Ready, Set, Report: Guide to Australian Climate-Related Mandatory Reporting

This guide provides insights into the upcoming requirements for Australian companies under the Australian Sustainability Reporting Standard (ASRS) S2. It includes key information for companies, executives, directors and reporting professionals on what to expect and how to prepare for climate-related financial disclosures. The aim is to help companies understand their obligations, navigate the nuances of the reporting process, and take advantage of the opportunities presented by the new standard.

"This new reality requires new behaviour and learning", Christine Holman on climate-related financial disclosures at AICD Essential Director Update (EDU2024).

Key Takeaways:

• Who must report: Listed and non-listed Australian companies that meet the criteria for one of the three reporting groups.
• What needs to be reported: Climate-related financial risks, as outlined in ASRS S2.
• When: Reporting starts in 2026 for Group 1 companies, covering the financial year beginning January 1, 2025.
• Why: Material climate-related financial risks can affect business models, cash flows, financial positions, assets, access to finance, and the cost of capital over the short, medium, and long term.
• How: Identify, assess, analyse, and report climate-related risks and opportunities. Review, enhance, or establish a climate change strategy that includes governance, strategy, risk management, and metrics and targets.

Climate Reporting Regulation Arrives in Australia

The Australian Accounting Standards Board (AASB) has released ASRS S2, a standard that will be regulated by the Australian Securities and Investments Commission (ASIC). This standard mandates climate-related disclosures for eligible companies, starting with the first group in 2026, see Table 1. According to ASIC, this standard aims to ensure that "companies report climate-related risks and opportunities that could influence their financial performance over time, in a consistent and comparable manner."

The mandatory reporting applies to the 2026 annual reports, covering operations from January 1, 2025, for Group 1 companies. Although companies may have up to a year to file their reports, it is crucial not to delay. Compliance may require a comprehensive review and integration of governance structures, strategies, risk management processes, and data systems.

Even advanced companies may need to adapt to changes introduced by the new requirements. Aligning climate-related disclosures with financial reporting timelines may reduce the time available for preparation.

Companies not in Group 1 are encouraged to consider voluntary reporting to benefit from enhanced transparency and engagement with stakeholders, such as investors, banks, and customers.

Directors have a duty of care to disclose material climate risks, regardless of mandatory reporting requirements, as outlined in the Corporations Act 2001. This obligation ensures that they act in the best interests of the company and its stakeholders by providing transparent and accurate information regarding climate-related risks that could impact the company's performance.

Table 1: Thresholds for Preparing a Sustainability Report

Source: ASIC Sustainability Reporting Guidelines

Operations, Systems, and Procedures for Real-Time Reporting

Entities subject to mandatory reporting will need to provide consistent, verifiable, timely, and understandable information. This includes calculating carbon emissions not only from their own operations but also throughout their value chain, covering upstream (such as suppliers) and downstream (such as product use).

Before reporting, companies must establish robust data collection systems, processes, and procedures. A sound climate reporting strategy begins with strong governance, followed by a clear policy framework and effective data systems. Companies should act swiftly to implement the necessary systems and processes to capture real-time data to meet these requirements.

"Reporting is the end game.  Like a bouquet, the real work begins long before the results are ready to present. There needs to be an agreed plan, the seeds chosen and planted, the plants nurtured, the flowers harvested, and the resulting output thoughtfully organised and considerably arranged." Michael Salvatico

Communicating Effectively with Financial Statements

The standard offers no guidance on formatting communications. Clear communication is a critical yet often overlooked aspect of reporting. A well-crafted communication strategy is important for sustainability, as it bridges the gap between company performance and stakeholder engagement.

The standard aims to create a clearer link between climate-related financial risks, opportunities, and their reflection in financial statements. Better communication is essential to meet these expectations, helping stakeholders understand the company's approach to managing climate risks and opportunities, and ensuring that the company’s efforts are fully recognised and valued.

According to the Australian Council of Superannuation Investors (ACSI), "investor expectations of company reporting on climate risk and opportunity are increasing," which means companies must go beyond mere compliance to convey the impact of their climate strategies.

Without a solid communication plan, companies with robust reporting efforts may fail to receive the recognition they deserve.

ASRS Origins: ISSB and TCFD

ASRS S1 and S2 are built upon the S1 and S2 frameworks of the International Sustainability Standards Board (ISSB), part of the International Financial Reporting Standards (IFRS). The ISSB frameworks draw from the Taskforce on Climate-related Financial Disclosures (TCFD), introduced in 2017 as an industry-led initiative.

Many Australian companies, particularly those in the ASX200, have already adopted TCFD frameworks. According to a 2023 report from ACSI, 82% of ASX200 companies are already reporting or [planned] to report against the TCFD. ASRS S2 expands on TCFD with more detailed governance, strategy, and risk management requirements, leading to deeper disclosures about a company's climate strategies and practices.

From Innovation to Compliance: Enhancing Business Strategy

Climate reporting is not just about meeting regulatory requirements; but an opportunity to strengthen business strategy. While compliance is essential, a forward-thinking approach to climate change can yield substantial performance benefits.

Before compliance requirements emerged, innovation was the driving force in the sustainability industry. Leaders pushed boundaries to understand and report on climate change risks and opportunities. My own experience highlights this shift. In 2009, I was working with very limited information to calculate the carbon emissions of corporations. Back then, the focus was on developing new methods and frameworks to assess a company’s climate impact, often with very few data points to guide us. Today, the landscape has changed significantly—there is a wealth of information and expertise available, and the methodologies are far more refined.

With the introduction of compliance frameworks, the focus has shifted to ensuring the accuracy and reliability of climate-related financial disclosures. While this shift helps standardise and enhance the quality of reporting, it can also lead to an overemphasis on simply meeting regulatory requirements, rather than driving meaningful action. This focus on compliance can be a double-edged sword: it brings necessary rigor but risks losing sight of the broader opportunities that a well-developed climate strategy can unlock.

It’s crucial that companies maintain a performance-oriented approach. There is ample evidence that understanding and managing climate risks can create new opportunities and drive long-term value. Viewing climate change strategy through this performance lens allows businesses to capture the full benefits of their sustainability efforts. In this way, the reporting process evolves into a meaningful record of what the company is doing to achieve success, rather than just a box-ticking exercise.

The value of sustainability as a strategic advantage is evident in a Morgan Stanley survey, where sustainability was found to be a value creation opportunity for 85% of companies, with 55% report that key business decisions are subject to sustainability criteria. For many companies, focusing solely on compliance risks misses the broader opportunities that come with understanding and managing climate risks. Viewing climate strategies through a performance lens can turn reporting into a reflection of a company’s success in navigating climate challenges.

Joe Longo, Chair of ASIC noted, "The most successful and resilient companies will look at mandatory climate change reporting not as a compliance exercise, but as an opportunity to demonstrate how they are building long-term value".

How ESG Factors Evolve to Demonstrate Financial Materiality

As stakeholders become more aware of risks like health and safety and cybersecurity, the importance of climate change is becoming clearer. ESG factors such as health and safety and cybersecurity have evolved over time. Stakeholders now understand that managing these risks is essential. For example, there was a time when the consequences of cybersecurity for businesses were unclear. Today, it is recognised as a critical risk, integral to business strategy and included in the risk registers of many companies. Similarly, new factors like artificial intelligence (AI) present risks that are not yet fully understood, but businesses are beginning to recognise their potential impact. Recognising climate change as a material risk follows a similar trajectory. Just as cybersecurity has become central to strategic planning, climate change strategy should be integrated into every business strategy.

A deeper understanding of the financial impacts of climate-related risks can improve decision-making, potentially influencing a company’s financial stability and access to capital over various timeframes. As understanding these risks continues to evolve, companies that proactively integrate climate considerations into their core strategies will be better positioned to navigate challenges and capture emerging opportunities.

Scenario Analysis: Qualitative vs. Quantitative

The standard leaves the decision to quantify potential climate-related risks and opportunities to a case-by-case consideration. Entities must consider the materiality of the climate-related risks and opportunities as well as access to the skills, capabilities, resources and costs to carry out quantitative climate-related scenario analysis. These might include both internal and external skills, capabilities and resources. The entity needs to use judgement to assess these considerations in light of the benefits of the information shared with primary users.

While some entities may choose a qualitative approach, others with significant exposure to climate risks may find a quantitative analysis more appropriate.

Companies with extensive physical assets across multiple locations or those operating in diverse jurisdictions may benefit from a more detailed analysis, helping them make informed decisions on risk management and investment priorities.

For example, management decisions can be more effectively informed and prioritised when they incorporate a financial assessment of the physical risks to individual assets, considering their vulnerability to hazards such as storms, floods, droughts, heatwaves, and sea level rise.

Climate Transition Planning: A Key Focus

While ASRS S2 is a significant step forward in climate reporting, it lacks depth in climate transition planning. Transitioning towards a low-carbon economy is essential for addressing climate change, and it should be central to a company’s climate strategy, providing a clear pathway for companies to adapt and thrive in the evolving landscape. To strengthen their transition plans, companies may consider adopting additional frameworks that offer more visibility into their approach to transitioning.

Conclusion

In summary, the standard brings a rigorous framework for climate-related disclosures, aiming to integrate climate strategy into the heart of business strategy. It represents a shift from voluntary initiatives to mandatory compliance. Still, for companies that embrace the change, it is an opportunity to align with stakeholder expectations, build resilience, and create long-term value.

For more details on how to navigate these requirements and develop a comprehensive response, please contact the Sodali & Co team.