First-year reporting is only the beginning: Businesses are expected to improve their disclosures over time

Mandatory reporting under AASB S2 Climate-related Disclosures shifts the focus away from the broader environmental and social impacts of a business and its activities and moves it towards assessing the financial risks of climate change on the business itself. This means even experienced reporters must learn a new framework, and in many instances undertake some work for the first time.

Australian Securities and Investments Commission (ASIC) commissioner Kate O’Rourke recently noted that for mandatory sustainability reporting in Australia, “We don’t want the baseline to become the benchmark”. So, as Group 2 reporters set about preparing their first mandatory sustainability reports, and with ASIC releasing its detailed analysis of first-round reporting, this is a timely reminder that first-year reporting should be viewed as a starting point, and one which will evolve over time.

This point in time creates an opportunity for accounting and sustainability practitioners, as well as Boards responsible for signing their Directors’ Declarations, to reflect on the early lessons and consider the opportunities to both strengthen their reporting processes and begin to derive some value from the underlying work.

Lessons from early reporting of Group 1 entities

Australia's first year of mandatory climate reporting has shown there is no single approach to meeting the new requirements. Early reports have varied significantly in both length and sophistication, highlighting different levels of reporting maturity as well as differences in interpretation across organisations. For instance, among December year-end reporters, many more climate-related risks were reported than opportunities, and while the vast majority undertook scenario analysis, only half provided quantitative information around the outcomes.

The first reporting cycle has also reinforced the importance of collaboration. Finance, sustainability, legal, risk, and operational teams all play a role in identifying, measuring and reporting climate-related information. Businesses that break down these silos will be better placed to respond as reporting requirements become more demanding.

This matters because climate-related disclosures are unlikely to be the end game for non-financial reporting in Australia. Across Asia-Pacific and beyond, many jurisdictions are beginning to adopt sustainability reporting standards aligned with both IFRS S2 and S1 (issued by the ISSB), which will introduce a much broader set of sustainability-related financial disclosures beyond just climate. Organisations that establish strong foundations now will be better positioned to adapt to emerging requirements and increasing assurance expectations.

We’re only at the beginning: expectations will continue to rise

There are already valuable lessons emerging that can inform and improve future reporting cycles. The recent findings published by ASIC encourage ongoing improvement in the quality of reporting, and the regulator has indicated it may use its information-gathering powers to request documents or other information from entities as part of its ongoing oversight.

This means organisations should focus on building a robust and repeatable reporting approach that can mature over time, rather than creating a process designed with only the first-year requirements in mind. Expectations will continue to grow, additional requirements are likely to emerge, and sustainability reports will need to withstand closer stakeholder scrutiny and increasingly rigorous assurance as time goes on.

Building repeatable, auditable processes as assurance scope increases over time

Our recommendation to organisations considering how to improve their sustainability reporting year on year, and to increase the value they derive from it, is to begin to treat it with the same level of rigour and governance as financial reporting. While the first year of reporting is likely to be built on a combination of spreadsheets and other disparate reports from across the business, finance teams and boards will expect greater structure and consistency around how they report going forward.

The vast majority of the disclosures required by AASB S2 are qualitative in nature, and so may fall outside an organisation’s traditional data governance framework for financial reporting. As the assurance scope expands to cover the entirety of the sustainability report, the reporting processes and controls will also need to be uplifted to meet this increased scrutiny. Rather than focusing purely on data quality, organisations should consider:

• Clearly assigning ownership and accountability for disclosures, assumptions and judgements.

• Documenting methodologies and assessment processes so that reporting outcomes are repeatable and consistent year-on-year.

• Establishing governance and review processes, and internal approval workflows, to support management and board oversight.

• Ensuring evidence is retained to support both quantitative metrics and qualitative disclosures and ensure the business can respond efficiently to internal review or external assurance requests.

• Embedding sustainability reporting into existing risk management, governance and reporting frameworks where possible.
  

These considerations apply not just to greenhouse gas emissions and other required metrics, but also to the qualitative disclosures relating to governance, strategy and risk management. The ambition should be to build a repeatable, auditable process that produces reliable and well-governed sustainability information, enabling key stakeholders to make informed decisions about the business.

Beyond year 1: from compliance to value creation

While improving the controls, governance and data quality around sustainability reporting will be critical as time goes on, the data itself is not the end goal. The purpose of AASB S2 is to help organisations understand how climate-related risks and opportunities affect enterprise value and future performance. Executive leadership, therefore, will want to understand how the insights from the significant initial investment in compliance can be used to inform strategy, capital, risk allocation and decision-making.

Organisations that derive the greatest value from the reporting process will be those that move beyond a pure compliance focus and use the underlying analysis to inform business strategy, strengthen resilience and identify opportunities for value creation. These organisations will be the ones who ask themselves the following questions:

• What do our climate-related risks and opportunities mean for the future of the business?

• How resilient is our strategy under different climate-related scenarios, and what are our strengths and weaknesses?

• Where are the greatest opportunities for growth, innovation, or competitive advantage?

• How should climate-related considerations influence our investment and capital allocation decisions?

• What actions should management take in response to the insights generated through the reporting process?
  

Over time, reporting maturity will be measured not only by the quality of disclosures, but by the extent to which climate-related considerations are embedded into decision-making across the organisation. A huge opportunity exists for corporate Australia to begin to approach sustainability reporting as more than just a compliance exercise, leveraging the insights generated to support strategy development, risk management, capital allocation and long-term value creation.

Author: David Pitts (pictured) – Partner, Sustainability Reporting Advisory, Grant Thornton Australia