With climate change posing growing financial risks, the Australian Government has recently mandated climate-related financial disclosures through amendments to the Corporations Act 2001. This new regime requires large companies and financial institutions to disclose their climate-related risks and opportunities, including strategies for managing them. It also aligns Australia with global standards, such as those adopted in the EU, UK and New Zealand, and is designed to enhance transparency, allowing investors to assess the full spectrum of climate risks businesses face.

While much of the discourse around climate-related financial disclosures has focused on emissions and the transition to a low-carbon economy, it is equally important to consider the physical risks posed by climate change – such as floods, droughts and bushfires. These events increasingly affect corporate assets, supply chains and valuations, yet they remain under-reported in many corporate disclosures. Indeed, our research has demonstrated that higher corporate carbon emissions correlate with elevated company-specific risk and increased capital costs for those companies. To fully address the financial risks posed by climate change, companies must expand their disclosures to include the broader range of physical climate risks.

As Australia aligns its policies with international standards, such as the Task Force on Climate-related Financial Disclosures (TCFD), there is a pressing need to address both transition risks and physical climate risks. We argue that Australia’s new disclosure regime should not only mandate reporting on carbon emissions but also require companies to disclose their exposure to physical climate risks such as floods, droughts and bushfires. By doing so, Australia can position itself as a leader in comprehensive climate risk management, aligning its policies with global best practices and protecting its economy from the unpredictable impacts of climate change.

The importance of considering broader climate risks

Corporate carbon emissions are now widely recognised as a critical factor influencing financial risk and capital costs. Our research, published in the International Review of Economics and Finance, demonstrates that companies with higher carbon emissions face elevated risk and experience increased costs in debt and equity markets. However, carbon emissions represent only part of the climate risk landscape. Physical climate risks – such as floods, droughts and extreme weather events – also pose significant threats to corporate assets, profitability and long-term valuations. While significant progress has been made in incorporating carbon emissions into corporate risk assessments, physical climate risks – such as extreme weather events – remain under-disclosed and underappreciated in many corporate strategies.

Firms in regions prone to climate-related disasters often suffer from reduced and unpredictable earnings. Industries with substantial fixed assets, such as energy, healthcare and utilities, are particularly vulnerable to these risks, as disruptions from severe weather can significantly degrade their operations. Similarly, sectors such as agriculture, food manufacturing and transportation – which rely on stable weather conditions and complex supply chains – face heightened risks in the face of climate-induced disruptions.

Given these broader risks, it is crucial for companies to adopt comprehensive strategies to manage both carbon emissions and physical climate risks. Measures such as maintaining higher liquidity, reducing dividend payouts or securing long-term debt have been recommended to buffer against these challenges. Expanding corporate financial disclosures to include physical climate risks will ensure that markets are better informed, promoting more resilient business practices.

A more comprehensive approach to climate risks

As the Australian Government introduces mandatory climate-related financial disclosures, effective management of climate risks demands a more comprehensive and transparent approach. Expanding the disclosure regime is essential not only for protecting corporate assets but also for ensuring the resilience of Australia’s broader financial system.

Our research highlights the financial implications of carbon emissions on capital costs and risks and underscores the need for a more holistic approach. Further research suggests that corporate management must place climate-related risks at the centre of their disclosure strategies to ensure long-term success. Addressing the systematic underestimation of these risks requires a unified regulatory framework that encourages comprehensive, consistent disclosure practices across industries.

Despite the increasing number of sustainability reporting frameworks, such as the Global Reporting Initiative (GRI), and the new standards from the International Sustainability Standards Board (ISSB) under the IFRS Foundation, inconsistencies in implementation persist. Our research highlights the shortcomings of focusing solely on short-term financial relevance, which can limit the scope of climate risk disclosures to immediate market concerns. Instead, a broader and more strategic approach is needed to account for long-term sustainability and resilience in the face of growing climate threats.

We make three policy recommendations to move towards a more holistic approach.

First, comprehensive climate risk disclosure. The Australian Government could expand its mandatory climate-related financial disclosure framework so that companies report not only on carbon emissions but also on physical climate risks. This includes detailed reporting on how environmental events – such as droughts, floods and bushfires – could affect company assets and operations. Companies should quantify potential financial losses from these risks, providing investors with a clearer understanding of their overall risk profile. By expanding the disclosure framework, Australia can empower investors with the information they need to make informed decisions in a rapidly changing climate landscape.

Second, a government-led physical risk assessment framework. To support corporate reporting on physical climate risks, the Australian Government should develop a standardised framework for assessing and disclosing the exposure of businesses and critical infrastructure to these risks. This would facilitate consistent risk assessments across industries, enabling corporations and investors to make better-informed decisions. Moreover, this framework would enhance transparency and provide a basis for cross-sectoral comparisons, thereby fostering a more resilient and adaptive corporate sector.

And third, climate risk stress testing. Just as financial stress tests are used to assess a company’s ability to withstand economic shocks, climate risk stress tests should be expanded to evaluate the impact of severe climate events on corporate operations and financial stability. These tests would simulate the financial consequences of physical climate risks – such as floods or bushfires – and provide companies with the tools to manage their exposure. This is especially crucial for sectors that are vulnerable to climate risks, such as agriculture, real estate and insurance.

Towards a more sustainable and resilient future

As Australia moves to implement its climate disclosure regime, governments must ensure that reporting frameworks reflect the full spectrum of climate risks. Market forces alone cannot drive the necessary corporate changes to climate-related risks. A more transparent and consistent approach to risk disclosure will safeguard corporate interests and protect the wider economy from the unpredictable and potentially devastating impacts of climate change. However, practical hurdles remain, such as aligning global reporting standards, ensuring sufficient corporate capacity for compliance and overcoming resistance from industries facing higher transition costs. Addressing these challenges will be key to building a more sustainable and resilient future for both businesses and society.

Dr Adam Arian is a Lecturer in Accounting and Finance at Australian Catholic University and an Adjunct Senior Lecturer at the University of Southern Queensland. He has extensive expertise in corporate sustainability, financial risk management, and climate risk disclosure. Dr Arian’s work focuses on the intersection of corporate governance, environmental performance, and capital markets, providing actionable insights for policymakers and businesses.

Professor John Sands is a Professor of Accounting at the University of Southern Queensland, specialising in corporate governance, sustainability accounting, and management accounting. His research focuses on corporate social responsibility, stakeholder engagement, and sustainability reporting.

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