Navigating Climate Risk: A Guide for Business Success

Damage from climate change has cost over , with losses more than doubled in the past two decades. Rising temperatures, extreme weather, and shifting regulation are no longer distant threats––they are here, impacting operations, supply chain and long-term business value. To stay competitive, companies must move beyond reactive responses. Proactively identifying and managing climate risks isn’t just about compliance––it’s a strategic advantage in a rapidly changing world.

Understanding Climate Risks

Investors are increasingly advocating for, and regulators are mandating, climate-related risk assessments to quantify the impacts of climate change on business portfolios and ensure public disclosure. A comprehensive risk assessment allows businesses to understand the level of exposure and vulnerabilities of assets to hazards. This deep understanding in turn informs a tailored climate adaptation strategy which in turn guides business strategy, providing stakeholders with deep insight to market dynamics and competitor trends.

Navigating Climate Risk: A Guide for Business Success — *A comprehensive risk assessment has business-wide impacts, including improved strategic planning, an informed adaptation strategy and comprehensive disclosures*

Climate Risks: Physical and Transition

Climate risks are broadly categorized into physical and transition risks. The impact that a risk could have on a company depends on the magnitude of the hazard, the level of exposure the company’s assets face, and the various vulnerabilities a company has. Companies must explore potential hazards, exposures and vulnerabilities under a variety of low and high carbon climate scenarios to get a full picture of the risks that climate change poses and adapt accordingly.

An arrow gradually changing color from left to right, from green to red.

The green, left side of the arrow shows a low carbon, 1.5 degree scenario, and states that there are more transition risks in this scenario. The text on this side of the image says "Net Zero 2050
An ambitious transition across all sectors. Transition risks will result from higher emissions costs and changes in business and consumer preferences. Physical risks would be reduced."

The red, right side of the arrow, shows a high carbon, 4 degree scenario and states that there are more physical risks in this scenario. The text on this side of the image states "Current policies
Climate policies are not sufficient to achieve official commitments. Physical risks would considerably increase leading to large impacts on the economy, society and environment." — *Low carbon and high carbon scenarios should be explored in climate scenario analysis, as physical and transition risks will have greater impacts at opposite ends of the spectrum*

Physical Risks

Physical risks refer to the direct impacts of weather and climate phenomena on businesses. These risks can be categorized as acute or chronic:

Acute Physical Risks: Short term, specific climatic events that change the state of the environment such as, cyclones, hurricanes, heat/cold waves, or flooding
Chronic Physical Risks: Gradual changes to the environment that result in longer-term shifts in climate patterns such as, sustained yearly higher temperatures, sea level rise, changes in precipitation patterns.

An equation stations that risk equals hazard times exposures times vulnerability. Whereby risk is defined as the operational or financial impact that an organization faces, a hazard is defined as a natural or human-induced physical event or trend that may cause damage / loss to property, infrastructure, life etc., exposure is defined as direct contact between the external hazards and company assets and vulnerability is defined as company-specific factors that determine susceptibility and ability to mitigate the impact of hazards.

Each aspect of the equation has an accompanying picture and example.

Risk has a picture of crusted soil and the example is decreased production. Hazard has a picture of grey crusted soil and the example is water stress. Exposure has a picture of crops growing on crusted soil, and the example is crops cultivated in water-stressed regions. Vulnerability has a picture of a dead flower and has the example limited supply chain redundancy. — *A physical climate change risk is the result of the interaction between hazards, exposure, and vulnerability*

Key Steps for Understanding Physical Risks

Identify Hazards: Explore the intensity and frequency of these hazards based on geographic location and activities across your value chain under various climate scenario conditions. Relevant hazards will depend on your company’s strategic direction.
ŷ��Ա�� Exposure: Analyze direct contact between the external hazards and company assets. Decisions and priorities should be informed by the uncertainty and confidence levels associated with the exposure indicators.
Evaluate Vulnerability: Consider financial importance of the system (criticality), the degree to which the system is affected by specific climate hazards (sensitivity), and the resources and measures available to the system to adapt to or mitigate the impacts of climate change (adaptive capacity).

Transition Risks

Transition risks arise from efforts to shift to a low-carbon economy and are typically categorized into 4 groups:

Policy and legal risks: For example, legislation and compliance burdens
Technology risks: For example, increased costs from adopting new technologies or stranded assets
Market risks: For example, energy price volatility or rising cost of raw materials
Reputational risks: For example, sector stigmatization or greenwashing

Key Steps for Understanding Transition Risks

Mapping Value Chains: ŷ��Ա�� the potential impacts transition risks might have on different parts of your business by mapping value chains. This is the most critical action for identifying transition risks.
Risk Modelling – Explore the drivers for these risks across your value chains, and understand which systems are at risk of being impacted. Models should be utilized to assess how different economic, political, environmental and energy variables may affect those drivers and systems exposure.
Risk Prioritization – Risks should be prioritized, based on the magnitude of impact on your business and the probability of occurrence, so that adaptation measure can be developed.

An example of a value chain map exploring the potential impact of carbon prices, a market transition risk, on a company.

The map states that the increased costs on purchased freight and transport services, purchased goods and services and purchased electricity will be passed onto the company, which will then in turn pass on these costs to customers. — *An example of a value chain map exploring the potential impact of carbon prices, a market transition risk, on a company*

Turning Risk Into Strategy: The Role of Disclosure

Recent years have seen significant across various geographies. Key frameworks include:

IFRS S2: Developed by the International Sustainability Standards Board to standardize climate risk reporting globally. These disclosure standards could be implemented in up to 140 jurisdictions.
CSRD: Mandates large and listed companies in the EU to report on climate risks and opportunities, among other ESG topics.
California SB219: Companies with annual revenues exceeding $500 million that conduct business in California must disclose their climate-related financial risks (both physical and transition) and the strategies companies are implementing to mitigate them, every two years.

Beyond compliance, these frameworks present an opportunity to embed climate risk into strategic planning and unlock value through better forecasting, stakeholder trust, and resilience.

Building Resilience Through Adaptation

Adaptation is no longer an afterthought—it’s a business continuity requirement. An identifies and implements measures that reduce climate vulnerability over time – a cost-effective way of reducing the escalating economic costs of climate change.

Two graphs showing the economic benefits of investing in climate adaptation measures.

The first graph shows that without action, over time, the costs of climate change will increase. The second graph shows that investing in climate adaptation measures reduces the cost of climate change over time. — *There are significant economic benefits to investing in adaptation measures*

There are 3 key types of adaptation measures:

No-regrets: Measures which are worthwhile implementing regardless of the future climate pathway (e.g., water leakages reduction to improve resilience to droughts).
Win-win:Measures that minimize the risks associated with climate change (or maximize opportunities) and have co-benefits (e.g., social, environmental, or economic) or contribute to other business goals.
Flexible or adaptive management options:Measures that can be easily adjusted at low cost should future conditions differ from projections.

From Risk to Opportunity

Navigating climate risks is not just a regulatory necessity but a strategic imperative for businesses aiming for long-term success. The escalating costs of climate-related damages underscore the urgency for companies to understand and manage both physical and transition risks. By conducting comprehensive risk assessments, businesses can identify vulnerabilities and develop tailored adaptation strategies that enhance resilience and capitalize on emerging opportunities.

Businesses must leverage opportunities arising from efforts to mitigate and adapt to the risks posed by climate change to be successful in a net-zero economy. For tailored guidance on assessing climate risks, carrying out a climate scenario analysis, or developing an adaptation plan, reach out to EcoAct to see how our experts can help.

Climate-related risks and opportunities

What are they and why should organisations assess them?
We are already experiencing the impacts of climate change and in the absence of sufficient action, these impacts will continue to accelerate. Limiting global warming to 1.5°C is essential to avoid the most catastrophic impacts of climate change, yet this is becoming progressively more challenging. The need for businesses to identify, assess and adapt to vulnerabilities in response to climate change is becoming increasingly important.

Download our new factsheet to learn:

What are climate-related risks and opportunities?
Why consider climate risk?
ŷ��Ա��ing climate-related risks and opportunities
Key steps in a Climate Scenario Analysis