Climate Risk 101: A Corporate Guide to Understanding and Managing Climate-Related

Climate Risk 101: A Corporate Guide to Understanding and Managing Climate-Related Risks

As the Corporate Sustainability Reporting Directive (CSRD) brings more companies under mandatory climate reporting requirements, understanding climate risk has become essential for business leaders. This guide breaks down the key elements you need to know to get started with climate risk assessment and management.

Understanding Climate Risks Through the TCFD Framework

The Task Force on Climate-related Financial Disclosures (TCFD) provides a clear structure for understanding climate risks, dividing them into two main categories. Physical risks arise directly from climate change impacts, such as extreme weather events damaging facilities or disrupting supply chains. Transition risks emerge from the shift to a low-carbon economy, including regulatory changes, technology shifts, and market dynamics.

For example, a manufacturing company might face physical risks from flooding at coastal facilities, while simultaneously navigating transition risks from carbon pricing regulations affecting their energy costs. Both types of risks can materially impact your business operations, financial performance, and long-term strategy.

Climate Scenario Analysis: Looking into Possible Futures

Scenario analysis is a powerful tool for understanding how climate risks might affect your business under different future conditions. The process involves examining your business model against various climate scenarios, typically including:

• The Net Zero 2050 scenario (1.5°C pathway): Assumes immediate and ambitious global action to reduce emissions, with rapid deployment of clean technologies, strong policy interventions, and significant changes in consumer behavior
• The Delayed Transition scenario (2°C+ pathway): Features limited action until 2030 followed by sudden and disruptive policy changes to catch up, leading to more severe transition risks
• The Current Policies scenario (3°C+ pathway): Based on existing policies and commitments, leading to significant physical risks from more severe climate impacts

Each scenario provides different assumptions about key variables like carbon prices, technology costs, energy mix, and physical climate impacts, allowing companies to test their resilience against various future states.

Quantifying Climate Risk Impacts

Converting climate risks into financial terms helps integrate them into business decision-making. By expressing climate impacts in monetary values, organizations can seamlessly incorporate them into traditional financial planning, risk management frameworks, and capital allocation decisions. This quantification enables direct comparison with other business risks and opportunities, making it easier for executives and boards to prioritize climate-related initiatives and justify investments in resilience measures. This involves:

•   Assessing direct costs from physical impacts (e.g., repair costs from extreme weather)
•   Calculating transition costs (e.g., carbon prices, technology upgrades)
•   Evaluating revenue implications (e.g., changing consumer preferences)
•   Considering broader financial implications like insurance costs and cost of capital

Building Climate Resilience

Effective climate risk management goes beyond assessment to building organizational resilience. Effective climate risk management goes beyond assessment to building organizational resilience. It requires creating a culture where climate considerations are embedded in every decision-making process, from operational improvements to strategic investments, ensuring the organization can adapt and thrive in an uncertain climate future.This means:

•   Integrating climate considerations into strategic planning and governance
•   Developing adaptation strategies for physical risks
•   Planning transition pathways to reduce exposure to regulatory and market risks
•   Regular monitoring and updating of climate risk assessments

How OCO Risk can help

By understanding and actively managing climate risks, companies can not only meet regulatory requirements but also build more resilient business models ready for a changing climate. Our team of climate risk experts can help you navigate the complexities of climate resilience.

Whether you're just starting your climate journey or looking to enhance your existing approach, reach out at [email protected] to learn how we can support your organization's climate resilience strategy.

Pragmatic data collection

We focus on what matters most - helping you identify and collect the essential data points needed for ESRS compliance without overwhelming your teams.

Scenario analysis made simple

We provide pre-analysed scenarios tailored to your industry, making it easier to assess both physical and transition risks.

Our approach includes:

• Physical risk analysis leveraging best-in-class third party data to fully capture assets exposure to climate change
• Stakeholder engagement workshops to validate scenario analysis outputs and outcomes
• CSRD-ready results to streamline reporting efforts and pre-established ERM integration processes

Financial impact assessment

We help you translate climate risks into financial terms, focusing on the specific metrics required by ESRS E1-9.

Including:

• Assets at physical and transition risk.
• Revenue exposure to climate risks.
• Potential liabilities from transition risks.

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