Nicole: Hi everyone, and welcome to Sustainability Matters. My name is Nicole Mohan, and I’m the National Sustainability Lead at RSM, as well as a Partner in ESG & Climate Services. 

Tom: Hi, my name is Tom Bofinger and I’m a Manager within the ESG & Climate Services Team. As there is a lot to cover within this topic, we will be recording two short videos on the definition of climate risk, why it’s a critical part of financial reporting and how scenario analysis can help you test resilience across different climate futures. 

Nicole: Climate risk refers to the potential financial impact that climate change, and the global response to it, may have on a business. Under the Australian Sustainability Reporting Standard AASB S2, entities that report under Chapter 2M of the Corporations Act and meet at least two of the following thresholds: 

• $500 million or more in consolidated revenue
• $1 billion or more in consolidated gross assets
• or 500 or more employees 

Are required to disclose climate-related risks and opportunities. These climate risks generally fall into two broad categories: physical risks, and transition risks. 

Tom: Physical risks include the direct consequences of climate change, such as flooding, rising temperatures, or supply chain disruptions from weather events. For example, if organisations have critical infrastructure in a flood-prone area, that’s a physical risk. 

Nicole: On the other hand, transition risks are tied to how the world responds to climate change. This includes new regulations, carbon pricing, shifts in customer expectations or the rollout of cleaner technologies that could make your current operations less competitive. 

Nicole: The first step is to identify and assess material climate-related risks and opportunities across your nominated short-, medium-, and long-term time horizons. Under AASB S2, companies must define what those timeframes are, and that depends on the nature of your business and your strategic planning framework. You might base them on the life of key assets, investment cycles, or your broader strategic plan. 

Tom: From there, assess how both physical and transition risks might affect operations, supply chains, markets, or customer behaviour. You will then need to integrate these risks into your existing risk management framework. That means updating enterprise risk registers, controls, and board reporting to include climate-related risks – and not just treating them as an add-on. 

Nicole: Finally, companies will need to disclose how those risks could impact financial performance, cash flow, and business resilience. That includes qualitative and quantitative analysis, and this is where scenario analysis becomes key. 

Nicole: Scenario analysis is about testing the resilience of your climate strategies and how your business would perform under a range of plausible climate futures. It’s not about predicting what will happen - it’s about preparing for what could happen. Scenarios to consider include different global temperature outcomes, different economic and policy responses, and assess how those variables could impact your operations, assets, and strategy. 

Tom: Under AASB S2, which aligns with the Australian Corporations Act 2001 and Climate Change Act 2022, companies are now required to assess at least two climate scenarios: 

1. One scenario in pursuing efforts with limiting warming to below 1.5°C, consistent with the Paris Agreement.
2. One scenario where warming well exceeds 2°C, to test resilience in a more extreme, high physical risk futures. 

This ensures that both low-risk and high-risk climate futures are formally evaluated. 

To develop these scenarios, we suggest aligning with the IPCC’s Shared Socioeconomic Pathways and Representative Concentration Pathways, both of which are underpinned by the latest global climate modelling tool, developed by the IPCC – CMIP6. These provide globally accepted assumptions about temperature trajectories, policy settings, and emissions. For example, SSP1-1.9 models a below 1.5°C world, while SSP5-8.5 reflects a worst-case, fossil fuel-intensive future with warming above 4°C. 

Nicole: Once you’ve benchmarked your temperature pathway, you can then connect to more practical, sector-specific scenarios like those from the IEA (e.g. Net Zero by 2050, Stated Policies) or AEMO’s Integrated System Plan (Step Change, Progressive Change, Green Energy Exports). These give you access to data such as carbon prices, fuel trends and demand forecasts, tailored to the Australian context. 

Tom: This linkage is critical. You’re grounding your scenarios in international climate science, but applying real-world financial levers to assess how your business could be impacted. It’s what takes scenario analysis from theory into action. 

Nicole: So what does this mean for you? Find out how to build your scenario analysis in the second part of this episode. Thank you for joining us today – as always, if you have any questions, please don’t hesitate to contact us.