Your bank now asks about climate risks before it renews a loan. Under the CSRD, a sustainability report must show how climate change affects the company's finances. And a heatwave last summer stopped one of your production lines for three days. The question is no longer whether climate risk matters, but how to measure it and what to write in the report.
- Climate risk analysis: a structured way to find, assess and manage how climate change affects a company, and what chances it brings.
- Physical risks: floods, droughts, heat and storms that damage sites and disrupt supply chains.
- Transition risks: new laws, carbon prices, technology and customer changes on the way to a low-carbon economy.
- Reporting: ESRS E1 in the EU and IFRS S2 of the ISSB both build on the TCFD structure.
Why does climate risk analysis matter?
Climate risk analysis lets a company find the threats from climate change that could affect its business. Without it, a company is exposed to physical risk from extreme weather, transition risk from new rules and the financial risk that follows from both.
So managing climate risk has become a basis of business resilience. The same analysis also shows opportunities: new products, new markets and lower costs.
How does climate change create risks for companies?
Climate change creates both physical risks and transition risks. Physical risk shows up as more frequent and more intense extreme weather, such as floods, droughts and storms. These can damage infrastructure and disrupt supply chains.
Transition risks come from laws on greenhouse gas emissions and the decarbonisation of the economy. They also come from the market expectations that follow this trend.
Which rules require a climate risk analysis?
Three frameworks now shape how companies analyse and report climate risks:
- ESRS E1 (EU): companies covered by the CSRD describe how they identify climate risks and opportunities, including scenario analysis, and their expected financial effects. We cover the standard in detail in our article on ESRS E1.
- IFRS S2 (ISSB): the global climate standard, which took over the TCFD recommendations. Many countries are building it into their own rules.
- UK rules: listed companies and large private companies report in line with the TCFD. The UK is preparing its own standards based on the ISSB.
Companies outside these duties are still asked for the same analysis by banks, investors and large customers.
How do you analyse climate risks?
Many tools help you find, assess and manage climate risks and chances.
A key part is physical risk: what extreme weather could do to your sites and value chain. Another is transition risk: the effect of rules on emissions and of the shift to renewable energy. Scenario analysis ties both together. It tests the company against several possible paths of climate change and policy.
How do you identify climate risks?
Finding climate risks is the first step in managing them. You can group them like this:
| Type of risk | Description |
|---|---|
| Physical risk | Comes from the direct effects of climate change, such as extreme weather, rising sea levels and changes in access to natural resources. |
| Transition risk | Linked to laws and market changes that aim to cut greenhouse gas emissions and decarbonise the economy. |
| Liability risk | Linked to claims against the company, for example for damage it caused or for misleading climate claims. |
Knowing these types of risk is necessary to build effective adaptation strategies.
How does climate change affect different sectors?
The effect of climate change differs by sector. It depends on how exposed each sector is to climate risks:
| Sector | Effect of climate change |
|---|---|
| Energy | Physical risk from extreme weather, which can damage infrastructure and interrupt energy supply. |
| Agriculture | Changes in rainfall and temperature that affect yields and productivity. |
| Finance | Climate risks and opportunities in investment and lending decisions. |
| Manufacturing | Supply chain disruption, raw material prices and changing customer demand. |
How do you assess and rank climate risks?
Assessment is the core of the work. It looks at how likely each risk is and how large its effects could be. Ranking the risks lets you set priorities and focus on the most exposed areas.
Scenario analysis plays a key role here, because it covers several possible paths of climate change. Repeat the assessment regularly and use the latest scientific results and climate data.
What opportunities does climate change bring?
Finding the benefits is as important as analysing the risks. Climate change creates serious risks, but it also creates new chances for companies and for the whole economy.
Finding potential benefits
Scenario analysis helps you find the chances that come from changing conditions. They can come from growing demand for renewable energy and low-carbon technology.
Adaptation and innovation
Adaptation and new ideas help you use these chances and limit risk. Companies can invest in research into technology that cuts emissions and saves energy. They can develop products and services that are more resistant to climate change. Adaptation can also mean changing the business model and production processes to fit new climate conditions.
Examples of positive action
The energy sector shows positive action clearly. More and more energy companies invest in solar and wind power, which cuts greenhouse gas emissions.
Food and farming companies use regenerative farming, which improves soil and makes crops more resistant to drought. These are key examples of adaptation and innovation.
How do you report climate risks?
A report on climate risks makes the company's approach open and accountable. It lets investors and the public judge how exposed the company is. It also lets them track progress in adaptation and in cutting emissions. Report the opportunities as well as the risks.
The TCFD set out four areas of disclosure, which IFRS S2 and ESRS E1 both follow:
| Area | What to disclose |
|---|---|
| Governance | The role of the board and management in overseeing climate issues. |
| Strategy | The effect of climate change on the business, strategy and financial planning, including scenario analysis. |
| Risk management | How the company identifies, assesses and manages climate risks, and how this fits its general risk management. |
| Metrics and targets | Emissions in Scopes 1, 2 and 3, reduction targets and other metrics used to manage climate risks and opportunities. |
How can EXERGY help?
We prepare climate risk and opportunity analyses.
We build analyses that become part of your ESG strategy.
We calculate greenhouse gas emissions in Scopes 1, 2 and 3.
We provide reliable emissions data for assessing climate risks and for reports under ESRS E1 and IFRS S2.
We use the four-eyes principle.
Two people work on each project: one prepares the data, the other checks it. This keeps the quality and credibility of our analyses high.
We work under the GHG Protocol and ISO 14064.
We help you find and organise emissions data in Scopes 1, 2 and 3, across the whole value chain.
We prepare reduction plans and decarbonisation strategies.
Based on the analysis, we help you choose real actions that limit climate risks and support your reporting.
We help you understand your impact on the climate.
We show the main sources of emissions and the areas where climate risks could affect your financial results most.