Australian Sustainability Reporting Standards: Foundations and Future

In this article, we’ll take you through the voluntary standard AASB S1 General Requirements for Disclosure of Sustainability-related Financial Information that underpins AASB S2 and sets the foundation for future sustainability standards.

But first, climate standards under AASB 2 are now in place

On 17 September 2024, the law putting in place mandatory climate financial disclosures for many large Australian businesses and financial institutions received Royal Assent.

Mandatory climate reporting requirements under AASB S2 will be phased in over the next three years across three groups of reporting entities:

• Group 1 entities are the first reporting cohort required to prepare annual sustainability reports, for the financial year commencing on or after 1 January 2025.
• Group 2 entities are required to prepare annual sustainability reports for the financial years commencing on or after 1 July 2026.
• Group 3 entities are required to prepare annual sustainability reports for the financial years commencing on or after 1 July 2027.

For more detail on what entities are required to report on under AASB S2, see our earlier article.

IFRS S1: one sustainability standard to rule them all

To quickly recap, the Australian Sustainability Reporting Standards are based on the International Financial Reporting Standards (IFRS) sustainability standards. In June 2023, the International Sustainability Standards Board (ISSB) issued its inaugural sustainability standards:

• IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (the basis for AASB S1)
• IFRS S2 Climate-related Disclosures (the basis for AASB S2).

The IFRS foundation explains it concisely:

• IFRS S1: prescribes how a company prepares and reports its sustainability-related financial disclosures. It sets out general requirements for the content and presentation of those disclosures, so that the information disclosed is useful to primary users.
• IFRS S2: sets out supplementary requirements that relate specifically to climate-related risks and opportunities. If a company decides that a climate-related risk or opportunity could reasonably be expected to affect its prospects, the company is required to apply IFRS S2 in preparing its climate-related disclosures.

IFRS S1 is essentially the ‘sustainability standard to rule them all’. It requires an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term.

An entity’s sustainability-related risks and opportunities arise out of the interactions between the entity and its stakeholders, society, the economy and the natural environment throughout the entity’s value chain (AASB S1). These interactions can be direct and indirect and could include risks related to water use, human rights violations, biodiversity, etc.

S1 uses the same conceptual framework as S2 – i.e., a requirement for entities to provide disclosures around governance, strategy, risk management as well as metrics and targets. Essentially, S1 is the general requirements, with S2 (and eventually, S3, S4 and so on – more on that later) designed to be topic-specific.

Companies applying the IFRS sustainability standards are required to apply the ISSB standards (S1 and S2) together.

Why is AASB S1 voluntary?

The Australian Government committed to mandatory climate-related financial disclosures only (i.e., not broader sustainability reporting), at least initially.

The AASB consulted on several ways to implement the IFRS standards (including having one standard that would combine the relevant contents of IFRS S1 into one climate standard) and feedback was generally in support of having two standards to maintain international alignment.

Those Australian entities that prepare AASB S1 disclosures and also wish to be IFRS sustainability disclosure compliant will need to carefully review the IFRS S1 as there are some differences between AASB S1 and IFRS S1, particularly related to industry disclosures.

S3, S4 … what’s coming up for sustainability standards

As part of its 2024-26 work plan, the ISSB is in the process of researching disclosure about sustainability disclosures for risks and opportunities associated with:

• Biodiversity, ecosystems and ecosystem services including how they might build from relevant pre-existing initiatives, such as the Taskforce on Nature-related Financial Disclosures
• Human capital referring to a company’s own workforce and workers in its value chain, and its workforce and workers’ competencies, capabilities and experience, and motivations to innovate (not human rights more broadly).

The research projects will help the ISSB decide whether it should pursue standard-setting for disclosure requirements on some or all of these topics.

Beyond these two topics, it is plausible that future standards could cover ‘Inequality and Social-related disclosures’ as the Taskforce on Inequality on Social-related Financial Disclosures (TISFD) was launched in September 2024. The Taskforce’s role is to develop a global framework for companies and financial institutions to include within their public reports more effective disclosures about impacts, dependencies, risks, and opportunities related to social issues, including inequality.

The Climate and Sustainability Practice Committee will update the profession as sustainability reporting initiatives continue to develop.

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