Beyond sustainability reports: AASB S2 now critical for investment and asset management decisions
AASB S2 Mandatory Climate Reporting goes beyond simply writing sustainability reports and is now critical for property funds’ investment and asset management decisions, according to climate reporting specialist, Thierry Lotrian, CEO and Founder of Climate & Decisions.
Mr Lotrian, presenting via a Property Funds Association of Australia (PFA) webinar on AASB S2, said climate exposure needs to be connected to valuations, rental income, insurance, capex, financing and investor returns. “As a fund manager and asset owner, you need to understand how the climate risk will affect asset value, investment returns, distributions, and capital allocation today and in the future.
“If you are responsible for an entity and the governance of this entity, you need to have clarity around who will oversee climate risk.”
Putting a system in place and establishing reliable data sources is critical, he said. “That is supporting evidence today and in the future. It’s a system, it’s not something that you do as a one-off.
“It has to be a new way of working that will transform the way you make decisions and reconsider trade-offs between climate and also financials, property valuation and technical advice.
“The key question for funds is: how should climate exposure inform due diligence, and valuations?”
Mr Lotrian said there are four connected pillars to keep in mind:
- Governance: board oversight and clear accountability across managers, funds, entities and asset teams
- Strategy: understanding physical and transition risks and their implications for the business
- Risk management: incorporating material climate risks into investment, asset-management and enterprise-risk processes
- Metrics and targets: emissions and other relevant measures, supported by reliable data and controls
Mr Lotrian warned against treating reporting as a sustainability-team-only exercise. “Finance, risk, strategy and asset teams should participate from the start.”
Fund boundaries and asset-level data need early attention
Reporting boundaries are particularly important for joint ventures and complex fund structures. Mr Lotrian recommended clarifying which entities and assets are in scope before collecting information, and engaging auditors early rather than waiting until disclosures are nearly complete.
He also emphasised considering the end-to-end value chain: construction materials and embodied emissions, contractors, critical suppliers, property services and tenant-related information.
“Data is the key to all of that. If you don’t have the right data, you will struggle to produce reliable, decision-useful disclosures and support them with evidence. So you need to invest in data as part of this. Carbon accounting and physical risk is a bare minimum.”
The value chain must also consider tenants, and an asset’s full life cycle. “Tenants have new expectations. They will look at energy consumption. They want to pay less, of course, and try to have the best occupancy at the least price, but they are a lot more aware and interested in green buildings.”
Climate exposure must translate into financial effects
The presentation connected climate pressures to property economics:
| Climate pressure | Potential consequences |
| Floods, storms and extreme heat | Damage, disrupted access and operations, tenant impacts and resilience expenditure |
| Energy transition | Electrification, retrofit costs, grid constraints and capex requirements |
| Insurance and lender responses | Higher premiums, changes in coverage and financing costs |
| Tenant and investor expectations | Occupancy, rental appeal and demand for efficient, resilient buildings |
| Regulation and policy changes | Transition costs and changes in asset competitiveness |
Mr Lotrian said asset owners need to trace these effects into profit and loss, balance sheets and cash flow over different time horizons. Scenario analysis should inform resilience and adaptation decisions, rather than being a standalone reporting exercise.
“Property funds need to connect all these dots together, understand how they could impact the economics of your business, and then how they actually impact your balance sheet and your cash flow down the track”, he said.
Regulatory expectations: more evidence
Mr Lotrian said there is now more clarity on ASIC’s expectations one year into the mandatory climate reporting regime. “ASIC’s review of the first mandatory sustainability reports found a marked improvement in the quality, quantity and consistency of climate-related financial information compared with earlier voluntary reporting.”
“It also identified opportunities to improve forward-looking disclosures, the transparency of assumptions and judgements, and the quantification of financial effects.”
He said ASIC has emphasised clear disclosure of relevant assumptions, judgements and measurement uncertainty, stronger connections between sustainability and financial reporting, and careful consideration of whether quantitative information can be provided for current and anticipated financial effects.
“Spending a bit of time clarifying the boundaries upfront will save you a lot of time down the track, because you need to collect information across all the entities that are actually in scope of AASB S2.
“When engaging auditors, do it right at the forefront of the engagement. This is an evolving market, and you need to get that right.
“So engage the auditor. Engage in a continuous discussion as you are implementing. And then make sure that you have regular decision cadences. All of that will be part of the evidence process at the end”, Mr Lotrian said.
For property funds, the key message is that AASB S2 should not be treated as an annual reporting exercise. The real value comes from embedding climate information into investment decisions, asset planning, capital allocation and ongoing governance.
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