ASIC’s verdict on Australia’s first mandated sustainability reports under the CRFD

ASIC’s recent verdict on the first sustainability reports lodged under Australia’s mandatory climate-related financial disclosures regime (CRFD) sets the standard for entities’ reporting going forward. 

Australia’s Group 1 reporting entities are among the first in the world to prepare mandatory climate-related financial disclosures under AASB S2 Climate-related Disclosures (S2), which is closely aligned with the International Sustainability Standards Board’s IFRS S2. ASIC, Australia’s corporate, markets and financial services regulator, has now released a report on these first sustainability reports for the financial year ending 31 December 2025, giving guidance across each of the core reporting pillars and specific observations for wholly owned subsidiaries of multinational groups. The findings offer an early benchmark for entities in Australia and in other jurisdictions that will soon follow.

For now, ASIC is taking a facilitative approach, but its expectations are clear. As ASIC now plans to review a sample of the reports of Group 1 entities with a financial year ending 30 June 2026, entities should expect closer scrutiny, including of the records that support their sustainability judgements. Nor should entities expect significant relief: although Treasury has consulted on making the regime more efficient, and ASIC supports reducing regulatory burden, ASIC has signalled that the core reporting requirements should remain.

The message for reporting entities, including Australian subsidiaries of multinational groups, is to use ASIC’s feedback now to strengthen governance, data and processes ahead of the next reporting cycle.

This Insight outlines ASIC’s approach, its eight key action items, its guidance on each core disclosure area and additional considerations for subsidiaries of multinational groups.

ASIC’s approach to reviewing Sustainability Reports 

ASIC’s methodology gives context to its findings and signals how it may approach future compliance reviews as it moves from market-wide reviews towards closer supervision and ultimately, enforcement.

ASIC reviewed the sustainability reports of 20 listed and 20 unlisted entities, prioritising sectors with higher greenhouse gas emissions or greater exposure to climate-related risks and opportunities (CRROs), such as mining, utilities, manufacturing, banking and insurance. Its desktop review involved:

• analysing each entity’s business model, assets, operations and historical disclosures, using analytical tools to understand its sector and organisational context, including its potential CRROs; and
   
• comparing each sustainability report (including cross-referenced information and related information in the financial report) against the Corporations Act 2001 (Cth) (Corporations Act), S2’s core content requirements (governance, strategy, risk management, and metrics and targets) and overarching principles such as materiality, and assessing whether users were given sufficient information to make informed decisions.

ASIC did not review the sustainability records held by reporting entities or their auditors, or otherwise seek evidence to substantiate disclosures.  Entities should not assume this will continue. Future reviews are likely to test the records and judgements behind disclosures, so entities should maintain those records now on the basis that ASIC may ask to see them.

Key action items for reporting entities

ASIC’s eight ‘key action items’ for reporting entities to consider are summarised below:

Action 1: Explain how information in the sustainability report connects with the financial report, including: 

• information under cross-industry metrics such as the amount and percentage of assets or business activities vulnerable to climate-related risks or aligned with climate-related opportunities; 
   
• use of carbon credits to meet climate-related targets, and capital or operational expenditure on mitigation or adaptation activities; and 
   
• the current and anticipated financial effects of CRROs. ASIC identified one entity that recorded an impairment of an investment project in its financial statements linked to a disclosed climate-related opportunity but did not mention it in its sustainability report.

In practice, sustainability and financial reporting teams must work together to ensure consistent data and assumptions across both reports, and clearly explain any significant differences.

Action 2: Move towards disclosing quantitative information about the financial effects of CRROs and otherwise make clear why only qualitative information is provided 

A significant portion of entities described, but did not quantify, the current and anticipated financial effects of CRROs. S2’s proportionality mechanisms permit this where the effects are not separately identifiable or where measurement uncertainty is so high that quantitative information would not be useful, and, for anticipated effects, where the entity lacks the skills, capabilities or resources. However, the relief is not a complete exemption. An entity relying on it must still:

• explain why it has not provided quantitative information;
   
• provide qualitative information, including the affected line items; and
   
• generally provide quantitative information about the combined financial effects with other risks and factors (unless such information is not useful).

ASIC expects quantitative disclosures to increase as methodologies and processes mature, and Group 1 entities should expect the relief to become harder to rely on. Entities should plan now for how they will produce reliable quantitative information, whether as a single amount or a range. ASIC suggests a starting point: the anticipated financial effects of board-approved mitigation or adaptation plans may be measurable with more certainty in the early years.

Action 3: Be comprehensive when identifying CRROs 

When identifying CRROs, entities should consider past events, current conditions and forecast future conditions, and how they may be affected, directly or indirectly, across their value chain – for example, risks to international suppliers or to roads, railways and other infrastructure on which the business relies.

ASIC compared climate disclosures with entities’ earlier financial reports, ASX announcements and voluntary disclosures, and found extreme weather events that had previously affected and been disclosed by an entity but were not reflected in its sustainability report. Entities should expect ASIC to keep testing disclosures against other public materials, and should identify and remedy or explain any inconsistencies before lodging.

Action 4: Provide clear, effective and proximate disclosure of judgements, assumptions and areas of measurement uncertainty

Judgements, assumptions and sources of measurement uncertainty should be disclosed clearly and close to the information they relate to. A bare statement that information is ‘not material’ or of ‘low financial materiality’ is not sufficient. Entities should already have this reasoning in their sustainability records, so the task is largely to bring it into the report.

Actions 5–8: Get the basics right

• Targets: include targets the entity must meet by law or regulation, such as under the Safeguard Mechanism, in its ‘climate-related targets’ disclosures.
   
• Voluntary information: do not let additional, voluntary climate-related information obscure material climate-related financial information.
   
• Cross-referencing: ensure cross-referenced information is available on the same terms and at the same time as the sustainability report. Information behind a paywall, or on a webpage that can change, is unlikely to qualify.
   
• Disclaimers: disclaimers that conflict with the statutory framework and objectives of Chapter 2M of the Corporations Act, such as statements that users should not rely on the report for investment decisions, must not be used. 

Specific guidance for ‘core’ disclosures 

Governance and risk management

• Risk matrices: entities that rate CRROs using a risk matrix should define the ‘likelihood’ and ‘consequence’ ratings so users can understand how risks were assessed and how significant they are. 
   
• Nature, likelihood and magnitude of effects: entities should explain how they assess the nature, likelihood and magnitude of the effects of climate-related risks, as required by paragraph 25(a)(iii) of S2, including whether they used qualitative factors, quantitative thresholds or other criteria. Some entities did not.

Strategy 

• Pre- or post-mitigation basis: ASIC often found it difficult to tell whether a disclosed risk was inherent (before mitigation) or residual (after mitigation), and said disclosures could be improved by explaining the relevant assumptions and judgements. This comment suggests that ASIC appears to accept risks can be identified and assessed on a residual basis, provided that the entity explains its approach. It highlighted an entity that assessed a range of physical risks and explained the adaptation measures already in place and how they reduced its residual exposure, supporting its conclusion that it had no material physical climate-related risks.   
   
• Entities with no material CRROs: two Group 1 entities in ASIC’s sample reported no material CRROs, and their audit reports specifically highlighted the judgement that no CRROs could reasonably be expected to affect the entity’s prospects. ASIC intends to examine this area more closely in future, so entities reaching this conclusion should carefully consider potential CRROs over the short, medium and long term and document their reasoning.
   
• Common CRROs: the CRROs most commonly identified by reporting entities are set out below.

• Climate resilience:  Under the Corporations Act, entities must use at least two scenarios - one consistent with limiting warming to 1.5°C and one well exceeding 2°C. ASIC did not clarify whether it is enough to apply the 1.5°C scenario to transition risk and the higher-warming scenario to physical risk, or whether both must be applied to each. However, it emphasised that entities must explain which scenarios they used, why they are relevant to assessing resilience and whether they relate to transition or physical risks. ASIC also advised entities to be mindful of meeting the separate disclosure requirements for anticipated financial effects and climate resilience. While the subject matter is related, the former reflects the entity’s current plans and expectations while the latter shows how those plans would fare under each scenario.

To avoid obscuring material information and meet paragraph 22(b)(ii) of S2, ASIC highlighted as better practice an appendix setting out the key scenario analysis assumptions, such as carbon prices, emissions targets, Safeguard Mechanism assumptions and expected physical impacts like heat and flooding.

Metrics and targets

Cross-industry metrics, including greenhouse gas emissions: ASIC regards cross-industry metrics as central to one of the regime’s core policy objectives - making disclosures comparable across entities.

Disclosures were generally consistent where S2 prescribes a measurement methodology (such as for scope 1 and 2 emissions, which were also more reliable because they were subject to limited assurance) or a specific variable (such as an internal carbon price). Elsewhere, comparability was limited, with inconsistent approaches to, and in some cases no disclosure of, the other required cross-industry metrics, including:

• the amount or percentage of assets or business activities vulnerable to climate-related transition or physical risks, or aligned with climate-related opportunities; and
   
• the amount of capital expenditure, financing or investment deployed towards CRROs.

S2 gives entities flexibility in how they approach these metrics, so some variation is inevitable. To make their figures useful, entities should explain the methodologies and judgements behind any disclosed cross-industry metrics, and be able to support those judgements with their records.

More than 80% of entities in ASIC’s sample relied on the first-year transitional relief for scope 3 emissions. Entities using this relief should clearly say so and should prepare now to report scope 3 emissions from year 2.

Identifying material information

Information about CRROs is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of primary users of general purpose financial reports. ASIC observed that information may be material even if it does not meet a specific financial materiality threshold, and that some entities excluded information as immaterial without explaining the judgements behind that view. It highlighted as better practice an entity that disclosed qualitative information about CRROs that fell below its financial materiality threshold. Entities should clearly disclose, close to the relevant information, the judgements made in identifying material information.

Additional considerations for subsidiaries of multinational groups 

S2’s one-size-fits-all approach creates challenges for Australian subsidiaries of multinational groups, whose climate strategy, governance, risk management and data are typically considered and managed at the group level.

Continuing uncertainty for multinationals – primary users: S2 disclosures must be useful to primary users – an entity’s existing and potential investors, lenders and other creditors. Information is material if it could reasonably be expected to influence their decisions about providing resources to the entity. ASIC’s report does not resolve how an Australian subsidiary whose sole shareholder is its foreign parent, and which has no reasonably foreseeable need for external capital, should identify its primary users. Too broad a view risks disclosures detached from the entity’s actual circumstances; too narrow a view risks omitting information material to the investors, lenders and creditors who do rely on its reports.

In the meantime, entities should ensure they maintain appropriate records to substantiate their approach to identifying their primary users.

Governance and risk management: explain whether and how the parent’s strategy, targets, risk assessments and governance processes apply to the local reporting entity.

Group climate targets: clearly explain how group and entity-level climate targets apply to the reporting entity and how they are being implemented.

Reporting entities should keep this feedback from ASIC in mind as they prepare their sustainability reports.