How to Assess and Address Climate Risks to Build a Resilient Future
Understanding climate risks is essential for long-term success.
Insights
Contents
- What are Climate Risks?
- How to assess Climate Risks
- Aligning TCFD and CSRD
- Building a resilient future
Share this article
What are Climate Risks?
Climate risks refer to the potential financial and operational challenges that arise from climate change, which can include both physical and transition risks. Physical risks stem from direct climate-related events, like extreme weather, rising sea levels, and shifting temperatures, which can disrupt operations and damage assets. For instance, a company in the agriculture sector might face severe crop loss due to flooding, leading to both immediate and long-term challenges like soil degradation.
As the world moves towards a low-carbon economy, businesses face risks related to policy changes, technological advancements, and shifts in market demand: transition risks. These can lead to increased costs, reduced revenues, regulatory pressures, and the need for significant strategic changes. For example, an agricultural company could face financial strain if required to invest in nitrogen emission reduction measures due to regulatory changes, forcing strategic shifts in its operations.
Companies are already facing these risks, and it is essential to understand the extent to which your business might be affected now and in the future. This impact can be direct (e.g., damaged assets or regulatory changes) or indirect (e.g., disruptions in the value chain or increased costs from suppliers). Beyond risks, climate change also presents opportunities for businesses to innovate and lead in sustainability, by adequately and proactively adapting to risks. Understanding these risks is the first step towards building a resilient business.
While these risks pose challenges, they also present opportunities for innovation and leadership in sustainability, enabling businesses to turn climate risks into a competitive advantage.
How To Assess Climate Risks
To effectively manage climate risks, businesses should align with the Task Force on Climate-related Financial Disclosures (TCFD) framework. This framework offers four key pillars for managing climate risks:
- Governance: Ensure that your company’s board and management are actively engaged in overseeing climate-related risks and opportunities.
- Strategy: Assess how climate-related risks and opportunities impact your business strategy and financial planning.
- Risk Management: Identify, assess, and manage climate-related risks as part of your company’s broader risk management process.
- Metrics and targets: Establish metrics and targets to assess and manage relevant climate-related risks and opportunities.
An integrated approach involves embedding climate risk assessment throughout these pillars, including:
- Scenario-analysis: Evaluate physical and transition risks under different short- and long-term climate scenarios (e.g., 1.5°C, 2°C, and 3°C warming pathways) to understand potential business impacts.
- Financial Impact Assessment: Assess how these risks could affect financial performance, including revenue, costs, and asset valuations, while also identifying opportunities.
- Stakeholder engagement: Involve internal stakeholders across departments to ensure climate risks are comprehensively understood and integrated into strategy and operations.
Aligning TCFD and CSRD
Additionally, CSRD requires businesses to disclose climate risks and their alignment with climate goals. By following the TCFD framework, companies can not only strengthen risk management but also ensure compliance with regulatory requirements. However, addressing climate risks is more than just meeting regulations—it is about safe-guarding the future of your business.
Building a Resilient Future: Action Steps
With a clear understanding of climate risks, businesses can now focus on resilience. Here are five essential steps:
1. Mitigate: Reduce carbon emissions to lower climate impact. This not only helps in fighting climate change but also mitigates transition risks associated with stricter regulations and changing market demands.
2. Adapt: Strengthen your infrastructure and supply chains to withstand physical climate impacts. For example, by enhancing the resilience of your infrastructure or diversifying your product lines, you can safeguard against physical risks.
3. Develop Resilient Strategies: Ensure that all future projects —whether new products, partners, or buildings— undergo a climate risk due diligence process. This foresight will help your business thrive in a changing climate.
4. Engage Internal Stakeholders: Continuously engage internal stakeholders to align climate strategies with operational realities and ensure broad support for climate resilience initiatives.
5. Proactively Manage the Value Chain: Take responsibility beyond your direct operations. Engage with suppliers, customers, and other stakeholders to build resilience throughout your entire value chain.
By addressing these risks now, businesses can not only protect against future disruptions but also seize opportunities for innovation and growth. If you would like more information or guidance on how to implement these strategies, please contact us.
We are the world’s leading purpose driven, digitally enabled, science-based activator. And always welcome inquiries and partnerships to drive positive change together.