As organisations across Australia face increasing pressure to address climate-related risks and opportunities, the introduction of the Australian Accounting Standards Board’s (AASB) new sustainability reporting standard, AASB S2, marks a significant step forward in corporate transparency.
What is AASB S2?
AASB S2 provides guidance on climate-related disclosures, aligning Australian Standards with international frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD). It aims to improve the consistency, comparability, and reliability of climate-related information disclosed by entities, facilitating better decision-making for investors and stakeholders.
Who Needs to Report?
AASB S2 applies to entities governed by the Corporations Act 2001*, with phased timelines:
* Not-for-profit entities, or entities that do not meet the thresholds outlined above, may be exempt from full AASB S2 reporting requirements
Disclosure Requirements
AASB S2 is structured around four core areas of climate-related disclosure: Governance, Strategy, Risk Management, and Metrics and Targets.
Governance
Entities must provide detailed information on the governance structures in place to manage climate-related risks and opportunities. This includes:
- Identifying the individuals or committees responsible for overseeing climate-related issues (such as board members or executive teams).
- Describing how climate-related responsibilities are integrated into broader corporate governance, including roles, skills, and frequency of oversight.
- Reporting how governance bodies oversee the setting and monitoring of climate-related targets, as well as any performance metrics linked to executive remuneration.
Risk Management
Entities must outline how they identify, assess, and manage climate-related risks. Specifically, the risk management disclosures include:
- Processes for identifying risks: How the entity monitors and assesses physical, and transition risks related to climate change.
- Integration with overall risk management: How climate-related risks are integrated into the entity’s broader risk management framework. This helps to understand whether climate risks are treated as separate from or part of the overall risk management process.
Strategy
The strategy disclosures require entities to explain the impact of climate-related risks and opportunities on their business model and strategy, including:
- Time horizons: Short, medium, and long-term, impacts of climate-related risks and opportunities must be disclosed, with clear definitions of what these time frames mean for the specific entity.
- Business impacts: Entities must explain how climate change could affect their business model, value chain, financial position, and cash flows. This includes identifying any areas particularly vulnerable to climate risks.
- Scenario analysis: Entities must conduct and disclose scenario analyses that assess how their strategies would fare under two specific climate-related scenarios: one aligned with international climate agreements (such as limiting global warming to 1.5°C or 2°C) and another reflecting more extreme physical climate risks (such as increased frequency of severe weather events or long-term climate shifts). This ensures that businesses evaluate both the transition to a low-carbon economy and the physical impacts of climate change on their operations.
Metrics and Targets
This section focuses on the quantitative disclosures of an entity’s climate-related performance, including:
- Greenhouse gas (GHG) emissions: Entities must report their Scope 1, Scope 2, and Scope 3 emissions in metric tonnes of CO2 equivalent.
- Targets: Entities must disclose any climate-related targets they have set, such as emissions reduction goals or energy efficiency improvements, along with the metrics they use to monitor progress. Additionally, entities should explain the basis for setting these targets (e.g. science-based targets or regulatory requirements).
- Capital deployment: Reporting how much capital has been allocated to address climate-related risks and opportunities, such as investments in low-carbon technologies
Where to Report
The climate-related disclosures required by AASB S2 must be included in a Sustainability Report, which is published as a separate section within the entity’s Annual Report. This ensures that climate-related information is integrated with the entity’s broader financial disclosures, making it accessible to investors, regulators, and other stakeholders.
In addition to the primary financial reporting, entities may provide supplementary materials or separate reports that delve deeper into their climate-related strategies, depending on stakeholder needs or specific regulatory requirements. However, the core disclosure must be contained in the Annual Report to ensure comprehensive and consistent reporting.
Preparing for AASB S2
To effectively comply with AASB S2, organisations should consider the following steps:
- Conduct a Gap Analysis: Assess existing reporting practices against the new requirements to identify areas for improvement, particularly in data collection and governance structures.
- Engage Stakeholders: Involve key stakeholders, including board members, management, and external advisors, in the development of the disclosure strategy to ensure comprehensive and informed reporting.
- Invest in Data Management: Implement systems to collect, analyse, and report on relevant climate-related data consistently. This might include adopting specialised software tools for emissions tracking and reporting.
- Educate Staff: Ensure that employees at all levels understand the importance of climate-related disclosures and their role in the reporting process, fostering a culture of sustainability within the organisation.
The introduction of AASB S2 represents a critical advancement in the way Australian entities disclose climate-related information. By preparing early and understanding the requirements, organisations can enhance their transparency and accountability.
For further guidance on AASB S2 and how to implement it within your organisation, feel free to reach out to Synectic Accountants and Advisors.
