Australia – Assurance of Climate-Related Financial Reporting

Introduction

Australian companies are entering a new era of mandatory climate-related financial reporting and assurance. By 2025, companies that meet two out of the three criteria (Revenue of AUD 500 Million or above; Gross assets of AUD 1 Billion or more; 500 or more employees) will be required to have their climate related financial information independently assured for the first time. More companies will be subject to this report every subsequent year. This significant change requires readiness from businesses, including the implementation of new systems and processes. Understanding the requirements for assurance, as well as the roles of key stakeholders, is essential for a successful transition to an assurance ready climate related financial reporting. EY recently released a whitepaper titled “Reporting ready: preparing for assurance of climate related disclosures”. This blog provides an overview of the key insights from the EY white paper.

The Scope of Assurance Requirements

The amendments to the Corporations Act mandate that companies obtain independent assurance for their climate-related disclosures. This new requirement will ensure that the disclosures meet regulatory standards and provide reliable information to stakeholders. 

Starting in 2025, the focus of assurance will be on governance, climate risk management, and greenhouse gas emissions, specifically Scope 1 and Scope 2. Over time, the assurance process will evolve, with assurance levels rising from limited to reasonable by 2030. This gradual increase in scrutiny will enhance the reliability of companies’ reported emissions. 

In addition to emissions, the assurance process will include an evaluation of how companies manage climate related risks and opportunities. Independent assurance will verify not only the accuracy of disclosures but also the effectiveness of governance structures in identifying and addressing climate risks and capitalizing on climate related opportunities. 

Limited assurance means a less extensive review, focused mainly on analytics and inquiries. Reasonable assurance, on the other hand, involves thorough testing of controls, data verification, and an in-depth examination of the information provided.

Steps for Assurance Readiness

To meet assurance requirements, companies need to ensure robust systems, processes, and internal controls. Here are a few important steps to get ready: 

1. Gap Assessment: Conduct an initial assessment to identify gaps in the current systems and disclosures. This will help determine where more detailed documentation or improved processes are required. 

2. Establish Robust Controls: Implement effective control mechanisms to manage disclosure risks. Companies should consider having documented policies, oversight processes, and training programs. Internal audits and oversight from boards will be crucial to ensure that controls are both effective and “auditable.” 

3. Process Documentation: Assure readiness requires proper documentation of all processes that contribute to climate related disclosures. This includes explaining methodologies used for estimations, as well as disclosing any assumptions that may impact results. 

4. IT Systems and Third-Party Dependencies: Companies must also assess their reliance on IT systems and third-party providers in the data collection and reporting processes. Critical systems should be identified, and control checks—such as user access management—must be aligned with broader organizational control standards.

Transition to Controls Audit Approach 

Historically, assurance for climate-related reporting has involved substantive audit procedures, relying heavily on manual processes. Moving towards reasonable assurance will require a shift to a “controls audit approach”. This means building by the company and maintaining an effective internal control environment that supports both financial and climate-related reporting. Integrating climate related data into standard risk management frameworks and performing internal audits will help streamline future assurance engagements.

Role of CFO and the Board 

The Chief Financial Officer (CFO) and the board play a pivotal role in preparing for assurance. The shift to mandatory climate related reporting requires close collaboration between sustainability and finance teams. The CFO and board must ensure that assurance processes are well integrated with other audit programs, driving connectivity between climate-related and financial disclosures. Clear structures and responsibilities within the company will help facilitate this integration.

Importance of Documentation and Governance 

In preparing for assurance, the governance of climate related risk and opportunity (CRRO) disclosures needs special attention. The complexity of climate reporting, including scenario analysis and resilience assessment, means companies must have proper governance and oversight over climate related information. 

Management must document every step—from methodologies and assumptions to external and internal validation of the models used. This kind of detailed process documentation will be essential for the audit process, particularly when moving towards reasonable assurance.

Conclusion 

Mandatory assurance of climate related disclosures in Australia is a transformative change for businesses. The move from limited to reasonable assurance would require a growing emphasis on accuracy, reliability, and the integration of climate related information into broader financial reporting. Companies must act now to assess their readiness and make necessary improvements to processes and controls. With robust systems, proper governance, and clear accountability, they can ensure compliance and maintain trust among stakeholders.

The involvement of CFOs, boards, and internal teams is key to making the assurance journey smooth and effective. Preparing early will not only make compliance easier but also strengthen the organization’s position in the competitive market of sustainable business practices.

Source: EY