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ACCA Strategic Professional · Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

Orion Ltd reports in its sustainability report that it is exposed to carbon pricing regulation. Under IFRS S2 Climate-related Disclosures, which type of climate-related risk does this represent?

Exposure to carbon pricing regulation is a transition risk under IFRS S2, because it arises from policy and legal changes as the economy moves to lower carbon emissions, rather than from physical climate events such as floods or long-term temperature changes.

  1. APhysical risk, acute
  2. BPhysical risk, chronic
  3. CTransition riskCorrect
  4. DClimate-related opportunity

Explanation

IFRS S2 divides climate-related risks into physical risks (acute events such as floods, or chronic shifts such as rising sea levels) and transition risks arising from the move to a lower-carbon economy, including policy and legal changes such as carbon pricing. Carbon pricing is therefore a transition risk, not a physical risk.

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