In 2022, Guerdon Associates published an article on the importance of common sustainability measurement and reporting standards for assessing financial risk and variable pay outcomes (See HERE). Since then, various reports have suggested companies are pulling back on executive pay ESG measures (for the facts, see our 2025 Executive pay and ESG report HERE). Anecdotally, it appears that some companies with no material ESG risk have pulled back in 2026, re-aligning executive pay to more material matters.

For others, though, new Australian Accounting Standards Board (AASB) sustainability reporting standards (AASB S1 and AASB S2) suggest they may have nowhere to hide. That is, the exposure of sustainability impacts to the business may require a rational board to align executive pay to improving outcomes.

These standards have been in effect for eligible entities for the first financial year on or after 1 January 2025. These standards are aligned with the International Sustainability Standards Board’s (ISSB) IFRS S1 and IFRS S2.

AASB S1 & AASB S2: what you need to know

AASB S1 is a voluntary standard covering broad sustainability-related disclosures including climate-related financial disclosures. Entities may adopt it if they wish to report on a wide range of sustainability risks and opportunities that may impact cash flows, access to finance, or cost of capital over short, medium, or long term.

Under the voluntary AASB S1, a company that opts in could choose to disclose how its broader sustainability objectives link to remuneration or incentive structures. Since the changes in US and other investor sentiment, it is not expected that we will see any impetus to link a greater proportion of executive pay to these sustainability standards.

AASB S2 is a mandatory standard (for certain entities falling under threshold criteria, see below) requiring climate-specific disclosure. It focuses on risks and opportunities linked to climate change that could affect an entity’s cash flows, financing, cost of capital or overall business prospects.

AASB S2 does not require eligible entities to have a climate-related executive remuneration performance measure. However, should the impact on an entity’s cash flows, financing, cost of capital or overall business prospects be material, it would be difficult to escape many investors expectations that executive pay be tied to managing the consequences of climate change.

In these cases, under AASB S2, entities must explicitly disclose:

• A description of whether and how climate-related considerations are factored into executive remuneration; and
• The percentage of executive-management remuneration in the current reporting period that is linked to climate-related considerations.

Who must comply with AASB S2?

Entities required to report under the mandatory AASB S2 standard will be determined by two factors. AASB S2 applies to entities that:

• Are required to lodge a financial report under Chapter 2M of the Corporations Act (i.e. reporting entities).
• Satisfy at least one of the following additional threshold criteria:
  • Size thresholds (“large-entity test”, the entity must meet two of three of the criteria in the below size groups); or
  • Is a reporter under the National Greenhouse and Energy Reporting Act 2007 or an “asset owner” such as a registrable superannuation entity.

For companies meeting the above criteria for mandatory reporting under AASB S2, a phased-in implementation will take place in accordance with the three different size groups that deem an entity eligible. An entity must include the AASB S2 climate-related disclosures in their sustainability reporting for the financial year corresponding with their entity size group as follows:

Group 1 (disclosure mandatory from 1 January 2025): at least two of:

• Consolidated revenue ≥ AUD 500 million
• Consolidated gross assets ≥ AUD 1 billion
• Employees ≥ 500

Group 2 (disclosure mandatory from 1 July 2026): at least two of:

• Consolidated revenue ≥ AUD 200 million
• Consolidated gross assets ≥ AUD 500 million
• Employees ≥ 250

Group 3 (disclosure mandatory from 1 July 2027): at least two of:

• Consolidated revenue ≥ AUD 50 million
• Consolidated gross assets ≥ AUD 25 million
• Employees ≥ 100

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