1. Overview and objectives

This report summarises guidance from the Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB) on assessing the materiality of climate-related and other emerging risks using AASB Practice Statement 2 Making Materiality Judgements (APS 2). These risks are often discussed outside financial statements, but under APS 2, qualitative external factors—such as industry exposure and investor expectations—may make them material, even without direct numerical impact. Entities can no longer treat climate-related risks purely as corporate social responsibility issues; they must consider them in financial reporting. The AASB and AUASB expect directors, preparers and auditors to apply APS 2 when preparing and auditing financial statements. Although not mandatory, APS 2 reflects best practice under the International Accounting Standards Board (IASB) and entities are already facing litigation over insufficient disclosure.

2. Key recommendations

Entities should assess whether investors could reasonably expect that emerging risks, including climate-related risks, affect financial statement figures or disclosures. If so, they should determine what information is material for inclusion under APS 2. The report presents a decision tree outlining these considerations. Auditors should assess climate-related and emerging risks under ASA 315 (Identifying and Assessing Risks of Material Misstatement) and respond to any risks under ASA 330 (The Auditor’s Responses to Assessed Risks). They should also evaluate implications for accounting estimates and fair value assumptions under ASA 540 (Auditing Accounting Estimates and Related Disclosures).

3. What are climate-related risks and why are they different to other emerging risks

Climate-related risks encompass physical risks from acute or chronic natural disasters, changing climate patterns, and transition risks including technology, market, legal and policy changes. Other emerging risks, such as cybersecurity or regulatory change, may also be significant; however, investors have specifically identified climate-related risks as under-addressed in financial reporting. Investor organisations—including the Investor Group on Climate Change (IGCC), the Principles for Responsible Investment (PRI) and the UN Environment Programme Finance Initiative (UNEP FI)—have issued statements urging greater disclosure. Companies such as BlackRock, Vanguard and HSBC have called for improved climate-related transparency, and legal action against the Commonwealth Bank of Australia in 2017 highlighted the financial materiality of such risks.

4. What is AASB Practice Statement 2 Making Materiality Judgements and how does it apply to disclosing climate-related and other emerging risks in financial statements

APS 2 provides guidance for applying materiality judgements required by Australian Accounting Standards. Information is material if omitting or misstating it could influence user decisions, considering both quantitative and qualitative factors. APS 2 stresses that even small or zero-quantitative impacts may be material if investors view the information as important. Entities in sectors exposed to climate-related risks—such as financial services, energy, transport, materials, buildings, and agriculture—are likely to find relevant disclosure necessary. Many entities currently disclose climate-related information in directors’ or governance reports, but not in financial statements. Applying APS 2 would result in inclusion of such information in financial statements where relevant.

5. Financial reporting considerations

Climate-related and emerging risks may affect financial statements through asset impairment, changes in asset useful lives, fair value adjustments, credit losses, provisions, or contingent liabilities. Specific accounting standards impacted include:

AASB 101 – Entities may need to disclose how climate-related risks were considered in impairment calculations, even where no numerical impact occurred.

AASB 136 – Climate risks can indicate asset impairment or affect recoverable amount estimates, especially for long-lived or resource-based assets.

AASB 116 and AASB 138 – Risks may influence asset recognition and useful life estimates.

AASB 13 – Entities must disclose how climate-related assumptions affect fair value estimates.

AASB 9 and AASB 7 – Lenders and investors must consider how exposure to climate-affected sectors impacts expected credit losses and investment risk.

AASB 137 – Entities must disclose how climate-related risks influence provisions, contingencies, or obligations, including decommissioning costs or litigation exposure.

6. Assurance considerations

Auditors must consider how climate-related risks affect their risk assessments, audit procedures, and professional responsibilities. Under ASA 315, auditors evaluate how such risks interact with an entity’s environment, strategy, and controls. Under ASA 330 and ASA 540, auditors address potential misstatements and assess estimation uncertainty. Material climate-related disclosures are audited under ASA 700 (Forming an Opinion and Reporting on a Financial Report). Auditors must also review other sections of annual reports for consistency with financial statements, as required by ASA 720. If assurance is provided on climate disclosures outside financial reports, ASAE 3000 applies.