A reporter asking whether physical risk is material is really running two different tests: an operational one the standard never mentions, and an information one the standard defines. You need both, in that order.
- “Is physical climate risk material under AASB S2?” is really two questions: an operational one, which hazards each site depends on being spared, and an information one, whether disclosing the risk could change an investor’s decision.
- AASB S2 defines only the second test, in Appendix D. The first is assessment practice; no paragraph of the standard asks for a site-by-site dependency map.
- The standard sets no materiality threshold (paragraph B19). The judgement is yours, which is exactly why the two tests blur.
- A “no material physical risks” conclusion is allowed (paragraph B25), but it has to be evidenced site by site and re-run every reporting date (paragraph B28). The dependency map is the evidence the information test runs on.
1. One question, two different tests
“Is physical climate risk material for us?” Every team preparing a first AASB S2 report hits this question early, because the answer decides how much of the work that follows is mandatory.
The question sounds like one test. In practice it is two. The first asks which climate hazards your sites and assets depend on being spared: an operational question, answered site by site. The second asks whether information about those risks could change the decisions of the people reading your report: a disclosure question, with a test the standard spells out. AASB S2 defines only the second. The first comes from assessment practice. Both travel under the same word, materiality, and running them together is one of the easiest mistakes to make in a first reporting year.
This piece separates the two, then shows why you cannot finish the second without the first.
2. Test 1: which hazard matters to which site
The operational test starts from what each asset does. A foundry that runs hot and depends on large volumes of cooling water has a different relationship with drought than a warehouse on the same map. A just-in-time supplier on a floodplain has no slack to absorb a flood that a buffered distribution centre could ride out. Whether a hazard matters to a site is a property of the operation, not just the location.
Assessment practice handles this with a dependency map: every site scored against every hazard for how much the operation depends on being spared it, on a simple scale running from not material to that site up to a critical dependency. Continuuiti’s manufacturing climate risk guide works a live example, a materiality map of which hazard matters to which site, where the weights describe the business rather than the climate and stay the same whatever warming scenario you run. The weights capture dependency only. Dollar consequence is estimated in a separate damage layer, so the two do not double-count.
One thing to be clear about: AASB S2 does not ask for this map. No paragraph of the standard prescribes site-by-site dependency scoring. It is the working method assessors use to give the disclosure judgement something to stand on. Which is where the second test comes in.
3. Test 2: AASB S2’s test is about information, not hazards
The standard’s own materiality test lives in Appendix D, the appendix that carries AASB S2’s general requirements, and it applies to information rather than to hazards. Paragraph 17 of that appendix carries the operative requirement:
“An entity shall disclose material information about the climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects.”
Paragraph 18 then supplies the test for what makes information material:
“In the context of climate-related financial disclosures, information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports, which include financial statements and climate-related financial disclosures and which provide information about a specific reporting entity.”
Primary users are the investors, lenders and other creditors reading your report: the appendix describes their decisions as buying, selling or holding equity and debt, providing credit, and exercising voting rights. So the unit of the standard’s test is not whether a flood would hurt a site. It is whether telling those readers about it, or failing to, could change what they decide. Paragraph 14 of the same appendix adds that materiality is entity-specific, judged by the nature or magnitude of what the information describes, in the context of your climate disclosures as a whole.
Two short notes to place this. Appendix D exists because Australia made its general sustainability standard, AASB S1, voluntary, so AASB S2 had to carry these requirements itself; the background is in our AASB S2 versus IFRS S2 comparison. And this is not the European double-materiality regime: both tests in this piece sit inside the investor lens, while the separate impact-on-the-world lens is an ESRS question, covered in our piece on double materiality for physical climate risk.
4. No threshold, no checklist: why the two tests blur
If the standard has its own test, why do teams mix the two up? Because neither test comes with a number. Appendix D’s application guidance, at paragraph B19, says so directly:
“Materiality judgements are specific to an entity. Consequently, this Standard does not specify any thresholds for materiality or predetermine what would be material in a particular situation.”
The neighbouring guidance, paragraph B21, adds that information is judged individually and in combination, against quantitative and qualitative factors both. No percentage of asset value, no hazard score, no cut-off. The judgement is yours.
That hand-back is what makes the blur expensive, in both directions. A team that treats a site-level hazard score as the disclosure answer has skipped the information test entirely. A team that drafts the disclosure straight from the standard’s words, with no site-level evidence underneath, holds a judgement it cannot defend when an auditor or an investor asks how it was reached.
| Test 1: operational (assessment practice) | Test 2: information (AASB S2 Appendix D) | |
|---|---|---|
| The question it asks | Which hazards does this site depend on being spared? | Could omitting or obscuring this information change a reader’s decision? |
| What it is about | Hazards and sites | Information and its users |
| Where it comes from | Assessment practice; the standard never asks for it | Defined by AASB S2 (Appendix D, paragraphs 17 and 18) |
| The unit | A dependency map: every site scored against every hazard | Material information in the report |
| Who it serves | The exposure work underneath the disclosure | Investors, lenders and other creditors |
| When you run it | First: it is the evidence | Second: on that evidence |
5. Test 1 is the evidence that Test 2 runs on
Look at what Appendix D actually asks you to weigh, and the dependency map stops being optional in practice.
For possible future events with uncertain outcomes, paragraph B22 asks you to consider the potential effects on the amount, timing and uncertainty of your future cash flows, and the range and likelihood of the possible outcomes. For physical risk, you cannot state a range of outcomes without knowing which sites face which hazards, and how hard.
Paragraph B23 asks you to weigh low-probability, high-impact outcomes, individually and in combination. The standard’s own example is supply-chain disruption: disruption from any single source may be unlikely, but the aggregate risk across all sources might still be material. Aggregating across sources is precisely what a site-by-site map makes possible.
Paragraph B24 weighs timing: effects that sit many years out usually matter less, except where an item draws close scrutiny from your readers, in which case magnitude and timing alone do not settle it.
Paragraph B30 warns against aggregation that obscures, and says you may need to break information out by geographical location. The standard’s own example is water: distinguishing supply drawn from abundant sources from supply drawn from water-stressed areas. That is a physical-risk example, and it is geographic to its core.
Every one of these judgements consumes what the operational map produces: which assets, which hazards, what dependency, where. Test 1 is not a competing definition of materiality. It is the evidence Test 2 runs on.
6. Concluding zero material physical risks still needs the map
First-wave reporting shows how often the judgement lands at zero. KPMG’s review of 30 early AASB S2 reporters, the FAST 30, found entities disclosed between zero and six potentially material physical risks, averaging 1.1 per entity. Some concluded they had none. Yet the same review found every observed entity reported at least two climate-related risks of some kind that could affect its prospects, even where it went on to assess them as not having a potentially material financial impact because of how the risks are managed.
A zero is a legitimate answer. Paragraph B25 of the appendix says an entity need not disclose information that is not material, even where the standard describes a disclosure as a minimum requirement. But the same appendix makes the zero provisional: paragraph B28 requires materiality judgements to be reassessed at each reporting date as circumstances change. A defensible zero is an evidenced conclusion that gets re-run every year, not a one-time waiver.
And the evidence is the part no template will hand you. EY’s illustrative AASB S2 report states plainly that it “does not demonstrate how the concept of materiality has been applied,” because the judgement is specific to each entity. KPMG’s advice to first-time reporters is to develop a materiality framework of their own. The judgement cannot be copied. The map underneath it can be built.
Continuuiti screens a site or a whole portfolio for which hazards each asset depends on being spared, then sizes the exposure. That gives the AASB S2 materiality judgement something to stand on: material physical risks identified and sized, or a defensible zero you can show your work for and re-run each reporting date.
7. Run the dependency map first, then make the call
The order of operations follows from the structure. Map which hazards each asset depends on being spared. Size the exposure. Then run the standard’s test: could omitting, misstating or obscuring this information change a reader’s decisions? Re-run both at each reporting date.
An asset-level physical-risk screen is the evidence base for that judgement whichever way it lands: material risks identified and sized, or a zero you can show your work for. For how the disclosed figure itself gets built, see the companion piece on the two measurement methods behind the paragraph 29(c) number, and the manufacturing guide for a dependency map worked end to end.
The disclosed figure: the two measurement methods behind the AASB S2 paragraph 29(c) number.
The standard comparison: what AASB S2 changes from IFRS S2 for physical-risk reporters.
Frequently asked questions
Does AASB S2 set a materiality threshold?
No. Application paragraph B19 states that materiality judgements are entity-specific, and that the standard sets no thresholds and predetermines nothing. There is no percentage of asset value or hazard score that makes physical risk material; the judgement is yours to make and defend.
Can we conclude we have no material physical risks?
Yes. Paragraph B25 permits an entity not to disclose information that is not material, even where a disclosure is described as a minimum requirement. But paragraph B28 requires the judgement to be reassessed at each reporting date, and the zero needs site-level evidence behind it. A defensible zero is an evidenced conclusion that gets re-run every year, not a one-time waiver.
Is AASB S2 materiality the same as double materiality?
No. Both tests in this piece sit inside a single investor lens: whether information could change the decisions of investors, lenders and other creditors. Double materiality adds a second lens, the entity’s impact on the world, and is a European ESRS concept rather than an AASB S2 one.
What does material information mean under AASB S2?
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that primary users of the report make. Primary users are the investors, lenders and other creditors reading it, deciding whether to buy, sell or hold, to provide credit, or how to vote.
Sources
- AASB S2 Climate-related Disclosures (September 2024), Appendix D paragraphs 14, 17, 18, 19; application guidance paragraphs B14, B19, B21, B22, B23, B24, B25, B28, B30.
- KPMG, AASB S2 First Impressions: FAST 30 (March 2026), climate-related risks and opportunities analysis and first-time reporter recommendations.
- EY, Quality Holdings Resources Limited: Illustrative AASB S2 climate-related disclosure (February 2025), disclosure requirements not illustrated.
- Continuuiti, Climate risk assessment for manufacturing guide, materiality map section.
