Sustainability reporting advisory

Directors already have the duty under the Corporations Act to exercise their powers with the care and diligence that a reasonable person would exercise in the circumstances, are applied to sustainability reporting. ASIC Regulatory Guide RG 280 Sustainability Reporting confirms that in discharging their duty of care and diligence, Directors of reporting entities should consider the extent to which climate-related risks could reasonably be expected to affect the reporting entity’s prospects. Directors of reporting entities should require the reporting entity to establish:  

• systems that identify, assess and monitor any material climate-related financial risks and opportunities;  
• controls, policies and procedures for overseeing, managing and preparing the sustainability report; and for keeping sustainability records. 

One frequently asked question is whether entities preparing to report are now required to have a sustainability officer or climate sub-committee or working group. It is important to recognise that AASB S2 does not impose any new governance requirements on entities. Rather it requires the entity to disclose its existing governance practices in relation to the governance, management and oversight of climate-related risks and opportunities. Developing governance over climate-related risks and opportunities is an integral part of overall good corporate governance. As such, in our view, entities should look to integrate their governance of climate-related risks and opportunities into their existing corporate governance frameworks, especially at a Board level. That said, in our experience, many entities may consider this as an opportunity to also reassess their existing governance processes and structures which may not have been updated recently. 

Unless another Australian Sustainability Reporting Standard permits or requires otherwise, an entity shall disclose comparative information in respect of the preceding period for all amounts disclosed in the reporting period. If such information would be useful for an understanding of the climaterelated financial disclosures for the reporting period, the entity shall also disclose comparative information for narrative and descriptive climate-related financial information. However, an entity is not required to provide the disclosures specified in AASB S2 for any period before the date of initial application. 

In the context of climate-related financial disclosures, information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports, which include financial statements and climate-related financial disclosures and which provide information about a specific reporting entity. (AASB S2 Appendix D.18)  

Preparers familiar with Australian Accounting Standards will notice the concept of materiality in AASB S2 is almost identical to the language used for the concept of materiality in the financial accounting standards, which was the intention of the ISSB.  

As with financial accounting, materiality is an entity-specific concept. Assessing whether information could reasonably be expected to influence the decisions made by primary users requires consideration of the characteristics of those users and of the entity’s own circumstances.  

Consequently, in the process of identifying material information about an entity’s climate-related risks and opportunities, it may be helpful for an entity to clearly articulate who their primary users are, and what decisions they may be making. It is also important to remember that climate-related financial disclosures are intended to meet common information needs of primary users. When looking at individual primary users, an entity may find that they have different, and sometimes even conflicting, information needs and desires, which may also evolve over time.  

In identifying the primary users of a general-purpose financial report, the AASB has introduced specific Australian paragraphs specific to not-for-profit entities. A not-for-profit entity is required to refer to the definitions of “general purpose financial reports” and “primary users of general purpose financial reports” specified in the Framework for the Preparation and Presentation of Financial Statements when applying AASB S2. 

Examples of decisions of primary users that relate to providing resources to for-profit and not-for-profit entities is shown below.  

For-profit entity  
(AASB S2 Appendix D.B14)  

• Buying, selling or holding equity and debt instruments  
• Providing or selling loans and other forms of credit; or  
• Exercising rights to vote on, or otherwise influence, the entity’s management’s actions that affect the use of the entity’s economic resources  

Not-for-profit entity  
(AASB S2 Appendix D.AusB14)  

• Parliaments deciding on behalf of constituents whether to fund particular programmes for delivery by an entity  
• Taxpayers deciding who should represent them in government;  
• Donors deciding whether to donate resources to an entity  
• Recipients of goods and services deciding whether they can continue to rely on the provision of goods and services from the entity or whether to seek alternative suppliers  

An entity’s climate-related risks and opportunities affect the whole of the business and not just an individual team. Therefore, in our view, it is important for the preparation for reporting to involve multiple stakeholders across the business. As an example, this might include:  

• existing individuals with sustainability-related responsibility  
• key representatives of the core departments of the business (including internal operations)  
• the finance team or whoever is charged with oversight of corporate reporting/audit liaison functions  
• the executive management team or individuals otherwise charged with business strategy;  
• the Board of Directors (or a subset of the Board with delegated authority).