Early signals from ASIC, practical insights from Group 1 reporters, and foreshadowed legislative reforms 17 min read
Although 'Group 1' reporters with a 30 June financial year end are yet to lodge their first mandatory sustainability reports, they can look to the experience of early Group 1 reporters for practical insights into compliance with Australia's climate-related financial disclosures (CRFD) regime.
The Australian Securities and Investments Commission (ASIC) has recently released its 'early observations' after reviewing a subset of mandatory sustainability reports lodged by Group 1 listed entities with financial years ending 31 December. In addition, ASIC has published a decisions register, which outlines its position on certain relief applications from reporting entities. Additional guidance is also flowing into the market, including from the Australian Accounting Standards Board and the International Sustainability Standards Board.
In this Insight, we outline some of the key learnings from the first wave of reporting. We offer our reflections on ASIC's initial observations and relief decisions, as well as our own insights from assisting 'Group 1' reporting entities, and broader market insights. Finally, we map what's on the horizon, including some important and potentially helpful legislative reforms the Federal Government has foreshadowed in its most recent Budget papers.
For further context, see our earlier Insights explaining the CRFD regime's key elements, and unpacking ASIC's regulatory guide for sustainability reporters.
Key takeaways
- ASIC has published initial feedback following its review of a sample of Group 1 sustainability reports, flagging a number of areas for improvement, including regarding disclaimer language and disclosure of relevant judgments, assumptions and measurement uncertainty, and reinforcing the need to ensure voluntary content doesn't obscure material information.
- Our insights from advising Group 1 reporters include that reporting entities should tackle challenging areas of disclosure early (eg, the quantification of anticipated financial effects); integrate sustainability reporting into the board calendar; approach proportionality mechanisms carefully; and ensure that the sustainability reporting and finance teams are working closely together to aid the identification and disclosure of 'connected information' as between climate and financial statements.
- ASIC has also published a register of relief decisions. Thematically, the applications reveal a focus on preserving key aspects of AASB S2 Climate-related Disclosures (AASB S2). For example, substituted reporting has been allowed in circumstances where the parent entity report will be AASB S2 aligned and audited to the same standard as an Australian reporting entity. Conversely, applications have been unsuccessful where they were seen as inconsistent with AASB S2's connected information requirements.
- The Government has signalled a suite of reforms which, if implemented, would ease the impact of the regime slightly. These are: raising the consolidated asset and consolidated revenue thresholds for Group 3 entities; adjusting assurance requirements; clarifying how key requirements such as 'undue cost and effort' apply in practice; and setting clearer boundaries for supplier information requests, to reduce costs for small businesses.
ASIC's early observations and our reflections
ASIC, drawing on its preliminary review, encourages entities to consider six observations when preparing their sustainability reports, which we outline below together with our own reflections.
Our overarching impression is that ASIC exercised restraint in preparing these initial observations, which were narrow in scope, pending further maturation among reporting entities and expansion of the pool of disclosures to draw upon.
ASIC identified concerns with disclaimers in sustainability reports that indicated users should not rely on the information contained in the report to make investment decisions, or disclaimers that stated the entity took no responsibility for the accuracy or completeness of certain information in the report. ASIC considers these impermissible, standing in conflict with the statutory framework and objectives of Chapter 2M sustainability reporting; in its view, they may confuse or, at worst, mislead report users.
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Anecdotally, a number of reporting entities have received similar feedback from their auditors. That is not to say disclaimers can't be included in sustainability reports at all. While broad disclaimers as to accuracy and reasonableness of forward-looking statements that are required under AASB S2 ought to be avoided, there is clearly a role for targeted disclaimer language to assist readers in understanding that climate-related data, metrics and methodologies (eg, in scenario analysis) are evolving, and are subject to certain assumptions, uncertainties and limitations. A variety of approaches were taken to disclaimers in the first wave of reports. Some reporters embedded disclaimer language throughout the report, while others presented a standalone disclaimer. |
AASB S2 requires that, regarding a number of disclosure items, a reporting entity 'use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort'. This includes when identifying the climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects.
ASIC identified instances where, although entities had previously reported (eg, in earlier financial reports or ASX announcements) that assets and/or operations were financially impacted by extreme weather events in prior financial years, they had not disclosed in the sustainability report information about similar risks and related mitigation activities. ASIC's view is that such 'information about past events, current conditions and forecasts of future conditions' constitutes 'reasonable and supportable' information.
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Entities are not required to 'undertake an exhaustive search for information to identify material climate-related risks and opportunities', but AASB S2 makes clear that 'reasonable and supportable' information can be drawn from a broad range of data sources, both internal and external, including: the entity's risk management processes; industry and peer group experience; and external ratings, reports and statistics. Reporters should ensure adequate systems are in place to ensure that the entity leverages information presented externally in other contexts, such as financial reporting, its operating and financial review, ASX announcements, investor packs, and other public disclosures, particularly where that information has been characterised as financially material in other disclosures. To the extent the reporter considers that, despite appearing superficially relevant, a past climate-related event is not material or relevant to its report, it would likely be prudent to ensure the rationale for this is objectively robust, and clearly set out in its internal sustainability records. Clear processes should also be in place as to the identification and use of internal company data on past climate-related events, which could be material to climate-related disclosures. The forthcoming government guidance on 'reasonable and supportable information' and other key concepts will be seeking to provide entities with greater clarity in applying these concepts. |
While ASIC observed some instances of entities disclosing their judgments, it also noted that on other occasions, report users would be required to draw their own conclusions about why information was included or disclosed in a particular way—eg, in relation to the application of the proportionality mechanisms in AASB S2. ASIC encourages reporting entities to disclose judgments, assumptions and areas of measurement uncertainty in a clear, effective and proximate manner.
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Reporting entities need to make a surprisingly large number of judgment calls in the course of preparing sustainability reports. For example, when selecting inputs and assumptions for scenario analysis, when determining how to characterise assets and business activities as 'vulnerable' to climate-related risks, when establishing what disclosures are 'material' to primary users, and in determining which anticipated financial effects need to be quantified. Entities should be mindful that AASB S2 expressly requires information to enable users to understand judgments made in the process of preparing their disclosures, and that have the most significant effect on the information included in those disclosures (see Appendix D, para 74–75). Relatedly, entities may recall that ASIC's Regulatory Guide 280 Sustainability Reporting (RG 280) cautions them to take particular care to ensure adequate sustainability records are kept to substantiate the application of AASB S2 proportionality mechanisms and related judgment calls—given their subjectivity, ASIC has indicated it will scrutinise entities' approach here. |
ASIC observed instances where reporting entities did not clearly distinguish between material information in the sustainability report and additional, voluntary climate-related information. While acknowledging that further voluntary disclosure may be necessary to ensure fair presentation of the sustainability report, ASIC highlighted that adding information beyond this can risk obscuring material information.
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Entities should delineate between mandatory and voluntary disclosures. This is most cleanly done by placing all mandatory disclosures in a standalone report or quarantining them in a clearly labelled portion of the annual report. Some December year-end reporters chose to achieve this by setting out two separate sets of content under the headings 'mandatory sustainability report' and 'voluntary sustainability report'. If a reporting entity prefers to intersperse mandatory and voluntary disclosures, it should clearly and prominently communicate how users can differentiate between the two. Regardless of the approach taken, voluntary disclosures should not obscure material information, and maintaining a firm focus on materiality will assist in following this principle. It is also worth keeping in mind that voluntary statements made in a statutory sustainability report will not enliven modified liability settings. |
AASB S2 allows reporting entities to include information in the mandatory sustainability report by cross-reference, subject to specified requirements being met. ASIC identified instances of reporting entities not meeting AASB S2 cross-referencing requirements—eg, where they cross-referenced information contained on websites or in reports the entity hadn't published, or failed to cross-reference a specific part of the relevant report. Echoing its expectations outlined in RG 280, ASIC encourages entities that cross-reference another report the reporting entity has prepared to lodge that other report (if not already lodged with ASIC).
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ASIC's observations reinforce that cross-referencing should be approached in a meticulous way. A common pitfall is to include cross-references to other documents with the intention of providing additional context, rather than with the intention of incorporating that document into the sustainability report. It should be abundantly clear to a user which documents referred to in the sustainability report are intended to be incorporated by cross-reference, as opposed to providing additional context. Indeed, entities should be disciplined when including external documents by cross-reference, noting not only that ASIC expects those documents to be lodged, but also that: modified liability settings do not apply to information included by cross-reference in the sustainability report; audit and sustainability record-keeping requirements apply to information incorporated by cross-reference; and the directors' declaration is given regarding information included by cross-reference. |
ASIC observed varied approaches to climate-related targets disclosures, particularly how entities determined what constitutes a 'climate-related target' for AASB S2 purposes. It encourages entities to consider carefully whether they have a disclosable 'climate-related target', noting disclosure requirements extend to targets the entity is required to meet by law or regulation, including greenhouse gas emissions targets (eg, the Safeguard Mechanism).
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Climate-related targets clearly capture more than net zero targets. Entities covered by sectoral emissions reduction requirements should carefully consider whether they are required to disclose a mandatory 'climate-related target' under AASB S2. We expect that market practice on disclosure of climate-related targets imposed by law or regulation will continue to evolve as further reports are prepared and published. In this respect, reporters may wish to refer to sustainability reports peers have published, noting also that the AASB S2 principle of comparability indicates that disclosures will be more useful to users where information can be compared between entities operating in the same industry. |
ASIC has said its review of 31 December 2025 reports will continue over the coming months and it may engage with reporting entities about their disclosures. Its final observations will be published in the second half of 2026.
Overseas, New Zealand's equivalent to ASIC, the Financial Markets Authority (the FMA), has also recently published its insights from a review of climate statements prepared for the second reporting period under New Zealand's climate reporting regime. Although the FMA's observations should be treated with care, because the disclosure standard in New Zealand is different from AASB S2, the FMA's observations on physical risk disclosures appear somewhat transferrable and may be of interest to Australian disclosers. In particular, it emphasised the need for clearer linkage between: the relevant hazard (such as extreme rainfall); the mechanism by which loss or damage arises (such as pluvial flooding); and the assets, operations, and/or other elements of the business (including customers) that are materially exposed. The FMA also cautioned that data outputs used in analysis underpinning physical risk disclosures should be selected to align with the specific hazard being assessed, noting that inappropriate choices may result in risks being understated or resources being misallocated.
Our insights from the first wave of reporting
Drawing on our experience assisting sustainability reporters, we offer the following additional insights:
AASB S2 requires disclosure on complex topics, which entities have not previously been legally required to report on, including the anticipated financial effects of climate change, and the number and percentage of assets or business activities vulnerable to climate-related risks. Mandatory disclosure has also introduced a firmer requirement to disclose only information that is financially material. Many of these new requirements are judgment heavy.
We have also observed that mandatory climate reporting has kicked up a surprising number of scope 1 and 2 emissions reporting challenges, with a number of entities having their approach to inventory preparation challenged by audit firms.
In our experience, working through these requirements, and preparing associated disclosures, can take considerable time. We recommend that reporting entities tackle these challenging areas of disclosure early, so that there is sufficient time to gather the correct data, consult with relevant internal stakeholders, and carry out the required analysis well before submission deadlines loom.
Sustainability reporting teams that engaged early with their boards—aligning on key milestones, systems and controls for reporting and record keeping, information requirements and sign-off expectations, and securing space in the board and subcommittee calendars at key points in time—were better able to avoid last-minute time pressures when finalising the report and securing the directors' declaration. This early alignment also benefitted cross-functional working groups—eg, aligning the internal sustainability reporting timetable with the annual financial reporting and audit timetables.
Entities should also ensure that judgment calls—whether on interpretation of undefined terms in AASB S2 (such as asset and business activity 'vulnerability') or on use of proportionality mechanisms (eg, 'undue cost or effort')—are appropriately documented and that supporting materials are recorded, including the 'reasonable grounds' on which decisions are made.
Front-ending record keeping for these decisions will also assist in navigating sustainability assurance at the back end of the process, including as audit requirements ramp up in future years.
AASB S2 includes proportionality mechanisms that temper disclosure requirements to reflect reporting entities' circumstances. For example, entities are able to rely on reasonable and supportable information available without undue cost or effort, or relief from providing quantitative information about anticipated financial effects disclosures if effects are not separately identifiable or if measurement uncertainty is so high that the disclosures would not be useful. While it may be tempting to rely heavily on these mechanisms, each instance of non-disclosure must be justifiable by reference to these reliefs. So, if measurement uncertainty is high for one aspect of anticipated financial effect disclosures, for example, the reporting entity must still make a genuine attempt to quantify the remaining aspects. This also ties in with ASIC's observations outlined at item [Don't forget 'reasonable and supportable information' already to hand] above.
The CRFD regime is a transparency regime; it does not require entities to implement any particular climate strategy or targets. However, in our experience, entities that honed their narrative at the outset had an easier time preparing their reports. For example, implementing desired uplifts to climate governance and risk management arrangements, and adopting new targets and developing their transition plan (if there is one), well in advance of the first reporting date, will allow entities to then report on these arrangements in their annual disclosures.
As explained in our previous Insight, entities should ensure that the business (with board oversight) is proactively managing the interface between climate disclosures and other duties and disclosures. In particular, entities should have systems in place to monitor consistency between disclosures in the sustainability report and all other public disclosures, and may wish to do so by establishing an approved lexicon. For example, the process of preparing a mandatory sustainability report may surface new information that must be disclosed elsewhere (such as in a product disclosure statement) or incorporated into risk management processes.
AASB S2 requires disclosure of (among other things) how climate-related risks and opportunities have been factored into business strategy and decision-making, which may raise internal concerns about publication of commercially sensitive information. However, entities should be aware that AASB S2 only permits the omission of such information in very limited circumstances—ie, as to climate-related opportunities (not risks), and only where: the information is not already publicly available; disclosure could reasonably be expected to seriously prejudice the economic benefits the entity would otherwise realise in pursuing the opportunity; and the entity has determined it is not possible to disclose the information in a manner that meets the disclosure requirements' objectives without such prejudice (eg, at an aggregated level). Importantly, this exemption can't be used as a basis for broad non-disclosure of climate-related financial information.
AASB S2 requires that 'connected information' as between the sustainability report and the financial report be disclosed, and that data and assumptions used in preparing climate-related financial disclosures are consistent to the extent possible with corresponding data and assumptions used in general purpose financial statements.
To achieve this, the sustainability reporting working group needs to work with the team responsible for preparing financial statements. Additionally, the respective teams should look out for conceptual inconsistencies as between the two reports. For example, if premises are accounted for as a lease in financial statements, the organisation should consider the treatment of leased premises in the Greenhouse Gas Protocol for the purposes of its emissions inventory disclosures.
ASIC's attitude to reporting relief applications has become clearer
A number of organisations have sought individual relief from reporting obligations where they consider that, by virtue of their corporate structure or as a result of a corporate transaction, the reporting regime would impose an unreasonable burden or would be inappropriate in the circumstances.
To inform the market on how it has approached sustainability reporting relief applications, ASIC has begun publishing a register of relief applications and decisions. As at the date of this Insight, the register has 11 entries, with four examples of successful relief applications and seven examples of unsuccessful applications. ASIC has no obligation to publish its decisions, so not all relief decisions will necessarily be published—nor is data available on the extent to which initial consultations that prospective applicants may have held with ASIC behind the scenes have dissuaded applications for relief from being submitted or relief applications from being withdrawn.
Nevertheless, the available information indicates that ASIC's approach to considering relief applications demonstrates strong adherence to preserving the regime's policy underpinnings. In particular, ASIC has consistently referred to its focus on ensuring that relief is not inconsistent with the 'connected information' requirements in AASB S2.
Importantly, the following themes can be identified based on ASIC's decisions register:
- For Australian subsidiaries of a foreign parent, where the foreign parent is to prepare a sustainability report in compliance with reporting standards at least equivalent to the AASB S2 standard, and audit equivalent to that which would be required in Australia, relief may be available for the Australian subsidiary.
- In contrast, relief is unlikely to be granted to an Australian subsidiary where the foreign parent has prepared a sustainability report in compliance with a standard that is not equivalent to AASB S2—eg a disclosure standard based on the Recommendations of the Taskforce on Climate-Related Financial Disclosures, or the European Corporate Sustainability Reporting Directive.
- ASIC has been wary of providing relief to entities within a corporate group where they are seeking relief to permit 'artificial consolidation', such that only one entity prepares a sustainability report on behalf of the other entities without controlling those entities. One of the consistent reasons for relief being withheld in these circumstances is that artificial consolidation would be inconsistent with AASB S2's connected information requirements—the requirement that the disclosing entity identify connections between information presented in the sustainability report and the associated financial report.
- Relief will not be granted merely on the grounds of inconvenience to the applicant or the cost of compliance (even where there may be duplication as to reporting within the same corporate group). One of the jurisdictional thresholds in section 342(1) of the Corporations Act 2001 (Cth) must be met—eg, an applicant must show clearly that to comply with the regime would impose an unreasonable burden.
- ASIC has demonstrated some sympathy for Group 1 reporters that have sought relief where they are subsidiaries of Group 2 entities, and will—when Group 2 reporting commences—be consolidated into their parent's reporting. It has accepted that the benefit to primary users is outweighed by the burden of the Group 1 entity being required to establish systems and processes, and undergo auditing with respect to a smaller economic entity for one to two years before consolidation occurs.
- If an application is successful, relief will ordinarily be granted only for a limited period and conditions are likely to be attached.
ASIC has also recently issued class relief to registered schemes, which will allow them to prepare a consolidated sustainability report for related schemes, subject to certain requirements being met.1 A key threshold for relying on this relief is that the relevant registered scheme's financial reports are also consolidated. ASIC had previously issued class relief for stapled entities.
Reform on the horizon
The Federal Government has announced, as part of the 2026–27 Budget and its 'Whole-of-Government Regulatory Reform Agenda',2 that it will seek to reduce compliance burdens for businesses by progressing a suite of legislative reforms. Relevantly for the CRFD regime, these include:
- raising the monetary thresholds for large proprietary companies from $50 million to $100 million in consolidated revenue and $25 million to $50 million in consolidated gross assets. This change, if implemented, would reduce the number of medium‑sized entities the CRFD regime's 'Group 3' size thresholds captures (see our previous Insight for further detail on current reporting triggers). This proposal comes in the wake of a similar (albeit larger‑scale) proposal to amend New Zealand’s climate reporting regime, including to increase reporting thresholds for listed issuers and remove managed investment schemes from the regime's scope;3 and
- consulting on reforms to reduce burdens while maintaining core sustainability reporting requirements, including:
- clarifying how key concepts (such as 'undue cost or effort') apply in practice;
- adjusting assurance settings to ensure they are proportionate and practical; and
- setting clearer boundaries for supplier information requests, particularly to reduce costs for small businesses.
We take this announcement as signalling the potential tailoring-back or introduction of carveouts from scope 3 disclosure requirements, which are currently subject to a complex, tiered disclosure framework that prioritises, where possible, the use of primary data sourced from the reporting entity's value chain. The primacy of direct, verified scope 3 data has triggered a number of organisations to make data provision requests of their suppliers of goods and services, which—in the case of smaller or less sophisticated suppliers—has not been a welcome development. Interestingly, the Department of Agriculture has on its website already issued guidance to farmers, encouraging them to push back on scope 3 data requests:
If a farmer is asked to support scope 3 emissions reporting under the new [climate-related financial disclosure rules], they can note that the use of farm-level data is not mandatory. They can also ask whether the customer or supplier has considered using industry averages or secondary data.4
The Budget announcement also appears to us to flag the potential for reducing the scope and nature of audit requirements, either across all cohorts, or for certain cohorts (eg, entities that fall below the Group 1 or Group 3 size thresholds). Anecdotally, we understand that the cost of having selected portions of a sustainability report audited to a limited assurance standard has been substantial, and will rise significantly as reporting entities move towards full, reasonable assurance.
We expect that reporting entities will likely welcome all the foreshadowed changes, if implemented. If you would like more information about them, or other issues raised in this Insight, please contact any of the people below.