Navigating AASB S2 Pillar 2: Embedding climate strategy into your reporting

Our sustainability webinar series breaks down the complex world of sustainability, making it a little easier for you to understand the basics and begin driving change within your organisation. 

In this webinar, Aletta Boshoff focuses on Pillar 2: Strategy, part of the Australian Sustainability Reporting Standard AASB S2 Climate-related Disclosures. This pillar is designed to help users of an organisation’s financial reports understand how it plans to manage climate-related risks and seize emerging opportunities.

Our 2025 sustainability webinar series is progressing through each of the four pillars in detail, having started with Pillar 1: Governance. This webinar continued the journey by exploring how strategic planning supports effective climate resilience and long-term value creation. 

Importance of Strategy 

The Strategy pillar of AASB S2 goes beyond compliance—it’s a critical lens through which investors assess a company’s future resilience and value. A survey cited in the Task Force on Climate-related Financial Disclosures (TCFD) materials found that the most decision-useful information for investors is how climate-related issues affect an organisation’s business and strategy. Three of the top ten most valuable disclosures fall under the Strategy recommendation. 

This insight underlines a fundamental truth: strategy is the bridge between climate risk and financial performance. When organisations clearly articulate how climate risks and opportunities shape their strategic direction, they offer stakeholders a forward-looking view of adaptability, competitiveness, and viability. 

While disclosures on GHG emissions (Scope 1, 2, and 3) and climate metrics are also highly valued, they are most impactful when embedded in a broader strategic narrative. In other words, metrics matter, but only when they tell a story. 

By aligning with the Strategy pillar, companies can: 

  • Show how climate considerations are embedded in core decision-making 
  • Build transparency and investor trust 
  • Strengthen access to capital and lower financing costs. 

As the climate disclosure landscape matures, strategy will remain the cornerstone of credible and decision-useful reporting. 

What is climate change, and how does it lead to risks and opportunities for your business? 

Defining climate change in the business context 

According to the Intergovernmental Panel on Climate Change (IPCC), climate change refers to a persistent shift in the state of the climate, identifiable through changes in the mean or variability of climate properties over decades or longer. These changes may result from natural processes (like volcanic activity or solar cycles). 

The UN Framework Convention on Climate Change (UNFCCC) further refines this definition by attributing climate change to human activities that alter the composition of the global atmosphere, distinguishing it from natural climate variability. 

In a business context, this definition is critical. It frames climate change not as a distant environmental issue but as a systemic force that can reshape markets, disrupt supply chains, alter consumer behaviour, and influence regulatory landscapes. Under AASB S2, organisations are required to assess and disclose how these climate-related changes could reasonably be expected to affect their: 

  • Cash flows 
  • Access to finance 
  • Cost of capital 

over the short, medium, or long term. 

Understanding the scientific basis of climate change helps businesses better identify physical risks (e.g., extreme weather, sea level rise) and transition risks (e.g., policy shifts, technological disruption), which are central to the Strategy pillar of AASB S2. 

Bridging climate science and policy in strategic planning 

Adequate climate-related financial disclosures require more than just data—they demand a strategic understanding of climate science and policy. Climate science provides the evidence base: observable trends in temperature, sea level rise, extreme weather events, and long-term shifts in climate systems. These insights help organisations identify physical risks that could disrupt operations, supply chains, or asset values. 

On the other hand, climate policy—including national emissions targets, carbon pricing mechanisms, and regulatory frameworks—shapes the transition risks organisations face. These include shifts in market preferences, legal liabilities, and compliance costs. 

Integrating both into strategic planning enables companies to: 

  • Anticipate and adapt to regulatory changes 
  • Align with investor expectations for credible transition plans 
  • Identify opportunities in low-carbon technologies and markets. 

Under AASB S2, this integration is essential for disclosing how climate-related risks and opportunities affect an entity’s strategy, financial position, and future performance. It ensures that disclosures are compliant and relevant for investors and stakeholders. 

How does an entity identify and assess climate-related risks and opportunities? 

To begin aligning with AASB S2, organisations must undertake a structured climate risk and opportunity assessment. This foundational step ensures that climate-related issues are identified, evaluated, and integrated into strategic and financial planning. Here’s a five-step methodology to guide the process: 

Step 

Description 

Step 1 – Identify climate risks 

Identify climate risk impact and likelihood across three time horizons: 

  • Short term 
  • Medium term 
  • Long term. 

Step 2 – Discuss with leadership team 

Discuss transition and physical risk with the leadership team and subject matter experts to decide on materiality. 

Step 3 – Assess control environment 

Assess the control environment for existing capability to manage: 

  • Key climate risks 
  • The adequacy of controls 
  • Any existing gaps. 

Step 4 – Consider impact on risk register 

Consider how these climate themes can be embedded in the enterprise risk register and framework. 

Step 5 – Prepare report

Report on the above to feed into the enterprise risk management framework. 

 

Turning strategy into action 

These five steps offer a practical roadmap for embedding climate risk into enterprise strategy and reporting. Each step builds a more resilient and transparent organisation by identifying risks across time horizons and integrating them into the risk register. This process supports compliance with AASB S2 and strengthens internal decision-making and investor confidence. Most importantly, it ensures that climate considerations are not siloed—they’re embedded in the core of your corporate strategy. 

Connecting climate risk to financial reality 

Meeting the disclosure requirements of  AASB S2—particularly under the Strategy pillar—demands more than qualitative insights. It requires a robust analytical foundation that connects climate risks to financial outcomes. This involves a three-step process: 

  1. Climate risk assessment 
    Identify and evaluate both physical and transition risks across relevant time horizons. This step sets the stage for understanding how climate change could affect operations, assets, and value chains. 
  2. Scenario analysis 
    Use plausible climate scenarios to explore how different pathways, such as a 1.5°C or 2.5°C world, might impact your business. Scenario analysis helps uncover vulnerabilities and test the resilience of strategic plans. 
  3. Financial modelling 
    Quantify the potential financial impacts of climate risks and opportunities. This includes modelling effects on revenue, costs, asset valuations, and capital expenditure—ultimately linking climate strategy to financial statements. 

Without this structured approach, disclosures risk being incomplete or non-compliant. More importantly, they may fail to provide the information investors and stakeholders increasingly demand. 

Disclosure requirements: What you must report 

To meet AASB S2 requirements, organisations need to identify climate-related risks and opportunities that could reasonably impact their outlook. These disclosures must be based on all reasonable and relevant information available at the time of reporting, including past events, current conditions, and future projections, without requiring excessive cost or effort. 

Here’s an extract of the types of disclosures for climate-related risks and opportunities: 

  1. Overall impact 
    Explain how climate-related risks and opportunities could reasonably be expected to affect your business outlook. 
    Subject to assurance in Year 1. 
  2. Detailed descriptions 
    Describe the specific risks and opportunities identified. 
    Subject to assurance in Year 1. 
  3. Risk classification 
    Explain whether each risk is a physical or transition risk. 
    Subject to assurance in Year 1. 
  4. Time horizons 
    Specify whether each risk or opportunity is expected to impact your business in the short, medium, or long term. 
  5. Time horizon definitions 
    Define what short, medium, and long term mean for your business, and explain how these align with your strategic planning timelines. 

How BDO can support your climate strategy 

Navigating the Strategy pillar of AASB S2 requires more than good intentions; it demands transparent processes, credible data, and financial insight. Whether you’re just starting your climate risk assessment or refining your scenario analysis and financial modelling, our sustainability experts can help you build a compliant and effective strategy.