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Regulatory update
The adoption of ESG and climate reporting standards in Australia has gained significant momentum. This has been accelerated by the introduction of the International Financial Reporting Standards (IFRS) S1 General requirements for disclosure of sustainability-related financial information and IFRS S2 Climate-related disclosure standards, both established by the International Sustainability Standards Board (ISSB) at a global level.
Australia has been gradually aligning its corporate reporting landscape with global standards, and the introduction of the IFRS S1 and S2 standards marks a significant shift. The Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) have been increasingly vocal about the importance of climate risk reporting for businesses, especially in sectors exposed to material environmental risks.
Through various consultations over the past 24 months, the Australian Accounting Standards Board (AASB) has established the AASB S1 (aligned to IFRS S1) for voluntary disclosures and AASB S2 (aligned to IFRS S2) for mandatory reporting. The latter passed through parliament in September 2024 and was legislated as mandatory reporting starting 1 January 2025. It marks Australia as one of the early adopters and leaders in ISSB-aligned requirements for reporting entities.
Entities required to prepare a financial report under Chapter 2M of the Corporations Act need to satisfy two of the three threshold measures (consolidated revenue, gross assets and /or employees) to determine when they need to start reporting (see below). This applies to publicly listed, private financial institutions, registered managed investment schemes (MIS) and super entities. Australian Charities and Not-for-profits Commission (ACNC)-registered companies have been excluded for now. However, non-ACNC not-for-profits that meet the thresholds will need to comply.
AASB S2 climate-related financial risk disclosures – phased in reporting groups.
In addition, Australian government entities and companies have established the Commonwealth Climate Disclosure Requirements aimed at supporting the delivery of Australia’s emissions reduction targets under the Paris Agreement and the government’s Australian public service net zero by 2030 target. The disclosures, aligned to international standards, will provide greater transparency, accountability and credibility in the way climate risks are managed across the commonwealth public sector. This policy aligns with the government’s commitment to mandate climate-related financial disclosures for Australia’s large businesses and financial institutions.
There is a clear intention to ensure the same rigour applied to financial reporting is also applied to sustainability reporting. In this regard, the Treasury requires that disclosures be included in general-purpose financial statements. Climate-related financial disclosures will be included in a new 'sustainability report' as part of the annual report. This must be lodged with ASIC as part of the entity's annual reporting obligations.
The disclosure requirements are expected to cover the following information across the four pillars –
- Governance – the processes, controls and procedures an entity uses to monitor, manage and oversee climate-related risks and opportunities
- Strategy – how the company manages climate-related risks and opportunities
- Risk management – the company’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
- Metrics and targets – performance concerning its climate-related risks and opportunities, including progress towards any climate-related targets it has set.
Sustainability reports will undergo external audit processes and be evaluated against the AASB S2 to provide credibility to disclosures and align them with other Chapter 2M reports. The AUASB is currently developing an assurance standard, which is expected to be finalised and released early 2025. This will follow the release of the International Auditing and Assurance Standard Board’s (IAASB) ISSA 5000, published in November 2024.
The AASB has outlined a phased approach to implementing assurance requirements, using the timeline set by the bill—starting from 1 January 2025 and ending on 30 June 2030. Over this period, the extent of required assurance will gradually increase, with a full audit anticipated for an entity’s fourth sustainability report and beyond. See below, which outlines a proposed timeline for when information in a sustainability report prepared following Chapter 2M of the Corporations Act 2001 would be subject to audit and/or review.
Key market insights:
Mandatory reporting requirements stipulate that companies must report their supply chain carbon emissions (Scope 3) starting in the second year of reporting. This indicates that companies not yet subject to mandatory reporting will likely be affected as well, and they will need to start measuring their carbon footprint to align with these wider supply chain requirements. For example, Coles, one of Australia's largest grocery chains, has publicly stated that it plans to partner with its suppliers to set science-based emission reduction targets by 2027. Given the complexity and time required to collect the necessary data, companies are advised to have at least two years of data, with the second year offering an opportunity to address any gaps. This means companies that delay data collection until the mandatory reporting year will be at a disadvantage. A recommended timeline has been outlined to support companies in preparing for these requirements.
Under the Corporations Act 2001, directors must exercise due care, diligence, and skill in overseeing company operations, which includes understanding and managing risks, such as those related to climate change. A transition period of three years has been established for directors to make qualified declarations that the company’s sustainability report complies with the act’s substantive provisions. Decarbonisation and emissions reduction targets are becoming increasingly important as companies face both reporting requirements and market pressure, with many using these targets as a signal of maturity and relevance to their stakeholders.
ASIC has made 47 regulatory interventions to address greenwashing misconduct during the 15-month period up to 30 June 2024, including the commencement of two Federal Court proceedings and over $123,000 in infringement notice payments.
Australia is also seeing rising regulatory pressure on emissions reduction pathways. The updated safeguard mechanism requires large emitters to reduce emissions by 4.9% annually until 2030 to meet national targets. This is part of the government's broader strategy to meet its national emissions reduction target. The mechanism aims to ensure that the country's largest carbon emitters contribute significantly to the overall reduction of greenhouse gas emissions, aligning with Australia's climate goals and helping to transition toward a low-carbon economy.
Data highlighting net zero ambitions in Australia
Data from Sustainable Platform shows a sharp increase in net zero targets in the region from 2019 to 2023 but an interesting drop in targets in 2024. Even optimistic projections are likely to see around 15% fewer net zero targets in 2024 than in 2023. The same projections indicate that while the number of net zero targets being disclosed in Australia is going down, climate risk disclosures are steadily rising as companies prepare for mandatory reporting.
While at first this may seem counterintuitive, the last 18 months have seen a rise in greenwashing litigation in Australia. In response to this, companies are increasingly removing net zero claims from websites and annual reporting. Whether this is out of genuine risk that the claims are unfounded or an overabundance of caution remains to be seen.
RSM continues to recommend that companies wanting to disclose green credentials and net zero targets undertake a robust assessment to ensure that targets are realistic and achievable.
The Australian Institute of Company Directors (AICD) Climate Governance Study 2024 highlighted that, beyond the regulatory implications of climate action, adaptation is becoming a significant concern for directors. This includes risks related to operational impacts, higher insurance costs, and challenges with continued access to resources. As climate reporting evolves, biodiversity and natural capital are gaining attention as key strategic disclosure areas. The Taskforce on Nature-related Financial Disclosures (TNFD) aims to integrate nature into financial decision-making, and Australia, as a funding partner to the TNFD, is expected to be a leader in adopting these recommendations. The Australian Sustainable Finance Initiative (ASFI) is also involved in this process, further indicating Australia's commitment to integrating nature and biodiversity into its sustainability framework.
The progression of ESG and climate reporting in Australia is evolving rapidly in response to increasing regulatory pressures, investor demand, and public scrutiny. As the Australian government, in addition to local and global stakeholders, continues to emphasise climate action and sustainable practices, companies will face stricter reporting requirements, particularly around carbon emissions, climate risks, and social impacts. This evolution is seeing a shift towards greater transparency, with organisations expected to disclose more granular data on their ESG performance and alignment to climate-related risk reporting.
Atlas Pearls, headquartered in Australia and Indonesia with operations across eight farms in the Indonesian archipelago, is deeply committed to sustainability.
The company integrates environmental stewardship into its pearling practices, ensuring that its operations not only protect but enhance marine ecosystems. Atlas Pearls employs regenerative aquaculture techniques, promoting biodiversity and minimising ecological impact while producing high-quality pearls.
Furthermore, the company supports local communities by creating jobs, fostering sustainable livelihoods, and investing in community development programs. Growing high-quality pearls requires pristine oceans with healthy, robust ecosystems. Protecting the environmens not a promotional strategy, it’s a business imperative.
"Atlas Pearls has a longstanding commitment to supporting our villages, stakeholders, and communities around our farms. Recognising our role as both neighbours and key employers in our operational areas, we have embarked on the early stages of an ESG/sustainability initiative to help drive positive impact and manage our performance and social licence to operate.” Michael Ricci - CEO, Atlas Pearl
Catherine Bell - Partner, ESG Services
"The pace of change driven by the energy transition and climate reporting is unprecedented, demanding businesses to pivot and evolve rapidly. To thrive in the new green economy, companies must boldly embrace transformation, aligning their strategies with sustainability imperatives and the expectations of a climate-conscious market.”
The information on this page is current as of 30 December 2024