Incorporating velocity in climate-related risk assessments: Enhancing business resilience and strategic planning

Traditionally, enterprise risk registers have focussed on assessing the likelihood and impact of risks that could harm people, revenue or reputation. This tool helps leaders identify risks and formulate strategies to manage them, ensuring the organisation's long-term success.

However, with the introduction of the Australian Sustainability Reporting Standard for Climate-related Disclosures (AASB S2), it’s worth questioning if the traditional risk assessment approach adequately captures the unique climate-related risks and opportunities. These need to be considered across different timeframes-short, medium, and long-term, to make informed investment and business decisions.

In this article, we’ll explore the idea of adding a ‘velocity’ factor to risk assessments, alongside the usual likelihood and consequence, to better understand how quickly climate-related risks and opportunities might materialise.

The role of AASB S2 in climate-related risk disclosure

In September 2024, the Australian Accounting Standards Board (AASB) approved its first sustainability reporting standards, prompting organisations to assess their climate-related physical and transitional risks and opportunities.

An objective of AASB S2 Climate-related Disclosures is for an entity to disclose information about its climate-related risks and opportunities that is useful to primary users of general purpose financial reports in making decisions about providing resources to the entity.

A tool such as a climate risk register, or the integration of climate-related risk into an enterprise risk register, can be used to:

Specify, for each climate-related risk and opportunity the entity has identified, over which time horizons—short, medium or long term—the effects of each climate-related risk and opportunity could reasonably be expected to occur (AASB S2, paragraph 10(c))
Specify current and anticipated effects of climate-related risks and opportunities on an entity’s business model and value chain (AASB S2, paragraph 13)
Evaluate an entity’s exposure and resilience to climate-related risks and opportunities (AASB S2, paragraph 14)
Meet the AASB S2 objective to identify, assess, prioritise and monitor climate-related risks and opportunities (AASB S2, paragraph 24).

Risk management and timeframe quantification

In traditional risk registers, time is often factored in through likelihood ratings, which estimate how frequently a risk might occur within a specified period. However, when integrating climate-related risks into an enterprise risk register, this conventional approach to timeframes can sometimes misrepresent the true nature of the risks or opportunities. As a result, climate-related factors may be deprioritised or not adequately addressed.

Velocity as a risk concept

Velocity in the context of risk assessment refers to the speed at which a risk or opportunity materialises and begins to impact an organisation. It measures the time that elapses between the occurrence of a climate-related event and the point at which the organisation first experiences its effects. Understanding velocity helps anticipate how quickly a risk can affect operations, allowing for more timely and effective mitigation strategies.

Velocity is a critical factor in risk assessments alongside likelihood and consequence because it provides additional insights into the urgency and immediacy of risks and opportunities. While likelihood assesses the probability of a risk occurring and consequence evaluates the potential impact, velocity highlights how fast the risk will manifest. This understanding is crucial for developing appropriate mitigation strategies and ensuring business resilience. By incorporating velocity, organisations can better plan for short-, medium-, and long-term risks or opportunities, enhancing their ability to respond proactively to climate-related challenges.

Table 1

Velocity	Description
Immediate	The impact of the risk event would be evident within 1 year	No warning
Very Rapid	The impact of the risk event would be evident in 2 - 5 years	Minimal warning
Rapid	The impact of the risk event would be evident in 6 - 10 years	Some warning
Slow	The impact of the risk event would be evident in 11 - 20 years	Good warning
Very Slow	The impact of the risk event would be evident after 20 years	Plenty of warning

For example, many credible forecasts, including those from the Intergovernmental Panel on Climate Change, the Australian Bureau of Meteorology and CSIRO, predict that changes in weather patterns and an increase in the frequency and severity of extreme events are almost certain, given our current emissions trajectory. However, these changes are likely to occur beyond a 5-year horizon.

In traditional risk assessments, anything beyond 5 years is often classified with a “Rare” likelihood. As a result, unless the consequences are deemed “Catastrophic” or exceptionally severe, the overall risk rating is likely to remain “Low”, and future treatments would typically align with this low-risk perception. But what if the risk were appropriately categorised as “Likely” or “Almost certain,” even if its full impact is expected over the medium to long term? Would this lead to a stronger strategic response, such as setting up a monitoring program with clear milestones in the interim?

Risk management process incorporating velocity

Step 1: For a given risk, consider the likelihood and consequence criteria of the inherent and residual risk ratings as you would in a traditional risk register process.

Step 2: Using the risk velocity criteria (table 1), determine the timeframe over which the risk or opportunity could materialise in your organisation’s operations.

Step 3: After applying the velocity criteria, assess the materiality of the risk’s rating over short-, medium- and long-term horizons. For example, a high-rated risk event expected to materialise in 10 years may be considered less material today than it would be in 10 years when the impact may arise.

Step 4: Develop risk management strategies over short-, medium- and long-term horizons, incorporating the timing of the risk or opportunity materialising.

To enhance our assessment, we integrate the concept of risk velocity, which helps you evaluate the short, medium and long-term likelihood, aligning with the requirements of AASB S2.

Example of how to incorporate velocity into your risk register

Residual risk			Velocity descriptions			Potential future management
Likelihood	Consequence	Risk rating	Velocity rating	Timing of impact	Potential warning level	Potential future management
Possible	Moderate	High	Very rapid	2 – 5 years	Minimal warning	Investigate: Undertake detailed analysis, consider future implications and update all policies and procedures related to managing exposure to this risk.
Possible	Moderate	High	Slow	11 – 20 years	Good warning	Monitor: Provide quarterly updates to the executive and Board on current conditions and future trends.

The benefits of incorporating velocity into climate risk assessments

Integrating velocity into climate risk assessments adds an extra layer of thoroughness, offering several advantages. These include a more comprehensive risk appetite framework, more effective mitigation strategies, and the ability to plan for quicker implementation of pre-emptive and recovery processes. Additionally, it improves resource allocation, enhances stakeholder communication, and increases overall organisational climate resilience.

How BDO can help

Our national sustainability team can assist your organisation in preparing a tailored climate risk assessment or review your existing framework and controls to ensure compliance with upcoming regulatory requirements.