AASB S2 Explained: A Comprehensive Guide to Mandatory Climate Reporting in Australia
In September 2024, the Australian Senate passed the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (the Bill). The Bill positions Australia as a global leader in sustainability reporting by aligning its standards to the International Sustainability Standards Board (ISSB) framework. The Bill solidifies the government's stance on climate-related financial disclosures, aiming to deliver Australian stakeholders with information on an entity’s exposure to climate risks, opportunities and climate-related plans and strategies.
Currently, 75% of the ASX200 have committed to, or are already reporting climate-related information against a similar framework, the Taskforce for Climate-related Financial Disclosures (TCFD). However, with the Bill's amendments to the Corporations Act 2001 (Corporations Act), the Australian Security and Investments Commission (ASIC) estimates that an additional 6,000 entities will now be required to prepare reports on climate-related risks (or opportunities) that may reasonably affect their operations[1]. With the legislative amendments in effect from 1 January 2025, the time to consider your entity’s climate-related risk and newfound regulatory obligations is now.
Reporting Entities and Phasing
While international regulators have focused their attention on publicly traded entities only, the Bill's amendments to the Corporations Act mean that both public and private entities can trigger the reporting threshold. The table below gives a snapshot of the relevant thresholds under the new reporting regime and the phased timing of when those relevant entities must commence mandatory reporting. All entities that are required to prepare financial reports under Chapter 2M of the Corporations Act will be phased into the mandatory reporting regime based on company size and level of emissions. This will occur in three stages over the course of three years, beginning on 1 January 2025 with the largest entities in Group 1 and concluding with smaller “large” entities in Group 3 on 1 July 2027 (Table 1).
Table 1: Reporting entities of Group 1, 2, and 3 and its timeframe.
The legislation sets out a list of thresholds that capture large entities, National Greenhouse and Energy Reporting (NGER) entities, and major asset owners.
Large entities that are required to prepare and lodge annual reports under Chapter 2M of the Corporations Act will now be required to participate in the new reporting regime. This includes listed and private entities, as well as financial institutions (including superannuation entities). “Large entities” are defined using the existing definition in the Corporations Act – a company is ‘large’ if it satisfies two of the three following criteria:
a) the consolidated revenue for the financial year of the company and any entities it controls is $50M or more.
b) the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $25M or more.
c) the number of employees for the entity and any entities it controls have 100 or more employees at the end of the financial year[2].
Entities with annual NGER reporting obligations under the National Greenhouse and Energy Reporting Act 2007 will be required to participate in the reporting regime regardless of the entity’s size. For Group 1 entities the threshold is based on whether entities exceed the publication threshold of 50,000 tonnes of carbon dioxide equivalence scope 1 and 2 emissions, thereafter all NGER reporters are required to report. Entities, especially those expecting to become first-time NGER reporters, should be aware of the thresholds surrounding mandatory NGER reporting and begin preparing their climate-related financial disclosures early.
Asset owners will need to report if the funds under their management are greater than $5 billion.
a) This includes superannuation entities and registered schemes.
b) These types of entities are explicitly excluded from Group 1, so even very large super funds and registered schemes will only commence reporting in Group 2.
Reporting Content
The Corporations Act requires entities to disclose their climate-related plans, financial risks and opportunities in accordance with the Australian Sustainability Reporting Standards (ASRS). These standards were drafted by the Australian Accounting Standards Board (AASB) using the ISSB’s International Financial Reporting Standards (IFRS) S1 and S2 as a baseline. The ASRS framework consists of two reporting standards AASB S1 and AASB S2:
a) AASB S1 General Requirements for Disclosure of Sustainability-related Financial Information (voluntary) – This standard is a voluntary standard. Entities may elect to apply this standard, which would require an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flow, its access to finance, or cost of capital over the short, medium or long term[3]. This standard uses IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information as its baseline.
b) AASB S2 Climate-related Disclosures (mandatory) – If an entity is captured by the legislation's applicable threshold, AASB S2 requires an entity to disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance, or cost of capital over the short, medium or long term[4]. This standard uses IFRS S2 Climate-related Disclosure as its baseline.
The climate-related financial disclosures outlined in AASB S2 relate to four disclosure pillars: Governance, Strategy, Risk Management, and Metrics and Targets. Within these four disclosure pillars, AASB S2 also sets out requirements for entities to conduct climate-related scenario analysis, and disclosure of Scope 1, 2, and 3 emissions. As AASB S2 is the mandatory standard that will apply to Group 1-3 reporters, further information on the reporting requirements is outlined below.
Governance
“The objective of climate-related financial disclosures on governance is to enable users of general purpose financial reports to understand the governance processes, controls and procedures an entity uses to monitor, manage and oversee climate-related risks and opportunities[4].”
To achieve this objective, AASB S2 requires entities to disclose the body(s) or individual(s) responsible for the oversight of climate-related risks and opportunities. Specifically, disclosures surrounding governance should focus on:
a) how responsibilities for climate-related risks and opportunities are reflected in mandates, role descriptions, and other related policies;
b) determining whether the appropriate skills and competencies are available or how they will be developed;
c) how often climate-related risks and opportunities are reported and brought to the attention of the oversight body(s)/individual(s);
d) accounting for climate-related risks and opportunities when overseeing an entity's strategy decisions on major transactions and risk management processes;
e) oversight of target-setting and progress monitoring of set targets; and
f) whether, or how, climate-related performance metrics are included in remuneration policies.
Disclosure of an entity's management is also important in the governance of climate-related risks and opportunities. This disclosure should include:
a) whether and how the management of climate-related risks and opportunities are delegated to specific management levels; and
b) whether management uses controls and procedures to support oversight, and how these controls are integrated with internal functions.
Strategy
“The objective of climate-related financial disclosures on strategy is to enable users of general purpose financial reports to understand an entity’s strategy for managing climate-related risks and opportunities[4].”
To achieve this objective, AASB S2 requires entities to disclose information that enables users of general-purpose financial reports to understand the climate-related risks that could reasonably affect an entity’s prospects, including:
a) the current and anticipated effect of those climate-related risks and opportunities on the entity’s business model and value chain;
b) the effects of those climate-related risks and opportunities on the entity’s strategy and decision making, including information about its climate-related transition plan;
c) the effects of those climate-related risks and opportunities on the entity’s financial position, financial performance and cash flows for the reporting period;
d) the anticipated effects of those climate-related risks and opportunities on the entity’s financial position, financial performance and cash flows over the short, medium and long term; and
e) the climate resilience of an entity’s strategy and its business model to climate-related changes, developments and uncertainty.
Risk Management
“The objective of climate-related financial disclosures on risk management is to enable users of general purpose financial reports to understand an entity’s processes to identify, assess, prioritise and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process[4].”
To achieve this objective, AASB S2 requires entities to disclose information concerning its:
a) processes and related policies the entity uses to identify, assess, prioritise and monitor climate-related risks;
b) use of climate-related scenario analysis to inform its identification of climate-related risks and opportunities; and
c) the extent to which, and how, processes for identifying, assessing, prioritising and monitoring climate-related risks and opportunities are integrated into and inform the entity’s overall risk management process.
Metrics and Targets
“The objective of climate-related financial disclosures on metrics and targets is to enable users of general purpose financial reports to understand an entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation[4].”
To achieve this objective, AASB S2 requires entities to disclose information relevant to the cross-industry metric categories of:
a) its absolute gross greenhouse gas (GHG) emissions during the reporting period (scope 1, scope 2, and scope 3);
b) climate-related transition risks: the amount and percentage of assets or business activities vulnerable to climate-related transition risks;
c) climate-related physical risks: the amount and percentage of assets or business activities vulnerable to climate-related physical risks;
d) climate-related opportunities: the amount and percentage of assets or business activities aligned with climate-related opportunities;
e) capital deployment: the amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities;
f) internal carbon price:
i. disclosure of whether and how the entity is applying a carbon price on decision making; and
ii. the price of each metric tonne of GHG emissions the entity uses to assess the cost of its GHG emissions.
g) remuneration:
i. whether and how climate-related considerations are factored into executive remuneration; and
ii. the percentage of executive management remuneration in the relevant period is attributed or linked to climate considerations.
Scenario Analysis
For entities required to prepare financial reports under Chapter 2M of the Corporations Act, the Act mandates that these entities conduct a scenario analysis and disclose relevant information derived from that analysis as part of their climate statements. Scenario analysis involves assessing plausible future states and the social, economic, and environmental aspects that lead to them.
AASB S2 does not explicitly state which scenarios should be considered. Instead, it refers to the Corporations Act, which requires a scenario analysis to be carried out using at least two warming scenarios set out in Section 3(a)(i) and 3(a)(ii) of the Climate Change Act 2022. Section 3 (a)(i) of the Climate Change Act 2022 states “… holding the increase in the global average temperature to well below 2°C above pre-industrial levels”, and Section 3(a)(ii) states “… pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels.”
The Explanatory Memorandum that accompanies the Bill clarifies that an increase of 2.5°C or higher would be considered to well exceed the increase mentioned in Section 3(a)(i) of the Climate Change Act 2022. The two climate scenarios assess an entity's climate resilience, which refers to its capacity to adjust to changes, developments and uncertainties concerning the changing climate.
In summary, the first scenario, referred to as the ‘low’ scenario, assumes a baseline of 1.5°C of warming. The second scenario, the ‘high’ case, considers global warming of 2.5°C or higher. The low scenario represents the world’s most ambitious goals for reducing global warming. In this scenario, the world and large companies move quickly to decarbonise their operations and supply chains. In contrast, the high scenario presents a bleaker outcome, where extreme physical risks and an increased frequency of extreme weather events due to climate change must be considered.
Assurance, Liability Framework, and Regulation
Under the new reporting regime, sustainability reports will be subject to assurance requirements similar to those currently required by financial reporting under the Corporations Act, including the same obligations of the auditor. The legislation requires all entities participating in the reporting regime to work towards obtaining reasonable assurance in a phased approach.
The Australian Auditing and Assurance Board (AUASB) has been tasked with developing the extent and level of assurance required for climate-related financial disclosures. As a result, the AUASB released ASSA 5000, General Requirements for Sustainability Assurance Engagements, and ASSA 5010, Timeline for Audits and Reviews of Information in Sustainability Reports, under the Corporations Act 2001.
While these standards will increase the level and extent of assurance over time, it is anticipated that assurers may be under considerable pressure for the first few years of the new reporting regime given the sheer quantity of new reporters to assure. It is imperative that entities, particularly those in Group 1, engage their financial auditors expeditiously to understand their regulatory obligations and expectations.
Table 2: AUASB assurance phasing with an ‘end-state’ of reasonable assurance (current as of January 2025)
Under the new legislation, climate-related financial disclosures will be subject to the legal frameworks embedded in the Corporations Act and the Investment Commissions Act 2001. This will cover areas such as directors’ duties, misleading representation provisions and reporting requirements. ASIC will be the agency responsible for administering and enforcing this new reporting regime.
Recognising that there will be a significant period of transition for those required to meet these new obligations, ASIC has come out in support of the Treasury's modified liability settings which will restrict private actions against certain protected statements for a period of three years[5]. This will include statements related to Scope 3 emissions, scenario analysis and transition disclosure plans for reports prepared between 1 January 2025 and 31 December 2027. Additionally, the modified liability will also apply to cover all forward-looking statements for the first financial year for Group 1 entities (reports prepared between 1 January 2025 and 31 December 2025).
How Greenbase Can Help
Greenbase offers comprehensive support across all aspects of AASB S2. Contact us today to find out how Greenbase can help you understand your reporting obligations.
References
[1] Start preparing now: Early ASIC guidance on the mandatory climate disclosure regime https://asic.gov.au/about-asic/news-centre/speeches/start-preparing-now-early-asic-guidance-on-the-mandatory-climate-disclosure-regime/#_ftn1
[2] Large company definition https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/preparers-of-financial-reports/are-you-a-large-or-small-proprietary-company/
[3] AASB S1 https://standards.aasb.gov.au/aasb-s1-sep-2024
[4] AASB S2 https://standards.aasb.gov.au/aasb-s2-sep-2024
[5] Modified liability settings https://asic.gov.au/regulatory-resources/sustainability-reporting/for-preparers-of-sustainability-reports/modified-liability-settings/
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