The standard’s two-part definition of physical risk becomes one disclosed number, but two different measurement methods sit behind it, and the figure is only as good as the weaker one.
- AASB S2 names two types of physical risk, acute and chronic, but paragraph 29(c) asks for one combined number, not two.
- Two different measurement methods sit behind that number: acute is a return-period (event) problem, chronic is a trend problem run across warming scenarios and time horizons.
- The methods do not substitute for each other. The disclosed figure is only as reliable as the weaker of the two.
- Chronic is the half teams skip, because there is no single event to point at. Skipping it understates the number in a way an assurance provider can probe and a lender can re-price around.
1. Two types, one number, and two methods behind it
AASB S2 splits physical risk into two types. Its definitions appendix calls them acute and chronic. Then, when it comes to the actual disclosure, the standard collapses them back into a single figure.
The physical-risk metric, in paragraph 29(c), asks for the amount and percentage of assets or business activities vulnerable to climate-related physical risks. One number. No instruction to report acute and chronic separately. Here is the standard’s definition of physical risk in full:
“Risks resulting from climate change that can be event-driven (acute physical risk) or from longer-term shifts in climatic patterns (chronic physical risk). Acute physical risks arise from weather-related events such as storms, floods, drought or heatwaves, which are increasing in severity and frequency. Chronic physical risks arise from longer-term shifts in climatic patterns including changes in precipitation and temperature which could lead to sea level rise, reduced water availability, biodiversity loss and changes in soil productivity.”
The two-part definition is there to help you understand the risk, not to set the format of the disclosure. But the two halves are not the same kind of problem, and that is the part first-time reporters miss. Acute exposure is estimated with event and return-period methods. Chronic exposure is estimated with trend methods, run across different warming scenarios and time horizons. Different data, different modelling, different evidence to put in front of an auditor.
So one number sits on top of two methods that do not substitute for each other. The standard does not tell you to run two methods. It asks for one figure and leaves the how to you. But you cannot get to a defensible figure any other way, and the single number is only as reliable as the weaker of the two methods behind it.
2. Acute is an event problem you size with return periods
Take the acute half first. Acute risk is event-driven: a storm, flood, drought or heatwave arrives on a given day, in a given place, and causes damage. That makes it a return-period problem. You estimate how often an event of a given size hits a location, how severe it is when it does, and the loss to the asset that sits there. The full list of acute hazard types is a topic of its own; what matters here is the method they share. Because acute risk is concrete and easy to picture, it tends to get the most attention, and that is the trap: it is only half the requirement.
3. Chronic is a trend problem you size across scenarios
The chronic half does not arrive as an event. It is a directional shift in the conditions an asset operates in: longer-term changes in precipitation and temperature that can lead to sea level rise, reduced water availability and lower soil productivity. That makes it a trend problem. The questions are which way a condition is moving, how far it moves over the horizon you care about, and what a permanently hotter, drier or higher-sea-level setting does to the asset’s value or output.
There is no single event to point at, which is exactly why chronic risk gets under-counted. A site that floods makes the news; a site whose water supply is slowly tightening does not. Both are physical risk under AASB S2.
4. The same driver can wear both faces
Here is the part that trips people up, and it comes straight from the wording of the definition itself.
Temperature appears on both sides. The acute list names heatwaves. The chronic list names changes in temperature. Precipitation appears on both sides too. The acute list is where floods sit, and floods are precipitation-driven. The chronic list names changes in precipitation. The definition even files drought under acute events, while putting reduced water availability under chronic shifts, splitting the same water theme across both halves.
The lesson is that you cannot sort hazards into two neat bins. The same climate driver can act on an asset as a sudden event and as a slow trend at the same time. A warming climate brings both worse heatwaves and a higher average temperature. What you are really sorting is not the hazard but the way that hazard acts on a specific asset.
| Acute physical risk | Chronic physical risk | |
|---|---|---|
| What it is | Event-driven: a storm, flood, drought or heatwave on a given day at a given place | A directional shift: longer-term changes in precipitation and temperature, sea level rise, water availability |
| How you size it | Return-period methods: the chance and severity of an event at a location, and the loss to the asset | Trend methods, run across warming scenarios and time horizons: which way a condition moves, and how far |
| Failure mode | Over-weighted, because it is concrete and easy to picture | Under-counted, because there is no single event to point at |
5. Why under-counting chronic shows up in the disclosure
All of this lands in one place: the disclosed figure. If a team works through the acute hazards, because those are the easy ones to picture, and rolls that into the paragraph 29(c) number without doing the chronic trend work, the number understates the real exposure. That gap is visible. An assurance provider can probe it, and a lender or insurer reading the disclosure can re-price around it.
Getting both halves done is mostly a data-sequencing problem rather than a drafting one.
6. The Australian layer: two scenarios sharpen the chronic question
AASB S2 reporters do not choose a single view of the future. The Australian regime requires scenario analysis against at least two warming pathways, a lower-warming case and a higher-warming case.
That requirement presses hardest on the chronic side. Chronic shifts compound over the horizon, so the gap between a lower-warming and a higher-warming path widens the further out you look, which makes scenario divergence especially visible for trend risks. Acute event risk is scenario-sensitive as well, so this is a matter of where the divergence is most cumulative, not a claim that acute risk holds still. The practical effect is that two-scenario reporting forces the chronic trend work that teams are most tempted to skip.
7. How a screen separates the two
A physical-risk screen handles the two halves with different machinery, which mirrors the split in the definition.
Acute hazards, such as riverine and coastal flood, severe storm and tropical cyclone, heatwave, drought and wildfire, are assessed at return periods: the chance and severity of an event at a location. Chronic hazards, such as temperature change, precipitation change, sea level rise and water stress, are assessed as trends across scenarios and time horizons. Sorting our hazard set this way is an application of the standard’s own acute and chronic definition; it is how the two halves of paragraph 29(c) get evidence behind them.
One honest limit is worth stating plainly. Flood damage can be quantified with established depth-damage curves. Damage functions for wind, wildfire and drought remain a gap across the industry, not just for any one provider. A defensible disclosure names where the modelling is strong and where it is still maturing, rather than implying every hazard is quantified to the same standard.
Continuuiti screens a location or a whole portfolio across both method types at once: return-period exposure for the acute hazards and trend-and-scenario exposure for the chronic ones, on two warming pathways and four time horizons. So the paragraph 29(c) figure rests on both halves of the work, not just the one that is easy to picture.
8. A defensible 29(c) figure needs both methods
AASB S2 gives you two words and asks for one number. Acute risk is an event problem you size with return periods. Chronic risk is a trend problem you size across scenarios and horizons. The same climate driver can show up as both. Paragraph 29(c) will not make you report them separately, but you cannot produce a defensible figure without doing both halves of the work, and the figure is only as strong as the weaker half.
The next step down is the disclosure itself: how paragraph 29(c) defines “vulnerable,” and what amount and percentage actually require. That is covered in the companion piece on the paragraph 29(c) physical-risk metric.
The disclosure itself: how paragraph 29(c) defines “vulnerable”, and what the amount and percentage actually require.
The standard comparison: what AASB S2 changes from IFRS S2 for physical-risk reporters.
Frequently asked questions
Does AASB S2 make me report acute and chronic physical risk separately?
No. Paragraph 29(c) asks for one combined figure, the amount and percentage of assets or business activities vulnerable to climate-related physical risks. The acute and chronic split is there to help you understand the risk and choose the right method, not to set the format of the disclosure.
Why does one physical-risk number need two methods?
Because the two halves are different kinds of problem. Acute exposure is a return-period problem: how often an event of a given size hits a location and the loss when it does. Chronic exposure is a trend problem run across warming scenarios and time horizons. They use different data and different modelling, and one does not substitute for the other. The standard asks for one figure and leaves the how to you.
Which method gets skipped, and why does it matter?
Chronic, because there is no single event to anchor on. A site that floods makes the news; a site whose water supply is slowly tightening does not. If a team works through only the acute hazards and rolls that into the paragraph 29(c) number, the figure understates the real exposure in a way an assurance provider can probe and a lender or insurer can re-price around.
Is drought acute or chronic under AASB S2?
The standard’s definition lists drought under acute events, while reduced water availability sits under chronic shifts. In practice a single drought event is acute, sized with return periods, while a long-term drying trend is chronic, sized across scenarios. The same water theme is split across both halves, which is why you cannot sort every hazard into one neat bin.
Sources
- AASB S2 Climate-related Disclosures (September 2024), Appendix A, definition of climate-related physical risks.
- AASB S2 Climate-related Disclosures (September 2024), paragraph 29(c), cross-industry physical-risk metric.
- AASB S2 Climate-related Disclosures (September 2024), Appendix A, definition of climate resilience.
- Corporations Act 2001 (Cth), Chapter 2M sustainability-reporting provisions, scenario-analysis requirement.
