Glossary›AASB S2 disclosure requirements / AASB S2 mechanics›Transition risk
Glossary term
Cluster C · C8
Tier 1
Transition risk
Definition
Transition risk is risk arising from the shift to a lower-emissions economy rather than from the climate itself. It covers policy and legal change, carbon pricing, technology substitution, changing customer and investor preference, and reputation. For most Australian service, retail and professional businesses, transition risk is the larger of the two risk categories.
On this page
In practice
Transition risk is where a climate disclosure becomes a commercial document. The questions are recognisable to any CFO: does a major customer have a supplier emissions requirement that we do not meet, is a product line exposed to a substitution, does our financing depend on a lender with emissions targets, is a required capital replacement now more expensive because the low-emissions version is the only one available.
The reciprocal question is the one entities forget. Transition risk for your customer is transition demand for you, and AASB S2 requires opportunities as well as risks.
What the assurer does with it
Transition risks are identified and classified inside the strategy disclosures that ASSA 5010 paragraph 10(a)(ii) places in the year-one review scope, so they are tested from the first report.
The assurer looks for the commercial trail, because transition risk almost always has one. They ask for the customer contracts or tender documents behind a supplier-requirement risk, the capital plan behind a technology substitution risk, and the facility terms behind a cost-of-finance risk. They accept a transition risk tied to a named counterparty, contract, product line or capital item, with a horizon consistent with the entity’s stated definitions. They reject a policy risk described at national level with no line to the entity’s own cost base, and a transition risk disclosed with no corresponding opportunity where the same commercial shift obviously creates one.
Commonly confused with
Physical risk, which arises from the physical effects of climate change. Also confused with general market or competitive risk: a transition risk is one whose driver is the move to a lower-emissions economy, not simply any commercial pressure.
Sources
1
2
ASSA 5010 Timeline for Audits and Reviews of Information in Sustainability Reports under the Corporations Act 2001
AUASB
Review status
Review required
Last reviewed
15 September 2026
Editorial pass, unsigned
Reviewer required
Registered company auditor
Next scheduled review
1 July 2027
Part of
Cluster C, AASB S2 disclosure requirements / AASB S2 mechanics
25 terms on what the climate disclosure standard actually requires, pillar by pillar, plus the reliefs and the effort standard.
Related terms
The other category every risk must be classified into
What the entity says it is doing about the transition
The reciprocal of a customer’s transition risk
Related questions
What will our audit and risk committee ask us?
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The same questions they ask about the financial report, applied to information the committee has never seen before. Expect them on capture and scope, where each number comes from and what controls sit over it, the significant judgements and materiality, who your assurance provider is and whether they are independent of the preparer, and what liability protection applies and until when. It works as a self-test: anything you cannot answer today is a work item.
Do we have to report Scope 3 in year one?
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No. AASB S2 gives first-time reporters relief from disclosing Scope 3 greenhouse gas emissions in their first annual reporting period, and Scope 3 is required from the second year. Taking the relief in year one is normal, but the supplier data work needs to start in year one anyway.
Other terms in this cluster
Transition risk