The first wave of mandatory climate-related financial disclosures under AASB S2 Climate-related Disclosures has now been released. Group 1 entities with 31 December 2025 year-ends, including some of Australia's largest corporations and significant emitters, were the first to publish their sustainability reports.
Much commentary on Australia’s new climate reporting regime has focused on the mechanics. The more significant question for the real estate sector is how these disclosures will begin to influence asset values, financing conditions and development decisions. Climate reporting is no longer simply a sustainability exercise; it is becoming part of the financial information on which investors, lenders and insurers base decisions.
The new regime requires reporting entities to prepare annual sustainability reports containing climate-related disclosures in accordance with AASB S2. These disclosures must cover governance, strategy, risk management, and metrics and targets including Scope 1 and Scope 2 greenhouse gas emissions. Scope 3 emissions become mandatory from year two. Group 2 entities follow for financial years beginning on or after 1 July 2026, and Group 3 from 1 July 2027.
This note is the first in a short series. As further reports are released over the coming months, we will provide more detailed analysis including sector-specific observations as patterns emerge. Set out below are our key takeaways for key real estate stakeholders based on the first round of reporting.
Climate Risk Is Now a Financial Risk
The new regime moves climate considerations squarely into annual corporate reporting, reinforcing they are a risk disclosure that boards are required to stand behind. Company directors must ultimately declare whether the sustainability report complies with the Corporations Act and AASB S2 and, initially, whether the company has taken reasonable steps to ensure that is the case. The disclosures are subject to progressively increasing assurance requirements commencing with limited assurance in year one and ultimately moving to full reasonable assurance. The regime imposes significant civil and criminal penalties for non-compliance, enforced by ASIC. Directors face personal liability for misleading statements and if they fail to take all reasonable steps to secure compliance with the sustainability reporting requirements.
For real estate stakeholders, this means that physical climate risks such as flood, bushfire and heat stress are now being assessed within financial modelling frameworks. Transition risks, including policy change, carbon pricing and shifts in tenant demand, are being costed. Scenario analysis is becoming embedded in board-level governance, with the Corporations Act requiring entities to test resilience under at least a 1.5°C and a high-warming scenario.
This brings asset-level climate risk assessments, capital expenditure planning and insurance modelling into core financial and strategy decision-making. These are no longer discretionary sustainability initiatives.
How Will This Impact Asset Valuations?
One of the most significant medium-term consequences of the new regime will be its impact on valuations. We are beginning to see companies disclose assumptions about useful asset life under climate scenarios and stress test asset values. This information brings greater transparency to issues such as exposure to physical risks, the capital expenditure required to upgrade buildings to meet energy performance expectations, and potential changes in operating costs (including insurance).
That additional transparency may begin to influence valuation inputs, including expected capital expenditure, tenant demand for higher-performing buildings, and long-term asset resilience. While these factors are unlikely to drive immediate valuation changes on their own, they may gradually shape how real estate stakeholders assess the long-term performance and risk profile of property assets.
Several questions are likely to emerge for the real estate sector: Will valuers begin applying differentiated yields to assets with higher climate exposure? How will lenders price risk where transition planning is unclear? Will insurers continue tightening underwriting in higher-risk locations?
Impacts For Lenders and Insurance
Lenders are also developing their own climate risk assessment capabilities. While these assessments do not suggest that climate risk will necessarily cause systemic stress across the financial system, they highlight the potential for concentrated risks in particular sectors or regions. As the reporting regime develops and more detailed information becomes available, lenders and insurers will become better equipped to differentiate pricing and risk assessments based on the climate exposure of individual assets and portfolios.
On the insurance front, the trend is already well advanced. Insurers are increasingly assessing assets for exposure to physical climate risks. In some locations premiums have risen significantly, or coverage terms have tightened. As insurance pricing becomes more closely linked to climate exposure, the risk of under-insurance or limited coverage increases, potentially transferring greater risk to property owners and their lenders. Mandatory climate disclosures will make these exposures more visible to the market, and it is reasonable to expect that lending decisions and asset valuations will increasingly reflect those risks.
How Will This Impact Development?
Developers will also feel the effects of the new regime. Emissions associated with construction materials and processes are becoming an increasingly important consideration as value chains come under scrutiny through Scope 3 reporting obligations. As tenant demand for low-carbon spaces grows there is a risk that buildings which do not meet energy performance and sustainability standards will become stranded assets.
This creates both risk and opportunity for developers. Those who integrate climate risk and embodied carbon considerations into design, procurement and construction will be better positioned to meet the expectations of occupiers, investors and financiers alike. Those who do not may find that their completed assets face reduced demand, lower rents and tighter financing costs.
Key Actions for Real Estate Stakeholders
Even if your organisation is not yet required to report under AASB S2, the practical implications are already being felt. Real estate stakeholders will increasingly consider their own climate exposures when transacting with or investing in real estate assets. Due diligence scope is widening, and the information demands are increasing.
Key areas where real estate stakeholders should be taking action now:
Governance and processes
- Ensure the board is comfortable with the governance arrangements in place for oversight of climate risk, including documenting responsibilities, and appropriate processes and controls
- Prepare documented scenario analysis covering at least a 1.5°C and a well-above-2°C warming pathway – refer to Mallesons’ alert: Day 1 readiness for mandatory climate reporting.
Transaction Readiness
- Ensure asset-level climate risk reports are current and ready for due diligence on physical and transition risk exposures
- Be prepared to respond to emissions data requests. Scope 3 becomes mandatory from year two, which may trigger greater data demands across the value chain
Development Strategy
- Capture a project's carbon profile as Scope 3 obligations expand
- Evolve lease structures to support emissions reduction and reporting, including green lease clauses, data-sharing obligations and energy performance standards
Financing
- Prepare for sustainability-linked loan KPIs with the possibility of lenders introducing climate conditions into financing terms
- Stress-test refinance risk against future energy performance standards; non-compliant properties may face higher borrowing costs or difficulty securing financing
Conclusion
The message for the real estate sector is straightforward: regardless of whether you are currently within the reporting thresholds, the flow-on effects of mandatory climate disclosure are already reshaping market expectations. Proactive engagement with climate risk through governance, data collection, scenario planning and strategic positioning is now the baseline for responsible real estate ownership and investment.
