Climate Risk Assessment

Overview

Climate risk assessment is the process of identifying, analyzing, and evaluating how climate change affects organizations. This includes both physical risks from climate impacts and transition risks from the shift to a low-carbon economy.

Types of Climate Risk

Physical Risks

Direct impacts from climate change:

Business Impacts:

• Asset damage and destruction
• Supply chain disruption
• Operational downtime
• Increased insurance costs
• Worker safety concerns

Transition Risks

Risks from moving to a low-carbon economy:

Business Impacts:

• Asset impairment (stranded assets)
• Revenue decline from unsustainable products
• Increased operating costs
• Access to capital constraints

Assessment Framework

Step 1: Governance

• Board oversight of climate risk
• Management responsibility
• Risk committee involvement

Step 2: Strategy

• Identify climate scenarios
• Assess impacts across time horizons
• Consider different warming pathways

Step 3: Risk Management

• Identify physical and transition risks
• Assess likelihood and impact
• Prioritize and manage risks

Step 4: Metrics & Targets

• Quantify exposure (e.g., emissions, asset location)
• Set risk appetite
• Track performance

Scenario Analysis

Purpose

Test strategy against different climate futures:

• Orderly transition: Gradual policy action (1.5°C-2°C)
• Disorderly transition: Sudden, delayed policy (2-3°C)
• Hot house world: Limited action (>3°C)

Popular Scenarios

• NGFS scenarios: Climate Central Banks Network
• IPCC scenarios: SSP1-2.6, SSP5-8.5
• IEA scenarios: Net Zero by 2050, Stated Policies
• Internal: Custom scenarios for specific risks

Outputs

• Impact assessment on business model
• Financial quantification (revenue, costs, assets)
• Strategic implications

TCFD Recommendations

The Task Force on Climate-related Financial Disclosures recommends:

Governance

• Board oversight
• Management's role in assessing/managing risk

Strategy

• Climate risks and opportunities
• Business impact across scenarios
• Resilience of strategy

Risk Management

• Risk identification processes
• Risk assessment methods
• Risk management integration

Metrics & Targets

• Climate-related metrics
• GHG emissions (Scope 1, 2, 3)
• Targets and performance against

Practical Guidance

For Companies

1. Start with mapping: Identify climate-sensitive operations
2. Engage experts: Climate scientists, risk consultants
3. Quantify where possible: Financial materiality assessment
4. Integrate into ERM: Part of enterprise risk management
5. Disclose publicly: TCFD-aligned reporting

Tools & Resources

• CDP Climate Change questionnaire: Standardized disclosure
• SBTi: Target-setting aligned with science
• Climate risk tools: Provider-specific tools (MSCI, Sustainalytics, etc.)
• Insurance models: Reinsurance catastrophe models

Key Takeaways

• Climate risk has two main types: physical and transition
• Assessment requires both qualitative and quantitative analysis
• Scenario analysis is essential for understanding uncertainty
• TCFD framework provides disclosure structure
• Integration into enterprise risk management is critical
• Financial sector increasingly requiring climate risk assessment

References

• GHG Protocol · ICMA Green Bond Principles · SBTi · IPCC — climate finance frameworks