A bank asks how floods or a carbon price would affect your plants. An investor wants to see a climate scenario analysis. Your sustainability report needs a section on climate risks and opportunities. All three questions follow the same logic, and it comes from the TCFD recommendations.
- TCFD: a framework for disclosing climate-related financial risks; since 2024 the ISSB has continued it through IFRS S2.
- Four pillars: governance, strategy, risk management, and metrics and targets.
- Two types of risk: physical risks, such as floods and heat, and transition risks, such as regulation and carbon prices.
- Scenario analysis: the most common method; it tests the business against two or three climate scenarios.
What is the TCFD?
The Financial Stability Board (FSB) set up the Task Force on Climate-related Financial Disclosures (TCFD) in 2015. Its task was to create one framework for reporting climate risks. Its 2017 recommendations help investors and lenders judge how exposed a company is to climate risks.
The TCFD finished its work in 2023. Since 2024, the IFRS Foundation has taken over its role. Its ISSB board issued IFRS S2, which fully includes the TCFD recommendations. The European ESRS E1 standard also follows a similar structure. So the TCFD logic remains the basis of climate risk reporting, even if the name changes.
Climate risk and opportunity analysis
Climate risk means the harm climate change can do to a company. It is not only about direct threats to nature. It also covers financial and operational risk.
Knowing these risks helps keep a company stable. A company that ignores climate risk can lose value and reputation. It may also find it harder to raise money.
Types of climate risks and opportunities
Climate risks fall into two groups: physical risks, and transition risks linked to the shift to a low-carbon economy. Companies must analyse both.
| Type of risk | Examples |
|---|---|
| Physical climate risks | Extreme weather (floods, droughts, storms), changes in access to natural resources, rising sea levels |
| Transition climate risks | New laws, carbon taxes, changing customer preferences, technology change in the shift to a low-carbon economy, reputation risk, effects on market value |
Knowing your risks helps you avoid actions that harm the environment. It also helps you adapt and plan technology or market changes, so your business model keeps up.
Methods for analysing climate risks and opportunities
Companies can choose from many methods. The most popular is scenario analysis. It shows how different climate scenarios would affect the company. Another is sensitivity analysis. It finds the factors that decide how well the company copes with climate change.
The right method depends on the sector, the size of the business and how mature its risk management is. In the end, the analysis should point to actions that help the company adapt.
Scope of the analysis in different sectors
The scope of the analysis differs by sector:
- energy companies: must track emissions and assess the effect of carbon prices and other rules;
- financial companies: should analyse risks in assets exposed to climate change;
- manufacturers: must consider raw materials, supply chain problems and changing customer needs.
In every sector, cover both physical risks, such as extreme weather, and transition risks, such as new laws. Indirect risks, for example in the supply chain, also matter more and more.
Putting TCFD into practice in ESG reports
The TCFD framework rests on four pillars:
- Governance: how climate issues fit into management. It shows the role of the board in climate risks and how climate enters strategy and risk decisions.
- Strategy: how climate risks and chances affect the business, the strategy and the financial plan. It covers short, medium and long-term risks. It also covers scenario analysis, with two or three scenarios in line with the Paris Agreement.
- Risk management: how the company finds, assesses and manages climate risks. It shows how they fit the general risk system. It also splits transition risks (law, reputation, market) from physical ones (extreme weather, long-term change).
- Metrics and targets: how the company measures progress. It covers emissions in Scopes 1, 2 and 3 and reduction targets. It also covers other metrics, such as emissions per unit of output.
TCFD analysis for a manufacturer: transition and physical risks
The table shows how a manufacturer can apply each pillar:
| TCFD pillar | Type of risk | Description | Examples for a manufacturer |
|---|---|---|---|
| 1. Governance | – | Who on the board answers for climate issues | A board member responsible for climate policy. Regular reports on emissions and climate risks for the board. Climate risks in company risk management. |
| 2. Strategy | Transition risks | Changes in law, technology, markets and reputation | Analysis of how CO₂ allowance prices in the EU ETS affect production margins. An energy strategy adapted to CBAM. Products with a lower carbon footprint for changing customer needs. |
| 2. Strategy | Physical risks | Direct effects of climate change on sites and processes | Assessment of plant exposure to floods, droughts and heat. Investment in cooling and protection against power cuts. Insurance and emergency plans for key plants. |
| 3. Risk management | Transition risks | Finding and assessing transition risks | Regular checks of new rules and taxes (ETS, ESG, EU taxonomy). Training for managers. Climate risks in the company risk map. |
| 3. Risk management | Physical risks | Managing the effects of extreme weather | Checks of how sites cope with heat and floods. Business continuity plans. Scenario tests, for example warming of 2–4 °C. |
| 4. Metrics and targets | Transition risks | Tracking and targets for the shift to low carbon | GHG emissions (Scopes 1, 2 and 3) and emission intensity. Share of renewable energy. Reduction targets, for example −40% by 2030. |
| 4. Metrics and targets | Physical risks | Metrics and targets for adaptation | Share of plants with an adaptation plan. Spending on climate protection. Weather incidents that stop production. Downtime caused by extreme weather. |
How do you report climate risks today?
The TCFD structure now lives on in three frameworks:
- IFRS S2 (ISSB): the global standard for climate disclosures, built on the four TCFD pillars. Many countries are adopting it into their own rules.
- ESRS E1 (EU): companies covered by the CSRD report climate risks, scenario analysis and expected financial effects under ESRS E1.
- UK rules: listed companies and large private companies in the UK already report in line with the TCFD. The government consulted in 2025 on UK Sustainability Reporting Standards based on the ISSB standards.
Good practice in climate risk reporting
Good reports describe how the company manages climate risk, clearly and in detail, including the scenario methods. They state the scope and cover both physical and transition risks. They also report metrics that show progress in cutting emissions and in adaptation. Investors check whether the report shows the real level of risk.
Good reports also take into account the views of employees, customers and local communities. Companies that report well gain investors' trust and a name for sound management.
What are the challenges in reporting climate risks?
Reporting climate risks in line with the TCFD is hard for many companies. A common problem is setting the right scope. Many companies struggle to find all the physical and transition risks that matter to them.
Companies often leave out risks linked to the supply chain, to changing customer preferences or to possible new laws. If a company underestimates these effects, its ESG report will be incomplete. It will not meet what investors expect.
Another problem is a lack of data and tools. Many companies lack data on their own emissions, energy use or exposure to extreme weather. Without reliable data, it is hard to judge the risk and plan how to adapt.
Some sectors are also complex and have no standard methods for climate risk analysis. In such cases, a company may need outside experts with knowledge of climate risk analysis and ESG reporting. What matters is a fair assessment, and a report that reflects the real level of climate risk. We describe the analysis itself in more detail in our article on climate risk and opportunity analysis.