Climate Risk Template for Businesses and Enterprises

Understanding Climate Risk in the Australian Context

Climate change creates two fundamental categories of risk for Australian businesses:

Physical Risks: Direct impacts from changing climate conditions and extreme weather events. These include acute risks like cyclones, floods, bushfires, and heat waves, as well as chronic risks like sea level rise, changing precipitation patterns, and temperature increases affecting operations, supply chains, and assets.

Transition Risks: Impacts from the shift to a lower-carbon economy. These include policy risks from carbon pricing and regulations, technology risks from clean alternatives disrupting existing business models, market risks from changing customer preferences, and reputational risks from stakeholder pressure on climate action.

For each risk category, businesses must assess:

• Likelihood of occurrence across different time horizons
• Magnitude of financial impact on assets, liabilities, revenue, and expenses
• Resilience of business model under different climate scenarios
• Mitigation and adaptation strategies to reduce exposure

The AASB S2 Risk Disclosure Requirements

AASB S2 mandates disclosure of climate-related risks and opportunities that could reasonably be expected to affect your business prospects, financial position, financial performance, and cash flows.

Required Disclosures

1. Risk and Opportunity Description

For each material climate risk and opportunity, disclose:

• Nature and characteristics
• Time horizon for impact (short, medium, long-term)
• Physical vs. transition classification
• Affected business activities and value chain

2. Financial Impact Assessment

Quantify current and anticipated effects on:

• Assets and liabilities (impairments, stranded assets)
• Revenue and expenses (market changes, cost increases)
• Capital allocation and financing (investment decisions, cost of capital)
• Strategic planning (business model evolution)

3. Climate Scenario Analysis

Describe resilience of business model under climate scenarios including:

• 1.5°C pathway (aligned with Paris Agreement)
• 2°C pathway
• Higher warming scenarios (3°C+)

For each scenario, explain:

• Assumptions about climate impacts and policy responses
• Qualitative and quantitative analysis of resilience
• Adaptations required to maintain business viability

4. Risk Management Processes

Explain how you:

• Identify climate risks and opportunities
• Assess materiality and prioritize
• Monitor and manage over time
• Integrate into enterprise risk management

Using This Template: Step-by-Step Guide

Step 1: Scoping Your Assessment

Use the Scoping Template worksheet to define:

Organizational Boundary: Which entities, operations, and geographies are included in your assessment?

Value Chain Scope: Are you assessing direct operations only, or including upstream suppliers and downstream customers?

Time Horizons: Define short-term (e.g., 0-3 years), medium-term (e.g., 3-10 years), and long-term (e.g., 10-30 years) relevant to your industry.

Materiality Threshold: What financial impact or likelihood threshold constitutes a “material” risk requiring disclosure?

Step 2: Identifying Risks and Opportunities

Use the Opportunity-Risk Register worksheet to brainstorm:

Physical Risk Examples for Australia:

• Acute: Cyclone damage to coastal facilities, bushfire impact on operations, flood disruption to supply chains, extreme heat affecting worker safety
• Chronic: Sea level rise threatening assets, changing rainfall affecting water availability, temperature increases impacting agricultural inputs

Transition Risk Examples:

• Policy: Carbon pricing increasing operational costs, vehicle emissions standards affecting fleet, building efficiency regulations requiring capital expenditure
• Technology: Electric vehicle adoption disrupting automotive markets, renewable energy making fossil fuel assets uncompetitive, carbon capture creating new compliance costs
• Market: Customer preference shifts away from high-carbon products, investor ESG requirements affecting capital access, insurance premium increases for climate-exposed assets
• Reputation: Stakeholder activism targeting climate performance, brand damage from inadequate climate action, talent attraction challenges

Climate Opportunities:

• Resource efficiency: Energy reduction lowering costs, circular economy creating new revenue
• Products/Services: Low-carbon alternatives meeting market demand, climate adaptation services
• Markets: First-mover advantage in clean technology, new customer segments
• Resilience: Diversification reducing risk exposure, adaptation enhancing competitiveness

Step 3: Scenario Analysis

The Future Climate Scenarios worksheet provides templates for three pathways:

1.5°C Scenario (Orderly Transition):

• Immediate policy action with carbon pricing ramping to $100+ per tonne
• Rapid technology deployment in renewable energy and electrification
• Moderate physical impacts from limited warming
• Business Implications: High transition costs, early policy certainty, limited physical damage

2°C Scenario (Disorderly Transition):

• Delayed policy action followed by sudden, disruptive measures
• Technology adoption accelerates but unevenly across sectors
• Moderate physical impacts with regional variation
• Business Implications: Unpredictable policy changes, stranded asset risk, supply chain disruption

3°C+ Scenario (Physical Risk Dominant):

• Minimal policy action, limited emissions reduction
• Slow technology adoption, fossil fuel dependence continues
• Severe physical impacts from extreme weather and chronic changes
• Business Implications: Low transition costs, catastrophic physical damages, operational disruption

For each scenario, assess:

• Which of your identified risks materialize?
• What magnitude of financial impact occurs?
• Can your business model adapt and remain viable?
• What strategic pivots would be required?

Step 4: Risk Documentation

The Risk Register worksheet captures complete information for each material risk:

Risk Description: Clear explanation of the risk event or condition

Category: Physical (acute/chronic) or Transition (policy/technology/market/reputation)

Time Horizon: Short/medium/long-term when impact expected

Likelihood: Probability of occurrence (e.g., unlikely, possible, likely, almost certain)

Consequence: Severity of impact (e.g., low, moderate, high, critical)

Financial Impact: Quantified estimate of effect on assets, liabilities, revenue, expenses

Current Controls: Existing mitigation or adaptation measures

Residual Risk: Risk level after controls applied

Action Plan: Additional measures to further reduce exposure

Owner: Person accountable for monitoring and managing this risk

Step 5: ERM Integration

The Example ERM Framework worksheet demonstrates:

Governance Structure: Board and management oversight of climate risks

Risk Appetite: Thresholds for acceptable climate risk exposure

Integration Process: How climate risks feed into enterprise risk register

Monitoring: KPIs and triggers for escalation

Reporting: Frequency and format of climate risk updates to board

From Template to Disclosure: Next Steps

Once your climate risk assessment is complete:

1. Validate with Stakeholders: Review with operations, finance, and business units to confirm risk identification and impact estimates

2. Prioritize for Disclosure: Apply materiality assessment to determine which risks require disclosure under AASB S2

3. Quantify Financial Impacts: Work with finance to translate risk assessments into financial statement effects

4. Develop Mitigation Strategies: Create action plans for priority risks with clear owners and timelines

5. Integrate into ERM: Incorporate climate risks into enterprise risk management systems and governance processes

6. Prepare Disclosures: Use risk register outputs to draft AASB S2 disclosures on risks, opportunities, resilience, and management processes

7. Engage Assurance: Share documentation with external auditors to support limited or reasonable assurance on climate disclosures

This template provides the foundation for a robust, compliant climate risk management framework aligned with Australian mandatory requirements.