be required to provide more detailed and quantifiable disclosures of both physical and transition risks associated with climate change. This includes specific metrics on potential financial impacts under different climate scenarios, such as increased costs related to compliance with new regulations and investments in climate adaptation measures.

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   Conclusion:
While BHP’s current practices align well with many of the new requirements, the company will need to enhance its scenario analyses, integrate climate risks more explicitly into financial statements, and provide more detailed disclosures on both physical and transition risks.

5. Chartwell’s Recommendations for Businesses

As companies prepare to comply with the new legislation and accounting standards, the following steps are recommended:

   1.  Enhance Scenario Analysis:

• Develop detailed scenario analyses that include both high and low global warming scenarios. Ensure these analyses are robust and reflect the potential impacts on financial performance and strategy.

   2.  Integrate Climate Risks into Financial Statements:

• Climate-related risks should be integrated directly into financial statements. This includes assessing the impact on asset valuations, impairments, and future cash flows.

   3.  Strengthen Governance and Risk Management Disclosures:

• Provide detailed disclosures on governance structures and processes for managing climate-related risks. This should include information on board-level oversight and how climate risks are integrated into enterprise risk management.​

   4.  Assess and Disclose Materiality:

• Implement rigorous processes for assessing the materiality of climate-related risks. Ensure that all significant risks are transparently disclosed in financial statements.

​   5.  Prepare for Regulatory Scrutiny:

• Ensure that all disclosures are compliant with the new regulations and ready for potential scrutiny by regulators and investors. This may involve conducting internal audits or engaging third-party assurance providers.

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By proactively addressing these areas, companies can ensure they are well-prepared to comply with the new climate-related financial disclosure requirements and mitigate any associated risks.  

Chartwell Consulting will be pleased to assist in building a framework to prepare for these changes, which are only 5 months away from being implemented.  We work discreetly with your senior team to build internal knowledge and preparedness for the changes.  Reach out for a conversation.

David Thomas
Partner 
25th August 2024

References:

1. Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, Australian Government.
2. AASB and IFRS Draft Standards on Climate-Related Disclosures, International Financial Reporting Standards Board.
3. Origin Energy Limited, 2024 Sustainability Report.
4. BHP, 2024 Decarbonisation Roundtable Presentation.

The Amazing Power of an Advance Payment
(Often called  a Prepayment)

Problem:  You want to do a brownfield expansion of your mine or install some new capital equipment to expand production.  Unfortunately – your banker either doesn’t understand your request – or can’t get an approval from their credit department.  And your shareholders don’t want to dilute their equity by raising more capital.

Solution:  You negotiate a long-term offtake contract with your preferred Buyer.  The value of the goods or minerals to be delivered over the term will pay for the investment you want to make.  Then you talk to a private credit fund or an investor through your preferred consultant and negotiate a three-way Advance Payment Agreement.  You also pay some money to some lawyers to document everything.  The Funder makes payment now to you for the goods or minerals you are going to deliver in the future.

Benefits:  All parties win – the Seller uses the Advance Payment productively.  The Buyer has a locked in supply contract from a preferred Seller. The Funder makes a margin on the funding.  If well structured – this arrangement can also often be classified as a trade payable/receivable – not core debt.  Your CFO and Treasurer will like this.

Other Sectors:  Though most often used with bulk commodities such as wheat, refined energy products or metal ores, this structure has also been used to fund the construction of wind and solar farms and for commercial construction.  The Seller and the Buyer need to have a strong and trusting relationship.

Conclusion:  When well designed, an Advance Payment or Prepayment is an amazingly powerful tool to source capital and enhance liquidity quickly.

David L Thomas

13 June 2023