Key points:
- The first year of mandatory reporting is already providing valuable lessons for boards, management and audit committees.
- The biggest challenge is rarely the disclosure itself, but the quality of the data and evidence supporting it.
- As Group 2 entities prepare for reporting, now is the time to focus on controls and accountability rather than compliance alone.
For many organisations, sustainability reporting is now a reality.
The first wave of mandatory reporters is discovering what it takes to produce sustainability information that can withstand scrutiny from directors, regulators, investors and assurance providers. At the same time, the next wave of organisations are beginning to prepare for their own reporting obligations.
For boards and audit committees, the discussion is rapidly shifting beyond disclosure requirements and reporting frameworks. Instead, attention is turning to a more fundamental question:
Can management support what it is reporting? That question may ultimately prove more important than the disclosures themselves.
From storytelling to evidence
For years, sustainability reporting centred on ambition.
Net-zero commitments, climate strategies and future targets dominated the conversation. While these remain important, stakeholders are increasingly focused on something much more fundamental: evidence.
Can the organisation explain how key metrics were calculated? Are the assumptions underpinning disclosures documented and supportable? Is there a clear audit trail? Would the information withstand external assurance?
These are familiar questions for finance teams, auditors and audit committees. As sustainability reporting matures, organisations are finding that the same disciplines underpinning high-quality financial reporting are equally important in this new reporting environment.
Publishing a sustainability report is one thing. The real test is whether the organisation can stand behind its claims when they’re scrutinised by regulators, investors and assurance providers.
What Group 1 organisations are teaching us
As the first reporting cycle progresses, several common observations are emerging.
Many organisations found that collecting sustainability information was less difficult than expected. However, demonstrating the accuracy, completeness and reliability of that information proved significantly harder.
Early observations from the first reporting cycle are reinforcing this theme. While the quality of first-time sustainability reporting has generally been positive, there has been a clear focus on the need for organisations to support disclosures with reasonable and supportable information, clearly explain assumptions and uncertainties, and avoid disclosures that obscure material information.
The message is clear: sustainability reporting is increasingly being held to a standard that looks much more like financial reporting than voluntary corporate communications.
Group 1 entities have spent the past year learning what sustainability reporting looks like in practice. Group 2 entities now have the opportunity to learn from those experiences before facing their own reporting deadlines.
The role of the audit committee is changing
Sustainability reporting can no longer sit at the edge of the audit committee agenda.
The audit committee’s role is to oversee whether the reporting process is credible, connected to financial reporting and supported by appropriate oversight.
That means applying familiar financial reporting disciplines to sustainability information.
How robust are the controls? Who owns the information? How are assumptions challenged? What evidence supports management’s conclusions?
The answers to these questions often provide greater insight into reporting readiness than the disclosures themselves.
Audit committees do not need to become climate experts. They do, however, need visibility over accountability, significant judgements and the evidence supporting management’s reporting.
Connecting sustainability and financial reporting
One of the biggest lessons emerging from the first reporting cycle is that sustainability reporting and financial reporting can no longer operate in separate worlds.
Climate-related risks can affect asset values, future cash flows and long-term business strategy. As a result, stakeholders increasingly expect sustainability disclosures and financial reporting to tell a consistent story.
The organisations that do this well will build credibility. Those that do not may find themselves facing difficult questions from investors, regulators and assurance providers.
Looking ahead
As Group 2 organisations prepare for reporting, there is a temptation to focus heavily on disclosure requirements and compliance deadlines.
While those issues are important, as I have highlighted, the greater challenge often lies elsewhere.
The organisations that will navigate sustainability reporting most successfully are unlikely to be those with the most polished reports. They will be the organisations that have invested in governance, accountability, controls and data integrity.
History has shown that reporting credibility is rarely determined by what is disclosed. It is determined by how well an organisation can support its disclosures when challenged.
For audit committees, that may be the most important sustainability question of all.
AASB S2 Climate Reporting – Board guide to mandatory climate reporting
To support boards in preparing for AASB S2, we have prepared a Board guide to mandatory climate reporting. The guide provides a snapshot of the key disclosure requirements under AASB S2 and outlines practical actions boards can take to implement and document strong climate governance.
If you are in the process of preparing for mandatory climate reporting, and need advice on how to get started, we can support boards by providing guidance on AASB S2 governance expectations and advising on practical, proportionate approaches to strengthening climate oversight and accountability within existing governance frameworks.
