Entities gearing up to commence reporting climate-related information in their annual financial reports should do so with the assurance requirements in mind. The aim is to foster stakeholder confidence in this new dimension of non-financial reporting and preparing in advance for the scrutiny of audit will be key.
Entities that prepare and lodge financial statements under Chapter 2M of the Corporations Act 2001 and meet certain size thresholds will have to prepare a sustainability report for inclusion in the annual financial report. Such a sustainability report will consist of:
- a climate statement, prepared under Australian Sustainability Reporting Standards
- notes to the climate statement
- a directors’ declaration.
Like financial reports, sustainability reports will be subject to audit processes which involve the independent validation of sustainability-related disclosures to enhance the trustworthiness of this information. The difference is that the data used to make these disclosures is qualitatively different compared to traditional financial data, and the processes to manage it are not as mature.
The standard-setters in Australia have acknowledged and reflected this in the phasing in of the assurance requirements over climate-related disclosures. The Auditing and Assurance Standards Board (AUASB) recently issued ASSA 5010 Timeline for Audits and Reviews of Information in Sustainability Reports which outlines the extent to which climate disclosures must be reviewed (limited assurance) or audited (reasonable assurance) during the period 1 January 2025 to 30 June 2030. From 1 July 2030, the Corporations Act 2001 requires reasonable assurance for all mandatory climate disclosures.
In the first year of mandatory reporting, limited assurance is only required over a few aspects of the disclosures required by AASB S2 Climate-related Disclosures, being Scope 1 and Scope 2 emissions, governance and selected paragraphs of the strategy disclosures related to risks and opportunities.
As shown in Table 1 below, Group 1 entities with financial years beginning between 1 January 2025 and 30 June 2025 will be subject to the Year 1 provisions twice. That is, they will have two years of partial limited assurance. Reporting of Scope 3 emissions is required for years commencing 1 January 2026 to 30 June 2026 for these entities, with no assurance required in this year (being the second year in which Year 1 provisions apply).
Partial limited assurance will progress to full limited assurance in either the second or third year of reporting, depending on an entity’s financial year. Reasonable assurance over all mandatory climate disclosures is the end state and will be required from either the fourth or fifth year of reporting.
Importantly, in the first year (and second year for some Group 1 entities), no assurance is required over information related to climate resilience / scenario analysis, transition plans, risk management and metrics and targets. However, this does not mean the disclosures are not required. Entities must still include this information in their sustainability reports as required by AASB S2, they will just not have to be reviewed or audited although entities may choose to do so.
The implementation of the assurance phasing requirements will be monitored by the AUASB on an ongoing basis to assess if any revisions are needed.
LEGEND:
- None = disclosure is required but is not subject to assurance
- N/A = disclosure is not required
- Limited = limited assurance (review engagement)
- Reasonable = reasonable assurance (audit engagement)
This article was first published in Issue 22 of the The Bottom Line.