Making Sustainability Reporting sustainable: A case for Tier 2 Reporting under AASB S2

Key points

• Treasury is currently consulting on improving the efficiency of mandatory climate-related disclosures.
• Australia’s current climate reporting framework risks creating unnecessary cost, complexity and compliance pressure for private businesses
• A Tier 2 sustainability reporting model would offer a clearer and more proportionate path forward, aligning climate disclosures with Australia’s existing financial reporting framework while maintaining useful information for stakeholders.
• Pitcher Partners is advocating for reform that supports transparency without overburdening business, including clearer proportionality guidance, adjusted implementation timelines and practical relief for smaller entities captured by the regime.

Budget-time announcements to enhance the efficiency of climate-related disclosures are a welcome commitment to setting a sustainable baseline for long-term sustainability reporting.

A recap of how we got here

• Australian entities lodging under Chapter 2M of the Corporations Act 2001 are captured by mandatory climate reporting requirements. These began phasing in based on size from years beginning 1 January 2025, and will apply to all lodging entities above size thresholds from years beginning 1 July 2027.
• The statutory requirement is for reports to be prepared under AASB S2. Disclosures include a full carbon emissions calculation for Scope 1 and 2 emissions, as well as significant governance, strategy, risk management disclosures and completion of two scenario analyses utilising formal climate models. Scope 3 emissions disclosures are required from the second year of reporting.
• Limited assurance (a review) is required on governance, selected strategy disclosures and Scope 1 and 2 emissions from the first year of reporting. In the second year, limited assurance is required on all disclosures. From the fourth year of reporting, reasonable assurance (an audit) is required on all disclosures.
• Following initial implementation, the Treasury has opened consultation on improving the efficiency of climate-related disclosures. Included in this request are options that remove/delay the transition to reasonable assurance, simplify implementation guidance and standardise Scope 3 data gathering. Pitcher Partners has made its submission on these points, and on implementing Tier 2 simplified disclosures for private entities.  

The current landscape

The majority of Group 1 sustainability reports will be prepared, assured and lodged by 31 October. But is the system itself currently sustainable?

The Government’s original goals for the mandatory sustainability reporting framework remain noble and appropriate:

• To enhance consistency and comparability of climate-related information;
• To provide information to manage Australia’s climate risk, and;
• To set a framework for future sustainability disclosures.

However, significant costs on initial implementation borne by Australia’s largest companies raise the question – are the costs and effort to meet compliance requirements sustainable and scalable across all large companies? And can it be scaled across future sustainability reporting areas?

Proportionality: Embedded, but unclear

Treasury’s request for consultation includes clarifying proportionality mechanisms within AASB S2. In our experience, they are unclear and difficult to apply. They are reliant on an entity’s assessment of “undue cost and effort” and what would be “commensurate with the skills, capabilities and resources that are available to the entity”. These judgements are heavily reliant on application of internal expertise and judgement. Ironically, the entities with the least internal resources to apply to this issue, are also the least well-equipped to make and defend these judgements to auditors, regulators and other stakeholders. They significantly weaken implementation certainty for those entities who should theoretically benefit the most.

Proportionality does not reduce the disclosures required, but asks entities to self-assess what is “undue cost and effort” – with that judgement subject to auditor and regulator scrutiny. Detailed disclosures under AASB S2 require most directors to spend significant time and invest in external expertise, in order to faithfully support a declaration that “reasonable steps” have been taken. This challenge further grows when modified liability settings end.

This is fundamentally different to Australian financial reporting requirements.

So what can be done about it? We propose aligning the well-worn concept of public accountability into the world of sustainability reporting.

Public accountability: efficient and sufficient disclosures

Tier 1 and Tier 2 reporting in sustainability reporting would materially impact efficiency of climate-related disclosures. We propose the concept of public accountability is applied, as already operating under AASB 1053. Tier 2 reporters (those without public accountability) would operate under a simplified disclosure regime, similar to AASB 1060 for financial reporting.

A simplified disclosure regime brings much-needed clarity to what is sufficient and appropriate disclosure, while acknowledging different user needs. Clear guidance on sufficient disclosures for non-publicly accountable entities would significantly improve the efficiency of adopting and complying with mandatory climate-related financial reporting requirements. Efficient compliance also means more time, energy and effort to make real changes toward a sustainable Australia.

Public vs Private: the reporting divide

Many public companies have been reporting on sustainability for years. Prior to the application of mandatory climate reporting, in 2023, 70% of the ASX 200 already reported under the voluntary TCFD regime, and 50% already provided Scope 3 emissions. Almost all listed entities, even those not directly reporting climate-related information, are reporting key governance, strategy and risk management strategies as part of their reporting requirements. Public companies transitioning from TCFD to AASB S2, or even first-time reporting, can draw on their existing reporting structures, disclosures and capabilities built up over years.

Non-publicly accountable entities reporting under Simplified Disclosure frameworks in Australia have never been required to disclose detailed governance, strategy and risk management information. AASB S2 therefore requires significant additional reporting in these areas, which is disproportionately high compared to compliance requirements and disclosures mandated around all other business risks.

A technical solution: Tier 2 sustainability reporting

A higher level of disclosure in reporting for entities with public accountability is an established concept within financial reporting.  AASB 1053 clearly states which entities are required to produce Tier 1 compared to Tier 2 reports. Tier 2 reports prepared under AASB 1060 are required to meet all the same standards for recognition and measurement of balances. However, a significant list of disclosures are not required for Tier 2 entities or are simplified to limit the reporting and assurance burden. This aims to reflect the relative cost-benefit for Tier 2 entities and their stakeholders in producing and assuring this information.

In the Basis of Conclusions to AASB 1053, standard-setters specifically decided not to impose Tier 1 status on entities that could seem “important” based on size, rather than public accountability. Their rationale was (extracted from AASB 1053.BC34):

1. size thresholds are arbitrary;
2. using public accountability (as defined by the IASB) for the for-profit sector in Australia would be consistent with international requirements;
3. large non-publicly accountable entities would still be required to prepare high-quality general purpose financial statements under the requirements of Tier 2; and
4. keeping size thresholds that identify ‘important’ entities up-to-date would entail additional maintenance and monitoring costs.

The above is strikingly different from the current sustainability reporting approach. Size determines your phase-in.

AASB S2: One size fits all

In contrast, AASB S2 is a blanket set of requirements for all entities. Disclosure requirements are the same regardless of public accountability status. These differences significantly increase compliance costs for entities without public accountability, cause significant disruption to business processes, and impose an undue reporting burden on entities without public accountability.

Size-related considerations only factor into the phase-in of climate-related financial reporting. Once phase-in is complete, a privately owned company just exceeding revenue and employee thresholds would currently require the same number of disclosures as an ASX200 company. Similarly, a company with one owner and no external debt must disclose significant and complex information without dependent users. As written, AASB S2 does not adequately address this structural inequity in cost-benefit across different entities.

Australia is a clear leader in sustainability reporting, however our one-size-fits-all approach across publicly traded and privately held companies is inconsistent with our global neighbours. It is also misaligned to long-held Australian financial reporting concepts.

Our closing thoughts

We welcome the other options raised by Treasury in relation to adjusting assurance settings, practical guidance on applying proportionality and clearer guidelines on Scope 3 emissions. We believe our proposal works in parallel with these changes, further enhancing efficiency gains, without a material loss of information for users reliant on external financial reporting.

We also encourage consideration of adjusting timelines for implementation of Group 2 and Group 3 while consultation is undertaken and adjustments to the standards are formalised. Many Group 2 and Group 3 entities have already started their compliance journeys with AASB S2, so clear and proactive communication of the future of the regime is needed before Christmas 2026 to avoid unnecessary costs.

We welcome the doubling of Group 3 size thresholds to $100m revenue and $50m assets for sustainability reporting. We acknowledge it provides welcome relief for smaller Group 3 entities. We encourage a timely announcement of the effective date to avoid unnecessary costs and efforts for Group 3 entities that would benefit from the change.

Understanding and managing Australia’s climate-related risks and opportunities is a delicate and complex problem. Collaboration is an essential part of any solution. We welcome the consultation efforts of government to increase efficiency. We will continue to fiercely advocate for a strong, resilient and sustainable Australian middle market. Now and into the future.