AASB S2 Climate-related Disclosures – Focus on Risk

The purpose of this article is to explain the risk elements, including climate-related scenario analysis, of the new Australian Sustainability Reporting Standard (ASRS). The content is largely drawn from Australian Government sources.

climate risk scenario analysis

The Australian Sustainability Reporting Standards (ASRS) include the AASB S1 General Requirements for Disclosure of Sustainability-related Financial Information and the AASB S2 Climate-related Disclosures published by the Australian Accounting Standards Board (AASB). These standards are aligned to the widely adopted International Financial Reporting Standards (IFRS) S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.

What are the AASB Climate-related Disclosures?

The AASB S2 Climate-related Disclosures are mandatory for companies under the ASRS with reporting commencing in 2025. The new disclosure requirements mandate that business entities include information in their general-purpose financial reports about climate-related risks and opportunities, that could reasonably impact their cash flows, access to financing, or cost of capital in the short, medium, or long term. The information provided must be useful and understandable to the primary users of the general-purpose financial report (1).

The primary users or readers of general-purpose financial reports are current and potential investors, lenders and other creditors. These users rely on this information to understand a company’s financial health to make decisions about purchasing or selling interest in the company. Other groups, such as customers, governments and the public, may also find the information in financial reports useful, although they are not generally considered to be the primary audience (3).

The main climate-related financial disclosure requirements in AASB S2 relate to governance, strategy, risk management metrics and targets, including information about climate risk scenario analysis and Scope 1, Scope 2 and Scope 3 greenhouse gas emissions.

The standard refers to climate resilience in the context of climate-related financial disclosures, emphasising the importance of understanding and disclosing how an entity (a company) can adapt to and manage, climate-related risks and opportunities.

Under the Climate Resilience section of the standard, entities are required to conduct climate-related scenario analysis to assess their resilience to climate change, using methods tailored to their unique circumstances. This assessment aims to provide users of the entity’s financial reports with insights into:

  • The potential impacts on the entity’s strategy and business model, including how it may need to respond to the outcomes of the climate-related scenario analysis.
  • The key areas of uncertainty taken into account when evaluating its resilience to climate-related risks.
  • The ability to modify or adapt its strategy and business model in response to climate change over the short, medium, and long term (1).

Climate-related scenario analysis

A climate-related scenario analysis is a way for organisations to explore how different future climate conditions might affect them. It involves imagining various “what-if” situations, like extreme weather events, changes in regulations, or shifts in market demand due to climate change. The goal is to assess risks and opportunities, understand potential impacts on their business, and plan strategies to adapt and stay resilient in different possible futures. It’s like a stress test, but focused on climate challenges.

One way to approach this analysis is to consider how organisations were impacted by previous extreme events and then consider the scenario where that event is repeated but with extremes brought about from global temperature increases of 1.5 and 2.0 degrees.

The standard refers to the need to conduct at least two possible future scenarios and one of these scenarios consistent with limiting global warming to 1.5°C and one where warming ‘well exceeds’ 2°C (2).

The introduction of climate-related scenario analysis is phased in with qualitative scenario analysis commencing with Group 1 companies in 2025, and quantitative analysis required for financial years from 1 July 2027 (6).

What is the difference between qualitative and quantitative scenario analysis?

Qualitative scenario analysis

This approach uses descriptions and expert opinions to explore how climate change might affect an organisation. It doesn’t rely on numbers or complex data but focuses on general trends and potential risks or opportunities – and as such can be interpretive, subjective or descriptive in it’s language. It’s useful for understanding general trends, risks, and opportunities, and is often used where little to no numerical data is available.

Quantitative scenario analysis

This analysis involves the use of data, models, and numerical methods to calculate specific impacts. It will provide measurable and comparable results between scenarios. However, it requires more detailed data and technical expertise. An outcome from a quantitative-based analysis is often objective in nature and is driven by the data to make a decision rather than the experience or opinion of the author.

In providing quantitative information, the standard requires information about the scenarios and time horizons used, and the scope of operations considered, for example, the operating locations (5).

Arguably, qualitative works well for early-stage exploration and strategic discussions, whereas quantitative supports detailed decision-making and accountability.

Defining Risk Types

The AASB S2 standard applies to:

  • Climate-related risks to which the entity is exposed, which are:
    • Physical risks, and
    • Transition risks, and
  • Climate-related opportunities available to the entity.

Physical risks

Physical risks are defined as risks arising from climate change, which may be either event-driven (acute) or related to long-term shifts (chronic) in climate patterns (4). They may include:

  • Acute Risks: Sudden events like cyclones, floods, bushfires, or heatwaves that damage infrastructure, disrupt supply chains, and increase costs.
  • Chronic Risks: Long-term changes like rising sea levels, temperature shifts, and water shortages impacting operations, agriculture, and energy systems.
  • Supply Chain Disruptions: Reduced resource availability and transport issues due to weather impacts.
  • Health and Safety: Risks to worker health, community well-being, and increased healthcare costs.
  • Infrastructure Damage: Higher costs to repair or adapt buildings, energy systems, and other assets to withstand extreme conditions.

These risks threaten operations, assets, and communities, requiring proactive planning and adaptation.

Transition risks

The shift to a lower-carbon economy may involve significant changes in policies, technologies, and markets to meet climate change mitigation and adaptation goals. Depending on the scope, pace, and emphasis of these changes, transition risks could create varying degrees of financial impact on organisations (4).

Examples include:

  • Policy and Legal: Stricter regulations (e.g., carbon pricing) and potential litigation.
  • Technology: Costs of adopting new technologies or losing competitiveness.
  • Market: Shifting consumer demand and price volatility for commodities.
  • Reputation: Damage from being seen as environmentally irresponsible or failing investor expectations.
  • Financial: Higher borrowing costs and declining value of carbon-intensive assets.

Climate-related opportunities

Efforts to address climate change through mitigation and adaptation can also generate opportunities for organisations. Opportunities will differ based on the region, market, and industry in which the organisation operates (5).

For example, these may include:

  • Resource Efficiency: Reducing energy, water, and waste costs through sustainable practices.
  • Energy Transition: Expanding into renewable energy and low-carbon technologies.
  • Market Growth: Developing climate-friendly products and services to meet shifting consumer demands.
  • Resilience Building: Strengthening supply chains and infrastructure against climate impacts.
  • Financial Benefits: Accessing green finance, incentives, and lower operational costs from sustainability efforts.

These opportunities allow businesses to innovate, reduce risks, and align with a sustainable future.

Change is inevitable, time to embrace it

In introducing the ASRS, the Australian Government is seeking to improve the quality of climate-related financial disclosures to provide Australians and investors with greater transparency and more comparable information about an entity’s exposure to climate-related financial risks and opportunities and climate-related plans and strategies (6).

Forward-thinking companies and organisations in Australia and around the world are already incorporating climate change into their operations and strategies by voluntarily reporting under the International Financial Reporting Standards and the earlier framework from the Task Force on Climate-Related Financial Disclosures (TCFD).

As concluded by the Climate Governance Initiative Australia that encourage organisations to think of climate reporting not merely as a compliance exercise, but as an opportunity to integrate climate considerations into strategic decision-making, build organisational resilience, and drive sustainable business practices (2).

Changes in our climate and resultant extreme events are already happening. The imperative to understand, act and communicate organisations’ plans to address potential risks and opportunities arising from climate change, has never been greater.

Disclaimer statement

The content of this blog is drawn from authoritative sources. The author has attempted to make the material more accessible to readers. Any misunderstandings are unintentional.

ChatGPT was used to assist in the summary of information. Readers are encouraged to read the source material if they seek further clarification or details.

Spatial Vision does not warrant the accuracy or completeness of information in this article and any person using or relying upon such information does so on the basis that Spatial Vision shall not bear any responsibility or liability whatsoever for any errors, faults, defects or omissions in the information.

Sources:

  1. Australian Sustainability Reporting Standards (ASRS). 2024 AASB Digital Standards Portal. Site: https://aasb.gov.au/news/australian-sustainability-reporting-standards-aasb-s1-and-aasb-s2-are-now-available-on-the-aasb-digital-standards-portal/
  2. Climate Governance Initiative Australia. (2024). A director’s guide to mandatory climate reporting. Retrieved from https://www.aicd.com.au/risk-management/framework/climate/a-directors-guide-to-mandatory-climate-reporting.html
  3. International Accounting Standards Board (IASB). (2018). Conceptual Framework for Financial Reporting. Originally issued September 2010, revised March 2018. Retrieved from https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2021/issued/part-a/conceptual-framework-for-financial-reporting.pdf
  4. International Actuaries Association (IAA). 2024. CRTF Introduction Climate Scenarios. Retrieved from https://www.actuaries.org/IAA/Documents/Publications/Papers/CRTF_Introduction_Climate_Scenarios.pdf
  5. Task Force on Climate-related Financial Disclosures (TCFD). (2017) Recommendations of the Task Force on Climate-related Financial Disclosures. Retrieved from https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf
  6. Treasury. (2024). Mandatory Climate-Related Financial Disclosures Policy. Retrieved from https://treasury.gov.au/sites/default/files/2024-01/c2024-466491-policy-state.pdf