Climate-related risks affect companies’ finances and operations in two main ways.
Physical risks come from the direct impacts of changing climate and weather. These include acute hazards (like storms, floods, droughts, and heatwaves), and chronic changes (such as sea-level rise, increasing temperatures, or shifting rainfall patterns). For example, storms and heatwaves are already growing more severe and frequent, threatening assets, supply chains, and even employee safety.
Transition risks arise when the economy shifts toward low-carbon business models. These include new policies, laws, or regulations (like carbon pricing), changing technologies, evolving markets, and reputational pressures related to climate action. Stricter emissions rules or customer demand for greener products can force companies to upgrade equipment or write off “stranded assets.” Analysts estimate that fossil fuel companies risk wasting $2.2 trillion on uneconomic projects over the next decade due to climate policies and clean-tech advances.
In short: physical risks threaten operations directly. Transition risks threaten business models and markets.
Why These Risks Matter Now?
Climate risks are material for virtually every business today, not just energy companies.
- 82% of large companies reported some climate-related disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD).
- Nearly 50% disclosed at least five of the eleven TCFD-recommended items.
- Governments and regulators are stepping in: the ISSB’s IFRS S2 standards will require climate-related disclosures in financial filings.
Climate risk is now recognized as a financial risk – on par with credit or market risk. Ignoring it can mean higher insurance costs, damaged reputation, and even business interruption from disasters. It’s no longer optional.
Key Disclosure Frameworks: TCFD and ISSB
The world is aligning behind common frameworks:
- TCFD (2017) recommended companies disclose climate governance, strategy, risk management, and metrics/targets.
- ISSB IFRS S2 (2023) formalized and expanded this, with governments and stock exchanges moving fast to require it.
Over 1,000 companies already reference ISSB standards in their disclosures. This is becoming the global business norm.
Managing Climate Risks
Companies can’t afford to be reactive. Active climate risk management includes:
- Assess and Monitor Risks: Map facilities, suppliers, and customers against physical hazards and transition risks. Use scenario analysis (e.g., 2°C, 3°C pathways) to stress-test your business.
- Strengthen Operations (Adaptation): Build resilience into infrastructure and supply chains. Upgrade flood defenses, secure multiple suppliers, and implement business continuity plans.
- Reduce Emissions (Mitigation): Transition to renewable energy, optimize energy efficiency, and rethink products. Public net-zero targets can future-proof your operations.
- Integrate into Governance: Assign board-level oversight, embed climate risks into risk management, and train leadership.
- Engage and Disclose: Communicate transparently with investors, customers, and regulators. Follow TCFD/ISSB guidelines to report exposures and mitigation strategies.
Real-World Examples
- Coca-Cola identified over 200 production facilities in high water-risk areas and committed to replenishing 100% of the water used at those sites.
- Rio Tinto uses advanced climate modeling to plan mining operations and increase resilience to extreme weather.
- Amazon powered 100% of its operations with renewable energy (seven years ahead of its goal) becoming the largest corporate purchaser of renewable energy globally.
Physical and transition climate risks are real, material, and urgent. Managing them isn’t just about regulatory compliance; it’s about business survival and long-term value creation. Companies that take proactive, data-driven action will protect themselves and unlock new opportunities in the low-carbon economy.
Do you want to know how to turn climate risk into strategic advantage? Let’s talk!
