Climate-Related Risks and Opportunities: What AASB S2 Actually Requires

The strategy pillar of AASB S2 requires disclosure of climate-related risks and opportunities that could reasonably be expected to affect your entity’s cash flows, access to finance, or cost of capital over the short, medium, or long term.

For most businesses, this is the most analytically demanding part of mandatory sustainability reporting. Unlike emissions figures — which are at least a deterministic calculation — climate risk assessment requires forward-looking judgement about uncertain futures.

Here’s what AASB S2 actually asks for, and how to approach it practically.

Physical vs transition risks

AASB S2 distinguishes two categories of climate risk:

Physical risks arise from physical changes in the climate system:

• Acute risks — extreme weather events: floods, cyclones, heatwaves, bushfires. These can damage assets, disrupt supply chains, interrupt operations, or create insurance and liability exposure.
• Chronic risks — long-term shifts in climate patterns: rising temperatures, changing rainfall patterns, sea level rise, water stress. These affect operating costs, asset values, and long-term viability in certain locations.

Transition risks arise from the process of moving to a lower-carbon economy:

• Policy risks — carbon pricing, emissions standards, building codes, fuel efficiency requirements
• Technology risks — disruption from clean technologies (electric vehicles, renewable energy, heat pumps) that may affect demand for existing products or services
• Market risks — shifts in customer and investor preferences, changing input costs (energy, materials)
• Reputation risks — stakeholder expectations around climate performance, including employee, customer, and community expectations

For construction and infrastructure, common physical risks include:

• Flooding of construction sites in coastal or floodplain locations
• Heat-related productivity impacts for outdoor workers
• Extreme weather causing project delays and insurance claims

Common transition risks include:

• Embodied carbon requirements in building codes and planning regulations
• Client requirements for low-carbon construction methods and materials
• Rising cost of carbon-intensive materials if a carbon price is implemented
• Liability exposure from buildings that don’t meet future energy performance standards

Opportunities

Risk is only half the picture. AASB S2 also requires disclosure of climate-related opportunities — potential benefits that could arise from the transition to a low-carbon economy or from adaptation to physical climate impacts.

For a construction company, opportunities might include:

• Demand for green building construction as clients seek energy-efficient assets
• Expertise in sustainable infrastructure as a competitive differentiator
• Revenue from renewable energy infrastructure projects (solar farms, transmission lines, green hydrogen facilities)
• Operational efficiency gains from electrification of plant and vehicles (lower fuel costs over time)

Time horizons: short, medium, and long term

AASB S2 requires you to identify the time horizons over which risks and opportunities are relevant. The standard doesn’t prescribe specific years — you define what “short,” “medium,” and “long” term mean for your business, based on your planning horizons and the nature of your assets.

Typically:

• Short term aligns with the annual planning horizon (1–2 years)
• Medium term aligns with strategic planning (3–10 years)
• Long term extends to the life of long-lived assets or major infrastructure (10–30+ years)

The time horizons you define should be consistent across the governance, strategy, and risk management sections.

Scenario analysis: the hard part

AASB S2 requires that you assess the resilience of your strategy under different climate scenarios, including:

• A scenario consistent with limiting warming to 1.5°C (a rapid transition to net zero)
• A higher-warming scenario (in which physical risks are more severe)

This doesn’t require building your own proprietary climate model. Common approaches use published scenarios from the Intergovernmental Panel on Climate Change (IPCC), the International Energy Agency (IEA), or the Network for Greening the Financial System (NGFS).

The disclosure should explain:

• Which scenarios were used and why
• The key assumptions in each scenario relevant to your business
• How your strategy holds up under each scenario (what changes, what risks become material, what opportunities emerge)

For first-time reporters, transition relief on scenario analysis is available for some groups. But the expectation is that scenario analysis will be in place as the regime matures.

What to avoid in risk and opportunity disclosure

Generic risk statements. “Climate change could affect our operations” is not a risk identification — it’s a placeholder. AASB S2 requires specific, relevant risks tied to your business, your assets, your locations.

Missing opportunities. Most first-time reports are heavy on risks and thin on opportunities. The standard requires both.

Inconsistency between sections. If the strategy section identifies flooding as a material physical risk, the risk management section should describe how flooding risk is managed, and the metrics section should include any relevant metrics (e.g., asset value in flood-affected areas).

Aspirational language without substance. Describing plans to “develop a net zero pathway” without any specifics or timelines is unlikely to satisfy AASB S2’s disclosure requirements as the regime matures.

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