Getting materiality right in your climate disclosures

The Australian Accounting Standards Board (AASB) has released new educational guidance to help entities navigate the practical application of AASB S2 Climate-related Disclosures. While the guidance does not introduce new requirements, it provides clarity on how to apply judgement when determining material climate-related risks and opportunities (CRROs), and how to present decision useful information to primary users.

To help organisations get started, this article unpacks the guidance into three practical buckets:

1. Defining materiality
2. Identifying CRROs
3. Preparing disclosures.

Defining materiality

Understanding materiality is the foundation of climate-related reporting. Aligned with financial reporting, materiality should be assessed from the perspective of primary users, defined as existing and potential investors, lenders and creditors. These are the users whose decisions may be influenced by climate-related exposures.

Similarly, AASB S2 adopts the same definition of material information used in financial reporting: “Information is material if its omission, misstatement or obscuring could reasonably be expected to influence primary users’ decisions.”

This alignment is intentional as entities must ensure connectivity between financial statements and climate disclosures, particularly where climate risks have financial effects, such as impairments, provisioning, and expected credit losses.

Materiality drives disclosures, even if not explicitly listed in AASB S2

The guidance clarifies that if information is material, it must be disclosed even if it is not explicitly listed in the standard; conversely, if a listed disclosure requirement is not material, it need not be provided. As a result, climate reporting cannot be treated as a tick‑the‑box exercise. Entities are required to apply judgement and provide sufficient context to enable primary users to understand information that could influence their decisions.

Primary users include both existing and potential investors, lenders and creditors, meaning materiality cannot be assessed solely by reference to current capital providers.

Material information is that which could reasonably influence an investor’s decisions or assessment of the entity’s prospects, including matters investors may perceive as significant, even where the entity concludes the financial impact is limited. For example, where investors expect exposure to flood risk, disclosure explaining why the entity is not materially exposed may itself be material, as it can alter investor understanding and decision‑making.

Materiality is dynamic

Materiality is not static, and entities must reassess materiality judgements:

• Each reporting period; and
• When there is a significant event or change in circumstances, such as new regulation, supplier transition and market shift.

This reflects and captures the fast- evolving nature of climate-related risks.

Identifying Climate-Related Risks and Opportunities (CRROs)

AASB S2 requires entities to disclose climate-related risks and opportunities that could reasonably be expected to affect their cash flows, access to finance or cost of capital. This section of the guidance explains the sources of those risks and opportunities and how entities should identify them.

CRROs arise across the value chain

AASB S2 defines the value chain broadly: operations, suppliers, distribution channels, financing environment, and end-of-life stages.

Entities must consider CRROs arising anywhere along this chain, including through indirect interactions like supplier exposures to drought and customer exposures to transition risks.

Importantly, entities are only required to use reasonable and supportable information available without undue cost or effort. This proportionality mechanism helps avoid over-scoping.

CRROs stem from dependencies and impacts

The guidance emphasises that climate-related risks and opportunities arise from how the entity:

• Depends on resources and relationships (e.g., water availability, stable climate, skilled labour);
• Interacts with stakeholders, society, the economy, and the natural environment (e.g. local communities, suppliers, use of raw materials); and
• Impacts those resources and relationships (e.g., emissions, land use).

Understanding this interdependence enables entities to identify financially exposed areas of the business model.

Consider CRROs in aggregate

Individual CRROs appear small on their own, but their combined effect may create a level of exposure that is material to primary users. Assessing CRROs in aggregate helps reveal concentrations of vulnerability.

Material information on CRROs

Entities must disclose material information about climate-related risks and opportunities that primary users could reasonably expect to affect financial prospects over time. To determine what is material, this assessment must not only consider management’s view, but also the expectations of investors, lenders and creditors. This means that a risk may not be financially material to you, yet information about it may still be material if primary users expect exposure for entities in your industry.

Preparing disclosures

Once relevant CRROs are identified, the next step is to clearly and effectively communicate the material information related to them.

Use both quantitative and qualitative information

AASB S2 requires entities to assess materiality using a blend of quantitative (financial impact, emissions magnitude, asset exposure) and qualitative factors (industry context, business model, location, stakeholder expectations).

Quantitative information enhances credibility and allows primary users to assess scale and financial relevance.

Present information clearly and avoid obscuring material information

The guidance warns against obscuring material information through:

• Vague or boilerplate language;
• Poor structuring;
• Excessive immaterial detail;
• Inappropriate aggregation or disaggregation; and
• Scattering information throughout the report.

Climate disclosures must be clearly identifiable, connected to financial impacts, and organised for ease of understanding.

Commercial sensitivity exemptions are limited

Entities may omit commercially sensitive disclosures for climate-related opportunities and must state that they applied the exemption. This omission does not apply to climate-related risks, preventing the withholding of financially relevant risk information.

Final thoughts: Where to start

If your organisation is preparing for the climate reporting mandate, the AASB’s guidance offers a clear pathway:

1. Start with materiality and defining what matters to primary users.
2. Understand your business model and value chain, such as where climate interacts with your operations.
3. Identify and prioritise CRROs based on financial relevance and expectations of primary users.
4. Present clear, entity specific, decision-useful disclosures.

Climate reporting under AASB S2 isn’t simply about compliance, it’s about demonstrating resilience and clarity in a rapidly changing environment.