Your top ten sustainability reporting questions answered
October 08, 2022
Climate risk is financial risk — understanding and managing it is essential for resilient business strategy.”
Understanding climate risk in business
Climate risk refers to any potential negative effects a business might experience due to climate change. These effects include financial, operational, social, and environmental impacts. Climate risk is generally divided into two categories: physical risks and transition risks.
Physical risks arise from direct climate hazards such as extreme weather events—wildfires, floods, droughts—and gradual changes like increasing temperatures and precipitation patterns. Physical risks are further split into acute risks (e.g., sudden floods or storms) and chronic risks (e.g., ongoing drought) (1).
Transition risks emerge from the global shift towards a low-carbon economy. These include regulatory changes, evolving market conditions, technological advancements, and reputational impacts. For example, changes in energy prices, stricter emissions regulations, or consumer preferences for sustainable products all fall under transition risks.
While climate-related opportunities exist, such as new market prospects from low-carbon products, this article focuses on managing the risks which are more challenging for many organisations.
The economic effects of climate change
The economic impact of unmitigated climate risk is vast. For instance, the wildfires in Los Angeles resulted in an estimated economic loss of around $250 to $275 billion across multiple sectors, including utilities, telecommunications, and travel (1). Flooding in Germany caused over $1.4 billion in damages, disrupting critical infrastructure and operations (2).
A recent study by the Potsdam Institute estimated that without significant mitigation, climate damages could cost the global economy $32 billion annually by 2050, translating to a potential 17% GDP loss under business-as-usual scenarios (3). This encompasses impacts on agriculture, infrastructure, productivity, and public health.
Understanding the economic effects highlights why climate risk assessment is critical to avoid costly disruptions and secure operational continuity.
Regulatory landscape and compliance
The climate regulatory environment is rapidly evolving globally. Across approximately 30 jurisdictions, regulations covering climate risk assessment and disclosure are either in progress or mandatory. Key regulatory frameworks include:
- CSRD ESRS: The EU leads with CSRD by introducing mandatory climate risk analysis, and adaptation planning for public companies starting 20252. Aligns with IFRS S2 on governance and financial risk assessment
- California SB 261 requires TCFD-aligned climate risk disclosure from 2026, effectively mirroring IFRS S2 structure. New York is proposing similar requirements via SB 3697
- IFRS S2, issued by the International Sustainability Standards Board (ISSB), is becoming the global baseline for climate-related financial disclosures, building onTCFD and its four-pillar framework.
More curious about California disclosure bills? Read our article and get informed.
Organisations often face a patchwork of overlapping requirements. A practical approach is to begin with the TCFD framework due to its global recognition and build compliance from there, scaling reporting efforts to meet jurisdiction-specific demands.
Governance structures are vital to managing climate risks effectively—assigning responsibility, engaging stakeholders, and integrating climate considerations into enterprise risk management ensures ongoing compliance and adaptation.
Download our reporting guide and dive into the regulations!
Steps to effective climate risk management
Managing climate risk follows a structured risk management process:
1. Identification
Identify relevant physical and transition hazards impacting the organisation’s operations, supply chains, and markets.
2. Assessment
Evaluate the potential operational, financial, and reputational impacts of these risks. This includes scenario analysis that considers future climate pathways.
3. Mitigation and adaptation
Develop and implement strategies to reduce risk exposure, such as infrastructure resilience or diversifying supply chains. Carbon footprint mitigation also plays a role by reducing the overall intensity of climate change and related risks.
4. Reporting
Disclose findings and management approaches aligned with regulatory and voluntary frameworks.
5. Iteration
Regularly update assessments and management plans to reflect changing business conditions, data availability, and scientific insights.
Notably, many organisations start small — focusing initially on high-priority assets or critical value chain components—and progressively expand their environmental risk assessment scope. The iterative process aligns with resource realities and helps build internal expertise over time.
Climate risk assessment methodology
A simplified risk formula involves three components: hazard, exposure, and vulnerability. For example, in assessing flood risk to a warehouse:
- Hazard: Likelihood and severity of floods in the area (e.g., annual flood probability and flood depth)
- Exposure: Value of assets or operations located in flood-prone zones
- Vulnerability: Readiness or susceptibility of the asset/business to flood impacts
Multiplying these factors yields a risk estimate, which can be refined by scenario analysis and risk scoring to prioritise mitigation efforts. Below, find an example.
Q&A session highlights
Are there TCFD-aligned templates available for climate risk assessment?
Yes, the TCFD framework provides a disclosure index template, but it does not detail risk estimation methodologies. Additional resources like IPCC guidelines and the International Energy Agency offer fragmented support. Many companies rely on specialised software and consulting to develop comprehensive climate risk assessments.
Can climate risk assessments be compared across businesses?
Climate risk results are often bespoke given different business models and geographies. Comparing similar assets within the same industry and region is possible, but broad inter-business comparisons require caution due to differing assumptions and contexts.
How does climate risk management align with ESG reporting?
Climate risk management is an integral part of overall ESG risk reporting. It should be embedded within enterprise risk management processes with senior oversight to ensure alignment and integrated decision-making.
Should climate risk be assessed at a company or product level?
This depends on the business model. Initial high-level assessments can focus on company and geographic levels. More mature organisations often drill down to product-level risks, especially when materials or production processes involve significant climate exposure(1).
How to assess risks in upstream value chains with limited data?
Start with proxy indicators based on supplier industry and geography. Engage with suppliers progressively to collect detailed data, though tier 2 and tier 3 supplier analyses remain challenging and typically advanced stages of assessment(1).
Key takeaways
- Climate risk is financial risk. It directly impacts business performance and resilience.
- Managing climate risk is a journey, not a one-time destination.
- Global regulations are scaling quickly, making compliance increasingly urgent.
- Focus on what is truly material to your business and stakeholders.
Watch the session: If you are interested to see more details and actionable tips, watch the session on-demand!
Nexio Projects: Supporting your climate risk journey
At Nexio Projects, our climate experts guide organisations through complex climate risk challenges with tailored services including:
- Climate risk consulting and CDP reporting: We clarify your climate risks and opportunities to strengthen your net-zero strategy while simplifying CSRD, TCFD, and CDP disclosures.
- CSRD & reporting: Our team of ESG reporting specialists and chartered accountants help you navigate the CSRD requirements to achieve compliance.
- Net zero and decarbonisation: We help craft robust emissions reduction strategies aligned with international standards like the Science-Based Targets initiative (SBTi).
Book a free consultation today to begin or advance your climate risk management journey.
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References
- Task Force on Climate-Related Financial Disclosures (TCFD), 2023. Implementation Guidance for Climate Risk Assessment.
- World Economic Forum, 2024. The Cost of Inaction: A CEO Guide to Navigating Climate Risk. [online] Available at: https://www.weforum.org/publications/the-cost-of-inaction-a-ceo-guide-to-navigating-climate-risk/ [Accessed 18 September 2025].
- Potsdam Institute for Climate Impact Research, 2024. Economic Effects of Climate Change: A Global Assessment. Journal of Climate Economics, 12(3), pp.45-67.
