With the first wave of mandatory climate reporting set to commence for December 2025 year-ends, Australia is moving faster than many peer jurisdictions and will be among the first countries to require mandatory assurance.
Deloitte’s Jonathan Streng, a lead author of A director’s guide to mandatory climate reporting, reflects on insights into Australia’s first climate disclosures, highlighting issues for directors to watch.
International investors, regulators, and standard-setters are watching closely to see how Australian companies implement IFRS S2-aligned standards, how regulators enforce them and how assurance providers opine on them. This creates both opportunity and scrutiny – and directors must establish governance practices that are not only compliant but aligned to the front-runner position.
Moving first means the world is watching
Australia’s leadership position provides the chance to set the tone globally, providing high-quality and transparent climate reports that are attractive for global capital markets. Just as the world looked to the Sydney Harbour fireworks to mark the start of 2025, attention will again be on us as the year closes.
This heightens the need for governance practices that not only meet compliance obligations but are consistent with the leadership mantle Australia now holds. I have seen this be a particularly relevant issue for Australian subsidiaries of large global entities, which may be setting the precedent and tone on behalf of their global group that may not yet have mandatory reporting obligations elsewhere.
Directors face real governance risks in the transition
Australia is on the cusp of its first wave of mandatory climate reporting, and many companies are already leaning in with voluntary disclosures ahead of their statutory obligations. While the mandatory requirements will only formally apply to the first cohort of companies for periods beginning 1 January 2025, many entities are testing the waters now. This momentum is welcome by investors, but directors are feeling the need to tread carefully. And no wonder – the transition to climate reporting carries real governance risks.
Unsubstantiated future promises: Promises about future climate reporting must be factual and substantiated. Caution should be used for statements like ‘we will prepare a high-quality climate report in FY27’ or ‘we will issue a AASB S2-compliant report in FY26’ – these types of statements about future compliance, which are currently unverifiable, could expose entities to greenwashing risk and should be avoided.
Labelling confusion: ASIC RG 280 notes that the ‘sustainability report’ as defined under s292A is the sustainability report required under law. Where annual reports contain existing voluntary sustainability reports, clear alternative labelling using other naming conventions such as voluntary sustainability reports, ESG reports, etc. is encouraged to avoid confusion or unintentionally misrepresenting that the report complies with AASB S2 if it does not.
Limited liability protection: Directors should be aware of the boundaries of the modified liability regime, with a bill currently being before Parliament that, if passed, will extend the benefit of the modified liability settings in certain limited circumstances (including to voluntary sustainability reports – provided they satisfy relevant content requirements).
The balance between adequate transparency to meet the needs of investors, and exposure to liability from unintentional language is fine – and boards must ensure ambition is matched by robustness.
Anticipated financial effects
Amid this context, the ISSB’s latest educational material on disclosure of anticipated financial effects deserves particular attention. This guidance goes to the heart of what directors will need to oversee – namely, how companies communicate the financial impacts of climate-related risks and opportunities on their business. Financial effects can be broadly categorised as:
Current effects: The financial effects of climate risks and opportunities that impact the current financial position, performance, or cash flows of the entity. For example, insurance premiums paid against flood risk, or the damage that resulted from a flood during the current year, including associated repair costs and impairment or write-off damaged inventory. These align directly with historical information of transactions and events that have occurred.
Anticipated effects: The effect of climate risks and opportunities on a company’s financial position, performance, and cash flows over the short, medium, and long term (noting that time horizons will be entity-specific). For example, the anticipated ongoing flood repair costs over various time horizons as global warming results in increased frequency and severity of flooding events, or associated increases in annual insurance premiums.
Two critical principles: Connectivity and proportionality
It is expected that a combination of qualitative and quantitative information would be most useful to investors. The ISSB educational material reinforced two principles:
Connectivity: Disclosures of anticipated financial effects must be consistent with the financial statements – not only are they for the same reporting entity and presentation currency as the accompanying financial statements but should also be reflective of the data and assumptions used to prepare the financial statements.
Proportionality: Although entities are not required to conduct exhaustive searches for new data to determine anticipated financial effects, more importantly, they cannot ignore information already at hand or readily available. The much-discussed ‘undue cost or effort’ mechanism is a double-edged sword. On the one hand, it recognises the practical limits of information-gathering, allowing companies to draw on resources readily available to them. On the other, it places clear responsibility on entities to fully utilise the information that is available to them, whether that is embedded in their existing systems, governance processes, or external environment.
The ISSB makes this point explicitly, noting that some information is always considered available without undue cost or effort. This includes information a company uses in preparing its financial statements, in operating its business model, in setting strategy, and in managing risks and opportunities. This also means entities should be looking beyond merely internal data sources. Publicly available climate scenarios (such as IPCC and Network for Greening the Financial System (NGFS) pathways), scientific data from agencies like the CSIRO, and government statistics all fall within the category of information ‘reasonably available without undue cost or effort’. Boards should expect management to leverage these resources in building robust disclosures.
No exemption from disclosure
Another aspect to the proportionality relief is where skills, resources and capabilities are not available to the entity to provide quantitative information about the anticipated financial effects. ASIC has said that they would scrutinise the approach taken by entities who rely on this and other proportionality reliefs in the standard. In preparing for the Group 1 wave (being Australia’s largest and most sophisticated businesses), one would generally expect that these companies have sufficient resources to obtain the requisite skills and capabilities even if not currently available in-house.
It should be noted that the proportionality reliefs should not be confused with ASIC’s overall approach to enforcement and surveillance which it has described as being ‘proportionate and pragmatic’. This does not suggest that entities have access to freely utilise the proportionality reliefs in the standards unless the criteria for accessing these have been met under the standards and can be justified.
Another important observation in the ISSB material is that proportionality relief on information-gathering does not equate to exemption from disclosure. Companies must still provide the required disclosures, but they can do so using the best available information rather than pursuing unattainable precision. This distinction is critical anticipated financial effects will often be estimated, scenario-based, and subject to uncertainty. What matters is transparency in method, assumptions, and boundaries, rather than the endless pursuit of pinpoint accuracy. Directors should expect management to strike this balance: providing sufficiently granular information to be meaningful and useful to investors, without overstating the perception of certainty or precision.
Building the foundation for reliable disclosure
The experience from financial reporting is clear: reliable disclosure rests on strong systems and processes, internal controls, and independent assurance. The same will be true for climate reporting. Boards should be asking early questions about the maturity of data systems, the clarity of reporting responsibilities, and the role of assurance in providing confidence to investors and regulators.
This would be the opportune time for directors to set their expectations on the robustness of the verification process that they want to see put in place. Climate disclosure is not a ‘tick the box’ exercise – it goes to the heart of how companies manage long-term value and risk.
The road ahead
The first wave of climate reporting will not always be perfect. But by focusing on the principles of disclosing material information about the climate risks and opportunities that could reasonably be expected to affect an entity’s prospects – directors can guide their organisations toward disclosures that are both relevant and decision useful.
About the author:
Jonathan Streng is a Managing Director in Accounting and Corporate Reporting team and technical climate reporting lead. He is a lead author of A director’s guide to mandatory climate reporting, an AICD practice guide developed in collaboration with Deloitte and MinterEllison for the Climate Governance Initiative Australia.
A director’s guide to mandatory climate reporting | Version 2 provides practical guidance for directors overseeing their organisations’ disclosures under Australia’s mandatory climate reporting laws. It includes questions for directors to ask management across governance, strategy and risk, and metrics and targets.
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