How to quantify the financial effects of climate risks
ASRS S2 requires disclosure of the potential financial effects of material climate risks and opportunities. Qualitative disclosure is acceptable in Year 1, but even qualitative approaches need to connect the risk to a specific financial mechanism. This article explains the spectrum from qualitative to quantitative and what is expected at each stage.
What this means in practice
Financial effect disclosure does not require a precise monetary figure. AASB requires you to describe the nature of the financial effect and, where feasible, its magnitude. “Feasible” is a judgment call - Year 1 expectations allow for qualitative disclosure where data is not yet available.
The spectrum from qualitative to quantitative:
Level 1 (qualitative, Year 1 minimum): “Extreme heat events could disrupt our operations and result in revenue loss. The magnitude of this impact is difficult to quantify at this stage given uncertainty about event frequency and duration.”
Level 2 (semi-quantitative, strong Year 1): “A one-day operational shutdown due to an extreme heat event would affect approximately [X]% of our annual revenue. Historical climate-related disruptions have caused disruptions of [X to Y] days per year.”
Level 3 (quantitative, Year 2 and beyond): a modelled financial impact range under each scenario and time horizon.
Year 1 expectation is typically Level 1 to 2 for most entities. Level 3 is expected to develop over successive reporting years.
When financial impact is genuinely very small: Use historical context and a range rather than a single point estimate. Example: “A worst-case scenario - a full operational shutdown due to a climate event, which has not occurred in the past five years - could affect up to one day’s revenue. Historically, climate-related disruptions have caused immaterial revenue impacts.”
Common mistakes
- Leaving financial effects blank or undisclosed (this creates an audit finding even if the impact is genuinely small)
- Using the same financial effect description for all risks regardless of the specific mechanism
- Claiming quantification is not feasible without attempting even a semi-quantitative estimate
Trace’s approach
Trace works with each client to identify the specific financial mechanism for each material risk and calibrates the disclosure approach to what is genuinely feasible given available data. For most Year 1 engagements, this produces a semi-quantitative disclosure that is both defensible and appropriate.
Frequently asked questions
Q: Our auditor is asking for quantitative financial effects in Year 1. Is that required? Not for most entities in Year 1. AASB S2 allows qualitative disclosure where quantification is not feasible. If your auditor is requesting quantitative figures beyond what the standard requires, you can push back or ask for justification
Q: Can we disclose a financial effect range rather than an exact estimate? Yes. A range with explicit assumptions is often more defensible than a single figure, because it is honest about uncertainty.
Q: We have completed a climate risk assessment; do we need to quantify the financial effects now? You do not have to in year 1 - We recommend disclosing qualitatively with line item mapping, plus combined quantitative effects where useful, and defer detailed per-line-item quantification to year 2. That gives you time to build the driver metrics, connect them to financial planning and develop internal capability, so year 2 lands as a genuine maturity step rather than a rushed figure your assurance provider will challenge.
This is general information about the ASRS regime and is not legal advice. Reliance on the exemptions for legally restricted or commercially sensitive information should be discussed with your legal adviser and auditor.