New Guidance from AASB on Climate Change Financial Reporting
Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB Practice Statement 2
The Australian Accounting Standards Board (AASB) working with the Auditing and Assurance Standards Board (AUASB), has now released guidance around the “Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB Practice Statement 2” to guide organisations in their financial reporting around the impacts of climate change. Even though this guidance is not mandatory, it now meets the International Accountants Standards Board best practice guidance for making the materiality judgements required when preparing general purpose financial statements in accordance with Australian Accounting Standards.
For most companies, climate-related risks and other emerging risks are currently predominantly discussed outside the financial statements, if at all. A recent survey by Board Agenda showed that 73% of the businesses either strongly agree, or agree, that ignoring sustainability would affect their company’s ability to create long term value, “a clear signal that the issue is high on the agenda of many boardrooms.”
However, as the AASB set out in 2017 in AASB Practice Statement 2 Making Materiality Judgements (APS 2), qualitative external factors such as the industry in which the entity operates, and investor expectations may make such risks ‘material’ and warrant disclosures when preparing financial statements, regardless of their numerical impact.
For example, any entities that decide not to include impairment testing on their books despite using that information in their own strategic planning (and the corresponding financial reports). This has led to lawsuits from shareholders around this disclosure. For example, Environmental Justice Australia v Commonwealth Bank .
The case argued that climate-related risks create material financial risks to the bank, it’s business and customers, and that the bank breached the Corporations Act 2001 by failing to give a true and fair view of its financial position and performance because of the inadequate disclosure of this risk. The case was withdrawn after CBA included several pages of discussions in their annual report that are based on the TCFD recommendations.
Key recommendations include:
- Whether investors could reasonably expect that emerging risks, including climate-related risks, could affect the amounts and disclosures reported in the financial statements and have indicated the importance of such information to their decision making
- What disclosures about the impact of climate-related risks are material to the financial statements in light of the guidance in APS 2.
Even if it is determined that there is no material impact, these organisations should still disclose why there is ‘no impact’.
Emerging risks such as data breaches and cyber-security are still relevant, but if investors have specifically identified climate-related risks as being used in their decision making, then that needs to be adequately addressed in annual reports and at AGMs as emerging best practice.