Summary

• The sustainability reporting regime under Chapter 2M of the Corporations Act 2001 (Cth) is expanding beyond the largest entities, with Group 2 entities commencing reporting for financial years from 1 July 2026 and Group 3 entities from 1 July 2027.
• ASIC has shared early observations arising from the initial Group 1 sustainability reports which will be useful for Group 2 entities and Group 3 entities.
• Many Group 2 and Group 3 entities are transitioning from limited or voluntary ESG reporting to a mandatory, audited and enforceable regime. This creates immediate challenges in relation to data availability, governance maturity and internal capability.
• Sustainability reporting is no longer a standalone disclosure exercise but will require integration into financial reporting, risk management and broader operational decision-making processes.

Background

As a brief recap:

• Group 2 entities are those required to lodge financial reports under Chapter 2M and meet two or more of the following: (a) over 250 employees; (b) over $500 million in consolidated assets; or (c) over $200 million in consolidated revenue. Group 2 entities also include NGER reporters, registered schemes, registrable superannuation entities and retail corporate collective investment vehicles.
• Group 3 entities are those required to lodge financial reports under Chapter 2M and meet two or more of the following: (a) over 100 employees; (b) over $25 million in consolidated assets; or (c) over $50 million in consolidated revenue.
• A unit trust that is not a registered scheme is not automatically caught by the regime as it will depend on whether the trust is an entity that has a Chapter 2M financial reporting obligation.
• A partnership is not required to prepare financial reports under Chapter 2M and is therefore generally not a sustainability reporting entity.

For a detailed look into the background of the sustainability reporting regime, please read our previous article – From Voluntary to Vital: The Shift to Mandatory Sustainability Reporting (link).

This outlines the key aspects of the regime, including requirements for climate statements, directors’ declarations and consequences of breach, which we will not cover here.

Early Lessons from first year reporting

ASIC observations

ASIC has published observations based on a review of selected Group 1 reports lodged for the financial year ended 31 December 2025. These observations are focused on several themes:

• ensuring disclosures are organisation specific rather than relying on generic statements;
• clearly explaining governance arrangements and board oversight;
• demonstrating robust climate scenario analysis;
• connecting climate risks to financial impacts; and
• providing transparent explanations of assumptions, methodologies and material judgements.

These early signals suggest that the regulator is looking beyond compliance as a tick-box exercise and is instead focused on whether users are being provided with high quality and decision useful information that complies with the Corporations Act and Australian Sustainability Reporting Standard AASB S2 (Climate-related Disclosures).

Specific Takeaways

As an overarching comment, ASIC has commended reports that use tables, diagrams and other visual aids to present information and increase readability for the end user.

Specific observations include:

• No conflicting disclaimers: Reporting entities are not allowed to use disclaimers that conflict with the statutory framework and objectives of Chapter 2M sustainability reporting as this may confuse, or even mislead those reading the report.
  • Example of prohibited disclaimer: A disclaimer indicating users should not rely on the information in the sustainability report to make investment decisions, or states the entity took no responsibility for the accuracy or completeness of certain information.
• Reasonable supportable information: Reporting entities must be mindful that the ‘reasonable and supportable’ information available to them to identify climate-related risks includes information about ‘past events, current conditions and forecast future conditions’.
  • Example: ASIC identified instances where, although assets or operations of reporting entities were previously disclosed as financially impacted by extreme weather events in prior financial years (based on prior financial reports), entities had not identified, or not disclosed information about, similar risks impacting prospects over the short, medium or long term (or related risk mitigation activities).
• Disclosure of assumptions and areas of measurement: Reporting entities must ensure the disclosure of judgements, assumptions and areas of measurement uncertainty are clear, effective and proximate.
  • Example: ASIC wants entities to avoid instances where users of the report would be required to draw their own conclusions about why information was included or disclosed in a particular way. For example, regarding how the entity had applied the proportionality mechanisms in AASB S2. Clear disclosure of assumptions and sources of estimation uncertainty supports users to understand the basis for forward-looking information.
• Additional voluntary climate disclosures: Reporting entities must ensure that the disclosure of additional climate-related information does not obscure the material climate-related financial information that must be disclosed under AASB S2.
  • Example: ASIC wants entities to avoid instances where material information in the sustainability report is not clearly distinguishable from additional, voluntary climate-related financial information. While the inclusion of additional climate-related information that is not specifically required by AASB S2 may be necessary or helpful to ensure the fair presentation of the sustainability report, including additional climate-related information beyond this may pose the risk of obscuring material information. Index tables are useful for setting out the location of information within the sustainability report.
• Cross-referencing per AASB S2 and ASIC RG 280: If a reporting entity cross-references another report prepared by the reporting entity, ASIC encourages the reporting entity to lodge that other report with its sustainability report (if it has not already been lodged).
  • Example of actions to avoid: Cross-referencing information contained on websites or in reports that were not published by the entity, or entities failing to precisely specify the part of the other report to be incorporated. ASIC’s view is that a sustainability report can only cross-reference to another report published by the entity if it is available on the same terms and at the same time as the sustainability report.
• Analysis of climate-related target: Reporting entities must carefully consider whether they have a ‘climate-related target.’ The definition of ‘climate-related targets’ in AASB S2 extends to targets the entity is required to meet by law or regulation, including greenhouse gas emissions targets (such as the Safeguard Mechanism).
  • Example: ASIC observed varied approaches to the ‘climate-related targets’ disclosure requirements, particularly how an entity determines what constitutes a climate-related target for the purpose of AASB S2. Per AASB S2, climate-related targets are ‘quantitative and qualitative climate-related targets an entity has set to monitor progress towards achieving its strategic goals, and any targets it is required to meet by law or regulation, including any greenhouse gas emissions targets’.

ASIC expects to publish further observations in the second half of 2026.

Future regulatory risk

The new regime significantly increases the potential for regulatory scrutiny and legal exposure, particularly once the transition period is over and the directors’ declarations from 1 January 2028 will need to confirm full compliance with the Corporations Act and AASB S2 requirements rather than merely “reasonable steps” to ensure that the report complies.

Reporting entities will be subject to:

• ASIC oversight, including potential enforcement action for misleading or inaccurate disclosures;
• greenwashing risk, particularly if sustainability claims are not appropriately supported by evidence; and
• increased director accountability, particularly from 1 January 2028 when declarations must confirm full compliance rather than “reasonable steps”.

Given that many entities are transitioning from voluntary frameworks, there is a heightened risk of inconsistency or error during early reporting periods. ASIC have indicated its initial approach will be pragmatic and proportionate; however it is important to ensure that reporting entities make best use of this transition to develop systems for proper compliance and to upskill their directors as needed.

Relief applications

ASIC have released a public register of selected sustainability reporting relief decisions that disclose certain instances where entities have been granted relief from sustainability reporting requirements. ASIC retains discretion under the Corporations Act to determine relief applications. If your reporting entity is considering whether to lodge a relief application, we would recommend lodging this as early as possible and would be pleased to discuss with you how best to approach this.

Commercial and Strategic considerations for Group 2 and Group 3 Entities

Beyond the compliance obligations of the sustainability reporting regime, it also creates potential commercial and strategic opportunities for Group 2 and Group 3 entities, including:

• (Enhanced access to capital) Robust sustainability reporting can improve credibility with banks, investors and lenders that facilitates access to ESG-linked financing that potentially reduces the cost of capital.
• (Supply chain and commercial opportunities) Large corporates increasingly require ESG data from their suppliers, making robust reporting capabilities essential for retaining and securing new contracts. Global companies such as IKEA and Patagonia require suppliers to meet strict environmental and emissions reporting standards meaning that entities without robust sustainability reporting may be excluded from key supply chains.
• (Improved risk management and resilience) Climate-related disclosures and scenario analysis help identify financial risks and opportunities early enabling better strategic planning and long-term business stability.
• (Competitive positioning and reputational value) Entities that adopt high-quality sustainability reporting can differentiate themselves in the market, strengthen stakeholder trust and enhance brand value.

From a risk perspective, climate change is now a material financial risk, with real-world events such as Australian bushfires, Canadian and North American wildfires and global flooding already impacting business operations, supply chains and asset values. These risks are expected to increase with climate-related losses projected to reach an average of 3.3% of asset value annually and up to 28% in high-risk scenarios if unmitigated (S&P Global Sustainable1 Physical Risk Exposure Scores and Financial Impact, November 2023).

What organisations reporting next should learn

In conclusion, companies that will enter the reporting regime in future phases have an opportunity to benefit from the experiences of first-wave reporters.

The past months suggest several priorities:

• begin data collection well before reporting deadlines;
• involve finance, risk and sustainability teams early;
• document materiality assessments thoroughly;
• strengthen governance and board oversight; and
• focus on organisation-specific disclosures rather than generic climate narratives.

In addition to starting the process of reporting early, entities should take note of the following key takeaways:

1. (Directors’ accountability) all directors should have a solid understanding of the entity’s requirements under the Corporations Act and AASB S2 to avoid non-compliance and minimise risk when required to sign off on the sustainability report.
2. (Retain key documentation and evidence) the RG 280 recommends that sustainability report must include evidence-based sustainability records which are formed from internal documentation. We suggest retaining all documents that may be used as sustainability records (as defined in section 9 of the Corporations Act).
3. (Timing) note that ASIC requires the sustainability report to be disclosed with the auditor’s report within three or four months of the end of financial year. The report will be lodged with ASIC along with the financial reports and directors report.
4. (Scope 3 Risks) on a practical basis, it is difficult for entities to control and measure scope 3 greenhouse gas emissions (being emissions not generated or arising from goods or services purchased directly by you). To assist with overcoming this, we recommend revisiting contractual agreements with parties that may have a material impact on the entity’s sustainability report. The contractual provisions should provide for the reporting entity to have access to relevant and accurate data from the contracting parties as a key requirement.
5. (Start Relief Applications Early) ASIC have recommended that all entities applying for reporting relief apply as soon as possible to avoid refusal due to insufficient time for ASIC to review the application.

Please contact the authors if you have any questions.

This article has been written by Thomas Kim, Partner, Kenneth Lee, Special Counsel and Bilal Khan, Law Graduate.