Where to present mandatory climate disclosures within the annual report?
Where to present mandatory climate disclosures within the annual report?
Deadlines for presenting the first set of mandatory climate-related disclosures is fast approaching, and entities need to consider where this is best placed in the annual report.
If you have previously not presented any Environmental, Social and Governance (ESG) information in your annual report, it’s a ‘no-brainer’ - have a separate section for mandatory climate-related disclosures. But what if you have spent years enhancing ESG disclosures in your annual report? You will be facing a dilemma:
- Keep the mandatory climate-related disclosures separate, or
- Weave them into your existing ESG report?
In this article, we explore the Australian Securities and Investments Commission (ASIC) guidance, RG 280 Sustainability reporting on this issue. In a nutshell, you have a choice, but there are some necessary guardrails.
Note: This article refers to ‘climate-related disclosures’, but we use the term interchangeably with the ‘mandatory sustainability report’ required under Chapter 2M of the Corporations Act 2001.
Key facts about mandatory climate-related disclosures
The mandatory sustainability report:
- Is the fourth report required as part of the annual report, alongside the annual financial report, directors’ report and auditor’s report (to be lodged with ASIC)
- Contents include the climate statements for a financial year (essentially AASB S2 Climate-related Disclosures), notes to the climate statements, and the directors’ declaration about the climate statements and notes
- Must be audited in accordance with Div 3 of Part 2M.3 of the Corporations Act 2001
- Is the only report that is the subject of the transitional modified liability settings for certain protected statements by directors and auditors.
As the modified liability settings only apply to the mandatory climate-related disclosures, it is crucial that entities distinguish between the mandatory disclosures required by Chapter 2M, and any voluntary disclosures or information provided about other sustainability topics.
For example, entities may wish to voluntarily disclose sustainability information by applying all or parts of AASB S1 General Requirements for Disclosure of Sustainability-related Financial Information, or by applying sustainability reporting standards other than AASB S1 and AASB S2. This additional voluntary information must be clearly differentiated from mandatory disclosures so as not to jeopardise any protections for directors and auditors under the modified liability settings.
What does ASIC say?
ASIC has not been prescriptive about exactly where to place the mandatory climate-related disclosures in the annual report.
However, it notes that these mandatory disclosures must be clearly identifiable and not obscured by additional information (see AASB S2, Appendix D, paragraph 62). This will reduce the risk of users being misled about which disclosures are mandatory under AASB S2 and which are not and facilitate consistent and comparable climate-related disclosure between entities.
Option 1 - Prepare a standalone report
Preparers may include a separate report containing only the mandatory climate-related disclosures required under Chapter 2M and AASB S2. ASIC recommends that this be clearly labelled as containing the mandatory disclosures. For example, it could be referred to as ‘Climate-related financial information required under section 292A of the Corporations Act 2001 and AASB S2’.
Option 2 - Merge into existing ESG reports with an appropriate index
ASIC will also accept this approach, provided that the climate-related financial information required under the Corporations Act 2001 and AASB S2 is clearly identified and not obscured.
Entities can achieve this by using an index table that is prominently located in the sustainability/ESG report (for example, on the front page):
- Identifying the climate-related financial information required under s292A of the Corporations Act 2001 and AASB S2, and
- Cross-referencing each mandatory disclosure to paragraph numbers in the sustainability report.
A system of indexing and cross-referencing is vital when entities choose to merge the mandatory climate-related financial information with voluntary sustainability disclosures. This is because:
- The directors’ declaration and the auditor’s report, required under sections 296A(6) and 307AA respectively, both relate only to the mandatory climate-related financial disclosures. Without this, directors and auditors are at risk of inadvertently declaring or opining on voluntary disclosures.
- The modified liability settings only apply to mandatory climate-related financial disclosures. Failing to clearly distinguish these from voluntary ones can have implications for director and auditor protections during the transition period.
BDO comments
Our preference is for option 1, i.e. to have a separate report. By practically distinguishing mandatory disclosures from voluntary ones, it is easier for users to understand what information is audited and what isn’t, quicker for auditors to determine what information they have to audit, and less risky for directors to make their declarations regarding the mandatory disclosures. Keeping mandatory climate-related financial disclosures separate also reduces the chance of the protections from the modified liability settings being compromised.
More information
Our previous article provides more information about ASIC's regulatory guidance for sustainability reporting, and our website contains additional resources for sustainability reporting and measuring your carbon footprint.
Need help?
With mandatory sustainability reporting imminent, entities must ensure they make the right presentation choices because rework in future years could be a costly exercise. Our sustainability reporting experts are always available to assist with your sustainability reporting journey. Contact us for help.
