How Close Is “Close Enough”?

Materiality, proportionality and a director's perspective on climate reporting

There is an old rule about visiting Bunnings: Never ask a man standing in the tool aisle whether he needs another tool.

The answer is already known.

There may be a similar danger emerging in climate reporting, particularly at this relatively early stage in the evolution of the reporting regime, and as smaller entities begin developing the systems, skills and processes needed to comply. If you ask whether better data would be useful, whether another emissions source could be measured more accurately, or whether another control could improve the reliability of a calculation, the answer will almost invariably be yes. But that is not necessarily the question a director should be asking.

Maybe it is more pertinent to ask: Does the company need it?

Australia's mandatory climate-reporting regime is moving from policy into practice. The first AASB S2 reports have been lodged and reviewed by ASIC. The AICD has spoken to directors involved in the first reporting cycle. Treasury is currently consulting on ways to improve the efficiency of climate-related financial disclosures. ASIC, meanwhile, has said its supervision and enforcement will be pragmatic and proportionate as the requirements are phased in.

At the same time, AASB S2 itself contains concepts familiar to directors: materiality, judgement, reasonable and supportable information, uncertainty, proportionality and, in specified areas, information available without undue cost or effort.

That raises a deceptively difficult question:

Begin with the end in mind

As with many journeys, a pragmatic approach probably starts with framing the outcome — Begin With the End in Mind.

Perhaps the most useful starting point is not to treat climate reporting as an entirely new discipline. The measurements may be unfamiliar, and the terminology certainly is. However, many of the underlying governance questions are not.

Directors already know how to assess risk. They know how to apply materiality, challenge a forecast, interrogate an assumption, consider uncertainty, assess the adequacy of controls and decide whether spending more money will materially improve an outcome. The challenge is to apply those familiar disciplines to unfamiliar information.

AASB S2 reporting is mandatory for entities within its scope. In that sense, the first question has already been answered: the company must comply. But compliance does not answer every question that follows. How much precision is appropriate? Where should the company use primary data rather than estimates? Which estimates warrant stronger controls? Where should management devote additional resources? And how much additional work is justified to reduce uncertainty?

To answer those questions, begin with the end in mind:

Who is going to use this information, what are they trying to decide, and what do they need to know to make that decision?

That is essentially where materiality begins.

The fact that a disclosure is required does not mean that every component used to produce it necessarily warrants the same degree of precision. The fact that a number can be calculated more accurately does not necessarily mean that doing so will make the resulting disclosure more useful.

Suppose an emissions estimate can reasonably be improved from 100,000 tonnes to 98,500 tonnes. Would the difference alter the assessment of a climate risk? Change progress against a target? Impact anticipated cash flows or capital expenditure? Would it matter to an investor, lender or creditor?

Would it alter a decision?

If not, the additional precision may have limited value. However, if we change the facts, the answer may be entirely different. If the uncertainty could materially alter a significant disclosure, affect an important financial assumption or change a decision by a provider of capital, obtaining better information may be essential.

We first need to understand what the number is for.

Precision is not the same as understanding

For many directors — and particularly owners and directors of businesses entering the reporting regime for the first time — climate reporting is unfamiliar territory. The terminology is unfamiliar. The methodologies are developing. Some of the data has never previously been collected. New models, emissions factors, scenarios, advisers and assurance requirements are arriving at the same time.

That can make the exercise daunting. When something is daunting, there is a natural tendency to concentrate on the mechanics: What data do we need? Which methodology do we use? What does the auditor want? What system do we need? What else should we measure?

Those are necessary questions. But they can obscure the bigger one:

What is this information actually intended to tell the users of our financial reports?

Financial reporting has reference points that directors intuitively understand. A director understands what $10 million of profit means and can contextualise that easily. Directors understand a deterioration in gross margin, a significant receivable or a large variance against budget. Decades of accounting practice have developed conventions around how those numbers are measured, controlled, audited and interpreted.

Climate reporting does not yet have the same familiarity.

Tell a director that the organisation's Scope 3 emissions are 87,000 tonnes of CO₂ equivalent and the immediate significance of that number may be much less obvious. Is 87,000 high? Low? Would 92,000 tell us something materially different? What about 105,000? How precisely could any of those numbers reasonably have been calculated in the first place?

Those are not criticisms of climate reporting. They reflect the relative maturity of the reporting regime, the nature of the information and, particularly for first-time reporters, the developing skills and systems of the organisations preparing it.

Unfamiliarity itself creates a risk. When directors are less able to judge intuitively whether a number is “good”, there may be a temptation to substitute precision for understanding: obtain more data, improve the calculation, add another control. More precision can feel like more certainty. It is not necessarily the same thing.

Indeed, the relative immaturity of climate reporting may make the traditional disciplines of materiality and proportionality more important, not less.

Consider a real, albeit anonymised, example.

A business with approximately €40 million in annual revenue consumed around twenty large bottles of propane in a year. It is possible to calculate those emissions with considerable precision. Someone can establish the exact number of bottles consumed, their capacity and composition, select the appropriate emissions factor, reconcile the invoices and document the calculation. Someone else can check it. After that, an argument can be made that the calculation can probably be made even more accurate.

But should it be?

Would the difference between eleven, twelve or thirteen bottles reasonably affect an investor's decision? A bank's lending decision? The assessment of the company's climate-related financial risks? Its strategy? Its cost of capital?

If the answer is no, the pursuit of additional precision may represent additional cost without producing additional decision-useful information.

That is not an argument for careless reporting. It is an argument for materiality.

Organisations can become extremely good at measuring things that do not matter very much. The process is usually incremental, too. A calculation is refined. Another data source is added. A reconciliation is introduced. Someone identifies a better methodology. Another control is added. Each step, considered separately, improves the number. But eventually someone needs to ask:

Is improving the number improving the decision?

Greater precision should not become an objective in its own right.

What if the number is wrong?

Now consider the problem from the other end:

A company prepares its AASB S2 compliant report. Six months later, management discovers that one of the reported numbers would now be calculated differently.

The instinctive response may be: How large is the difference?

That matters. But first there is a more fundamental question: Why is the number different?

Perhaps source data was entered incorrectly or a formula was wrong. Maybe some data was accidentally omitted. Maybe the wrong emissions factor was used, despite the correct information being readily available. Those are errors in the conventional sense.

But consider a different situation.

Management used the best supplier information available at the reporting date. An accepted estimation methodology was applied. The assumptions were reasonable and documented. Twelve months later, better supplier data becomes available and the estimate changes. The number is different.

Was the original number wrong?

That distinction is familiar in financial reporting. Estimates change as information improves. An impairment assessment, expected credit loss or provision can prove materially different from the eventual outcome without demonstrating that the original estimate was improperly prepared.

Climate reporting contains substantial elements of this uncertainty. Some disclosures use historical activity data that can be measured pretty directly. Others depend upon emissions factors, estimates, proxies, supplier information and allocation methodologies. Still others — scenario analysis, transition pathways and anticipated financial effects — are inherently forward-looking.

AASB S2 expressly recognises this. Scope 3 measurement is likely to involve estimation rather than solely direct measurement. For scenario analysis, the standard recognises that judgement increases as detailed information becomes less available and time horizons extend.

The appropriate degree of precision therefore has to reflect the nature of the information being reported.

We already understand this from budgeting

Companies can devote enormous effort to producing detailed annual budgets. Yet there is one thing we know with considerable confidence about almost every budget: The actual result will be different.

Revenue will be higher or lower. Costs will move. Customers will behave differently. Projects will slip or accelerate. Things management expected to happen will not happen, and things nobody anticipated will.

The usefulness of a budget does not depend upon every forecast ultimately proving correct. It depends upon whether the budget was constructed using reasonable information and assumptions, whether the important uncertainties were understood, and whether it provided a sufficiently reliable basis for making decisions.

When actual results subsequently differ from budget, a good board does not simply ask, “Why was the budget wrong?” It asks: Why was the outcome different?

Was the original assumption unreasonable? Was the model defective? Was the calculation wrong? Did management overlook information it should reasonably have known? Or did circumstances simply develop differently?

Donald Rumsfeld's much-quoted distinction between the “known unknowns” and the “unknown unknowns” was made in an entirely different context, but the idea is useful here.

Some uncertainty can be identified and incorporated into a model. Some can be estimated only imperfectly. And some information simply cannot be known at the reporting date.

Good governance does not require directors to eliminate the unknowable. It requires them to understand what is known, recognise what is uncertain, challenge the assumptions that matter and apply a level of rigour appropriate to the decisions the information is intended to support.

So when a climate number subsequently changes, the better question may not be “How wrong were we?” but: Why were we different?

A bad calculation is one thing. A reasonable estimate changing because better information becomes available is another.

Three different perspectives

A sustainability professional, a CFO and a company director may all reasonably look at the same information through different lenses.

For the sustainability professional, improving data quality may itself be desirable. Better measurement can assist emissions management, target setting and understanding the organisation's environmental impact.

The CFO is likely to place greater emphasis on financial implications: cash flows, asset values, capital expenditure, financing, insurance, margins and cost of capital. The CFO must also consider how climate information fits within existing reporting systems and controls.

The director has to step back further again.

The board must consider both perspectives while also addressing compliance, the reliability of information provided to users, the consequences if it is wrong, the cost of obtaining greater certainty and the appropriate allocation of finite corporate resources.

Those perspectives need not conflict. Good reporting should draw on all three. But they can reasonably produce different answers about how much precision is warranted.

The best answer is not always the best investment

Directors make that trade-off elsewhere all the time.

In one start-up business, an investor strongly encouraged us to implement SAP.

There was nothing wrong with the suggestion. SAP was unquestionably a more sophisticated system than the one we were using. It offered better functionality and considerably greater capability as the business grew.

However, that was not really the question. The system we had did what we needed it to do. Replacing it would have cost tens of thousands of dollars at a time when the business had far more immediate uses for its capital: We needed another truck.

The choice was not between a good accounting system and a bad one. Nor was anyone arguing that SAP was not the better system. The question was whether having the better system would improve the business more than spending the same money somewhere else: It would not.

Climate reporting requires the same discipline.

Better data is generally preferable to worse data. Greater precision is generally preferable to less precision. Stronger systems can generally increase confidence in a reported number. But companies do not have unlimited resources. The relevant question is therefore not simply, “Would this improve the number?” It is:

Would it improve the number enough to matter?

If additional work could materially change a significant disclosure, alter an important judgement or affect a decision made by a user of the financial report, the expenditure may be entirely justified. If it merely makes an already adequate estimate slightly more precise without changing any conclusion or decision, the case is much weaker.

That is not lowering the standard. It is allocating resources according to what matters.

This is not a new governance discipline

This is perhaps where climate reporting starts to look considerably less exotic.

AASB S2 says that, in identifying climate-related risks and opportunities and in preparing anticipated financial effects, entities should use reasonable and supportable information available at the reporting date without undue cost or effort. For anticipated financial effects, it also requires an approach commensurate with the skills, capabilities and resources available to the entity.

The standard goes further. It recognises that measurement uncertainty can become so high that quantitative information would not be useful, and it expressly expects estimation in Scope 3 measurement.

Those are not permissions to produce poor information. They are recognition that judgement, uncertainty, capability, resources and usefulness are part of the reporting framework.

The experience of Australia's first reporters points in much the same direction. The AICD found that early board engagement was valuable particularly around significant judgements, uncertainty and materiality. It also reported that first-wave directors were interested in whether, and how, investors and other users would actually use the disclosures in capital-allocation decisions.

Perhaps most tellingly, the AICD described the first year as establishing a “credible reporting baseline, not perfection.”

ASIC has likewise said its supervision and enforcement approach will be pragmatic and proportionate as the requirements are phased in and industry adjusts.

The message for directors should therefore be reassuring without suggesting the task is easy:

What should a director be able to defend?

The framework and the experience of first reporters suggest a practical way to frame the task.

Is the information material to the decisions of primary users? Is it based on reasonable and supportable information? What information was available without undue cost or effort? Where does significant measurement uncertainty exist? What assumptions and judgements have been made? And has the organisation applied an appropriate process to the matters that matter most?

Those questions are more useful than simply asking whether every number could have been calculated more accurately. If a significant climate disclosure later proves inaccurate, the board's strongest position is unlikely to be: Every number was perfect.

The reporting framework does not demand perfect foresight or the elimination of estimation.

The stronger position is that the organisation understood what mattered, identified the important uncertainties, used reasonable and supportable information, documented significant judgements and applied resources and controls proportionately to the risks involved.

In other words: The organisation had a rational process for determining how good each number needed to be.

So, how close is close enough?

There cannot sensibly be a universal percentage.

5% might be enormously significant in one disclosure and irrelevant in another. A small numerical difference may matter because of the nature of the information. A much larger estimation range may be understandable where the underlying information is inherently uncertain.

Perhaps “close enough” is therefore the wrong question if it is understood as asking for an acceptable margin of error.

The better question is:

That does not excuse a bad calculation. It does not make an unreasonable assumption reasonable. And it does not allow inconvenient information to be ignored.

It means recognising that a reasonable estimate is not necessarily deficient merely because a more precise estimate could be produced.

Where greater precision could change a material disclosure, a significant judgement or a decision made by a user of the financial report, the case for obtaining it may be compelling.

Where it cannot reasonably change any of those things, directors should be prepared to ask what the additional work actually achieves.

That is not a retreat from rigorous climate reporting.

It is materiality and proportionality applied to it.

For directors approaching the regime for the first time, the most useful starting point may therefore not be a new climate-reporting framework at all.

It may simply be the governance questions they already know how to ask:

• •What matters?
• •What do we know — and what don't we know?
• •What assumptions have we made?
• •What could change the answer?
• •What happens if we are wrong?
• •What decision could this information influence?
• •What additional work would actually give us a better basis for making that decision?

Those questions should come before another system, another calculation or another control.

The objective should not be to establish how much climate information an organisation is capable of collecting. It should be to establish how much reliable information its users actually need.

Perhaps the question we should have asked before we walked into Bunnings was: What are we building?

Once we know that, we can decide what tools we actually need.

Sometimes the right governance decision will be to buy the better tool.

And sometimes the right decision will be to walk out of Bunnings without it.

Selected sources for review

• •Australian Accounting Standards Board, AASB S2 Climate-related Disclosures (Dec 2025 compilation). Key provisions used in this discussion include paragraphs 11, 18–21 and B9–B12, B38–B40.
• •Australian Institute of Company Directors, “Board insights from Australia's first mandatory climate disclosures” (2026). First-wave director experience, including materiality, uncertainty, user usefulness and the observation that year one is about a credible reporting baseline rather than perfection.
• •Australian Securities and Investments Commission, sustainability reporting guidance and educational material. ASIC states that its supervision and enforcement approach will be pragmatic and proportionate as the requirements are phased in and industry adjusts.
• •Australian Treasury, “Improving the efficiency of climate-related financial disclosures” consultation (24 August–2 October 2026). Current policy consultation concerning the efficiency and burden of the climate-related financial disclosure regime.

This article is a discussion paper provided for general information. It summarises the general application of AASB S2 and does not constitute legal, accounting or assurance advice. Entities should confirm their specific reporting obligations with appropriately qualified advisers.