Climate-Related Risks and Opportunities

Building on your understanding of climate science, this lesson provides a comprehensive framework for identifying, categorizing, and assessing climate-related risks and opportunities that are material to your organization’s strategy, operations, and financial performance.

AASB S2 Risk and Opportunity Framework

Fundamental Definitions

Climate-Related Risks Potential negative impacts to an organization arising from climate change, including both:

Physical risks from the physical effects of climate change
Transition risks from the transition to a low-carbon economy

Climate-Related Opportunities Potential positive impacts that may arise for an organization from efforts to mitigate and adapt to climate change.

Materiality and Time Horizons

Materiality Assessment

Quantitative thresholds: Financial impact relative to organization size
Qualitative factors: Strategic importance, stakeholder concerns, regulatory focus
Dynamic assessment: Materiality changes over time with evolving risks

Time Horizon Definitions

Short-term: 0-3 years (operational and immediate strategic decisions)
Medium-term: 3-10 years (strategic planning and investment decisions)
Long-term: 10+ years (strategic positioning and adaptation planning)

Transition Risks: Detailed Analysis

Policy and Legal Risks

Carbon Pricing Mechanisms

Current Status: Australian Carbon Credit Units, state-based schemes
Future Development: Potential national carbon pricing, border adjustments
Business Impact: Direct cost increases, competitive positioning changes
Assessment Method: Sensitivity analysis across carbon price scenarios

Example Assessment:

Manufacturing company with 100,000 tCO2e annual emissions
Carbon price scenarios: $25, $50, $100 per tCO2e
Annual cost impact: $2.5M, $5M, $10M respectively
Strategic response: Energy efficiency, renewable procurement, process changes

Regulatory Requirements

Current: NGER reporting, state renewable energy targets
Emerging: Mandatory climate disclosure, scope 3 requirements
Future: Potential sectoral regulations, building energy standards
Business Impact: Compliance costs, operational constraints, competitive advantages

Litigation Risk

Trends: Increasing climate litigation globally (1,800+ cases worldwide)
Types: Failure to disclose, inadequate action, greenwashing claims
Australian Context: Emerging shareholder and stakeholder actions
Risk Factors: High-emission activities, misleading claims, poor governance

Technology Risks

Technology Displacement

Current Technologies at Risk: Internal combustion engines, coal power, gas heating
Emerging Alternatives: Electric vehicles, renewable energy, heat pumps
Assessment Factors: Technology maturity, cost competitiveness, regulatory support
Business Impact: Stranded assets, market share loss, required investments

Case Study: Automotive Industry

Risk: ICE vehicle production becoming stranded
Timeline: 50% EV sales by 2030, 100% by 2040 (projected)
Impact: $50B+ investment required for EV transition globally
Response: Platform transformation, battery partnerships, charging infrastructure

Process and Product Innovation

Low-Carbon Alternatives: Green hydrogen, synthetic fuels, bio-based materials
Competitive Threats: First-mover advantages, patent positions, supply chain access
Investment Requirements: R&D spending, pilot projects, scaling investments
Success Factors: Technical capability, financial resources, partnership strategies

Market Risks

Commodity Price Volatility

Energy Markets: Renewable energy reducing fossil fuel demand
Raw Materials: Critical minerals for clean technology increasing
Agricultural Products: Climate impacts affecting yields and quality
Assessment Method: Scenario analysis across commodity price paths

Customer Preference Shifts

Consumer Trends: Increasing preference for sustainable products/services
B2B Requirements: Supply chain sustainability requirements
Investor Expectations: ESG investment criteria, divestment campaigns
Measurement: Market research, customer surveys, competitor analysis

Supply Chain Disruption

Concentration Risk: Key suppliers in climate-vulnerable regions
Alternative Sourcing: Limited suppliers for low-carbon materials
Cost Implications: Premium pricing for sustainable alternatives
Resilience Building: Diversification, local sourcing, circular economy

Reputation Risks

Stakeholder Expectations

Investors: Climate risk disclosure, transition planning, performance delivery
Customers: Authentic sustainability claims, transparent reporting
Employees: Purpose-driven career choices, employer sustainability
Communities: Local environmental impacts, just transition support

Greenwashing and Disclosure Risks

Regulatory Scrutiny: ASIC guidance on misleading sustainability claims
Media Attention: Investigative reporting on climate claims vs. actions
Social Media: Real-time fact-checking and accountability
Mitigation: Robust verification, conservative claims, transparent methodology

Physical Risks: Comprehensive Assessment

Acute Physical Risks

Event-Driven Risk Assessment

Bushfires

Probability Assessment: Use Bureau of Meteorology fire danger ratings
Impact Analysis: Asset exposure mapping, business continuity planning
Financial Quantification: Asset replacement costs, business interruption losses
Risk Treatment: Defensible space, early warning systems, evacuation plans

Flooding

Frequency Analysis: 1-in-X year flood mapping and trend analysis
Vulnerability Assessment: Asset elevation, flood protection adequacy
Economic Impact: Property damage, supply chain disruption, customer access
Adaptation Options: Flood barriers, elevated infrastructure, insurance

Extreme Weather Events

Hail and Storm Damage: Increasing intensity affecting building integrity
Heat Waves: Temperature thresholds affecting operations and workforce
Cyclones: Intensification affecting northern Australian operations
Assessment Tools: Climate projections, vulnerability mapping, impact modeling

Chronic Physical Risks

Temperature-Related Risks

Rising Average Temperatures

Energy Costs: Increased cooling requirements and peak demand
Worker Productivity: Heat stress affecting outdoor and non-air-conditioned work
Equipment Performance: Reduced efficiency and increased maintenance
Customer Patterns: Seasonal demand shifts, tourism pattern changes

Heat Extremes

Operational Limits: Temperature thresholds for safe operations
Infrastructure Stress: Roads, railways, power lines exceeding design limits
Health and Safety: Work hour restrictions, protective equipment requirements
Business Continuity: Planned shutdowns during extreme temperature events

Water-Related Risks

Water Availability

Drought Impacts: Reduced water allocations, increased costs
Hydroelectric Generation: Reduced capacity affecting electricity supply/prices
Agricultural Productivity: Irrigation limitations, crop yield reductions
Industrial Processes: Water-intensive operations facing supply constraints

Precipitation Changes

Reduced Rainfall: Southern Australia experiencing long-term decline
Increased Intensity: More severe flooding despite lower annual totals
Seasonal Shifts: Timing changes affecting agricultural and tourism seasons
Water Quality: Higher temperatures and extreme events degrading quality

Sea Level Rise

Coastal Infrastructure

Current Exposure: $226 billion in coastal infrastructure at risk
Timeline Assessment: 20cm rise likely by 2050, up to 80cm by 2100
Critical Assets: Ports, airports, roads, utilities, commercial properties
Adaptation Costs: Sea walls, elevation, managed retreat options

Operational Impacts

Port Operations: Increased storm surge, wharf access, loading restrictions
Coastal Tourism: Beach erosion, accommodation vulnerability, access routes
Real Estate: Property values, insurance availability, development restrictions
Supply Chains: Coastal manufacturing and logistics facility impacts

Resource Efficiency Opportunities

Energy Efficiency

Building Performance: LED lighting, HVAC optimization, smart building systems
Process Optimization: Waste heat recovery, equipment efficiency, load management
Digital Solutions: IoT monitoring, AI optimization, predictive maintenance
Financial Returns: 15-25% IRR typical for efficiency investments

Water Efficiency

Conservation Technologies: Low-flow fixtures, recycling systems, smart irrigation
Alternative Sources: Rainwater harvesting, greywater systems, desalination
Process Improvements: Closed-loop systems, leak detection, efficiency monitoring
Cost Benefits: Reduced utility costs, improved resilience, regulatory compliance

Waste Reduction and Circular Economy

Material Efficiency: Design for disassembly, remanufacturing, sharing economy
Waste-to-Energy: Biogas from organic waste, energy from waste facilities
Industrial Symbiosis: Waste outputs becoming inputs for other processes
Value Creation: New revenue streams, cost reduction, resource security

Energy Source Opportunities

Renewable Energy Procurement

Power Purchase Agreements: Long-term price certainty, cost competitiveness
On-site Generation: Solar PV, small wind, energy storage systems
Community Energy: Local renewable projects, shared ownership models
Grid Integration: Demand response, virtual power plants, grid services

Distributed Energy Resources

Battery Storage: Peak shaving, backup power, grid services revenue
Electric Vehicle Integration: Vehicle-to-grid, fleet electrification
Microgrids: Energy independence, resilience, optimization
Investment Returns: 8-15% IRR for well-designed systems

Products and Services Opportunities

Low-Carbon Product Development

Innovation Areas: Electric vehicles, plant-based foods, sustainable materials
Market Growth: Clean technology markets growing 10-20% annually
Competitive Advantage: First-mover benefits, patent positions, brand differentiation
Investment Requirements: R&D, manufacturing, market development

Climate Adaptation Services

Consulting Services: Climate risk assessment, adaptation planning, resilience building
Technology Solutions: Early warning systems, climate modeling, monitoring equipment
Infrastructure Services: Flood protection, cooling systems, renewable energy
Market Size: Global adaptation market expected to reach $2 trillion by 2030

Financial Products

Green Finance: Green bonds, sustainability-linked loans, climate insurance
Carbon Markets: Carbon credit development, trading, offset projects
Risk Management: Climate risk modeling, catastrophe bonds, parametric insurance
Growth Potential: Green finance market growing 50%+ annually

Markets and Resilience Opportunities

New Market Access

Export Markets: Australian renewable energy and minerals for global transition
Supply Chain Position: Becoming preferred supplier for sustainability-focused customers
Geographic Expansion: Markets with strong climate policies and carbon pricing
Partnership Opportunities: Collaboration with climate leaders, technology providers

Enhanced Resilience

Supply Chain Diversification: Reduced concentration risk, improved reliability
Operational Flexibility: Multiple energy sources, adaptable processes
Stakeholder Relations: Improved reputation, customer loyalty, employee engagement
Financial Performance: Reduced volatility, improved access to capital

Financial Impact Assessment Methodologies

Quantitative Assessment Approaches

Direct Financial Impacts

Revenue Effects: Changes in demand, pricing, market access
Cost Impacts: Energy, materials, labor, compliance, insurance
Capital Requirements: Adaptation investments, stranded assets, new technologies
Assessment Tools: NPV analysis, sensitivity analysis, scenario modeling

Indirect Financial Impacts

Supply Chain: Supplier cost increases, availability constraints
Market Dynamics: Competitive position changes, industry transformation
Stakeholder Relations: Customer retention, investor access, employee costs
Measurement Challenges: Attribution, time lags, interaction effects

Risk Quantification Techniques

Probabilistic Risk Assessment

Event Probability: Historical data, climate projections, expert judgment
Impact Magnitude: Asset values, revenue exposure, cost implications
Expected Loss Calculation: Probability × Impact across multiple scenarios
Confidence Intervals: Uncertainty ranges, sensitivity analysis

Scenario-Based Assessment

Multiple Scenarios: Best case, worst case, most likely outcomes
Time Horizon Analysis: Short, medium, long-term impact profiles
Interaction Effects: Combined risks, cascading impacts, system effects
Decision Making: Robust strategies across scenario ranges

Time Horizon Considerations

Short-Term (0-3 years)

Primary Focus Areas:

Operational efficiency improvements
Immediate regulatory compliance
Supply chain optimization
Stakeholder engagement

Risk Priorities:

Extreme weather preparedness
Energy cost management
Regulatory requirement implementation
Reputation and disclosure risks

Medium-Term (3-10 years)

Strategic Considerations:

Technology transition planning
Market positioning for low-carbon economy
Infrastructure adaptation investments
Capability building and partnerships

Risk Evolution:

Technology displacement acceleration
Policy implementation and strengthening
Physical risk intensification
Market preference solidification

Long-Term (10+ years)

Transformational Planning:

Business model adaptation
Stranded asset management
Climate resilience building
Systemic risk preparation

Uncertainty Management:

Multiple scenario preparation
Adaptive management strategies
Option value preservation
Continuous monitoring and adjustment

Summary

A systematic approach to climate risk and opportunity assessment enables organizations to:

Identify material climate-related risks across transition and physical categories
Assess climate-related opportunities for competitive advantage and value creation
Quantify financial impacts using robust methodologies and scenario analysis
Consider appropriate time horizons for different risks and strategic responses
Develop integrated strategies that address risks while capturing opportunities

This framework provides the foundation for the scenario analysis work covered in our next lesson.

Key Takeaways

✅ Transition risks include policy, technology, market, and reputation risks across multiple time horizons ✅ Physical risks encompass both acute events and chronic changes with material business impacts ✅ Climate opportunities exist across resource efficiency, energy, products/services, and markets ✅ Financial impact assessment requires both quantitative and qualitative approaches ✅ Time horizon analysis helps prioritize risks and align responses with planning cycles ✅ Integrated approach considers interactions between risks and opportunities

Risk and Opportunity Assessment Framework

Category	Short-term (0-3 years)	Medium-term (3-10 years)	Long-term (10+ years)
Transition Risks	Regulatory compliance, energy costs	Technology displacement, carbon pricing	Business model transformation
Physical Risks	Extreme weather prep, supply chain	Infrastructure adaptation	Chronic climate impacts
Opportunities	Efficiency gains, procurement	Technology adoption, new products	Market transformation, resilience
Assessment Priority	Operational readiness	Strategic positioning	Adaptive capacity

Practical Exercise

Risk and Opportunity Register: For your organization or a case study company:

Identify 5 material transition risks across policy, technology, market, and reputation categories
Identify 3 material physical risks including both acute and chronic risks
Identify 3 significant opportunities across efficiency, energy, products, and markets
Assess financial materiality using quantitative estimates where possible
Assign time horizons (short, medium, long-term) for each risk and opportunity
Prioritize for management attention based on materiality and time horizon

Use the framework and examples provided to structure your assessment and ensure comprehensive coverage of climate-related risks and opportunities.