An In-Depth Guide to Evaluating Climate-Related Risks for Enterprises

Climate change poses a growing threat to global financial stability, and enterprises of all sizes are increasingly expected to account for climate-related risks in their business strategies. As regulations tighten, investor scrutiny increases, and physical impacts intensify, evaluating climate-related risks has become a strategic imperative for business leaders.

This guide offers a detailed exploration of how enterprises can evaluate climate-related risks effectively. We’ll cover definitions, frameworks, methodologies, tools, and best practices—providing a practical roadmap for organizations to understand, assess, and manage their exposure.

Understanding Climate-Related Risks

Climate-related risks are typically divided into two main categories:

1. Physical Risks: Result from the physical impacts of climate change, including extreme weather events (acute risks) and long-term shifts in climate patterns (chronic risks). These can lead to:

   • Property damage

   • Supply chain disruptions

   • Operational downtime

   • Health and safety hazards

2. Transition Risks: Arise from the shift to a low-carbon economy. These include:

   • Policy and regulatory changes

   • Market and technology shifts

   • Legal liabilities

   • Reputational damage

Each of these risks can have significant financial implications, affecting revenues, costs, asset values, and access to capital.

Why Evaluating Climate Risk Matters

Evaluating climate-related risks is not only about compliance; it’s about strategic foresight and resilience. Companies that fail to assess these risks adequately may face:

• Regulatory penalties and reputational fallout

• Asset devaluation or stranded assets

• Increased cost of capital

• Loss of investor and stakeholder confidence

Conversely, those that take a proactive approach can:

• Enhance long-term value creation

• Identify new market opportunities

• Strengthen stakeholder trust

• Align with global sustainability initiatives (e.g., TCFD, EU Taxonomy)

Key Frameworks for Climate Risk Evaluation

Several internationally recognized frameworks guide enterprises in climate risk assessment:

1. TCFD (Task Force on Climate-related Financial Disclosures)

TCFD provides a structured approach to disclose climate-related risks and opportunities across four pillars:

• Governance

• Strategy

• Risk Management

• Metrics and Targets

Enterprises can align their climate risk evaluations with TCFD to improve transparency and attract sustainability-focused investors.

2. ECB and EBA Guidelines

The European Central Bank (ECB) and the European Banking Authority (EBA) have issued detailed expectations for how institutions should incorporate climate and environmental (C&E) risks into governance, strategy, risk management, and disclosure.

The ECB’s 2020 guide emphasizes:

• Forward-looking risk identification

• Integration into ICAAP (Internal Capital Adequacy Assessment Process)

• Scenario analysis and stress testing

3. PRI Frameworks for Private Markets

The Principles for Responsible Investment (PRI) provide a dedicated technical guide to help private market investors assess physical climate risks. This includes guidance on:

• Portfolio screening

• Asset-level assessments

• Risk modeling and analytics

Methods for Assessing Climate-Related Risks

1. Risk Screening and Materiality Mapping

The first step in any climate risk assessment is identifying the risks that are material to your business. This typically involves:

• Reviewing physical and transition risk drivers

• Mapping risks across geographies, sectors, and value chains

• Determining financial materiality

2. Scenario Analysis

Scenario analysis allows organizations to evaluate how different climate futures might impact their operations and finances. Common scenarios include:

• 1.5°C-aligned (Net Zero by 2050)

• Business-as-usual (BAU)

• High emissions or delayed transition scenarios

Scenario modeling provides insight into:

• Changes in energy prices

• Carbon pricing implications

• Climate hazard exposure

Tools such as IPCC datasets, NGFS scenarios, and proprietary climate models can be used for this purpose.

3. Stress Testing and Sensitivity Analysis

Stress testing quantifies potential losses under adverse climate scenarios. This helps in:

• Identifying portfolio vulnerabilities

• Setting risk tolerance levels

• Informing strategic planning

Sensitivity analysis complements stress testing by showing how key assumptions affect outcomes—essential for understanding uncertainty.

4. Geospatial Risk Mapping

Geospatial analysis identifies physical risk hotspots such as flood zones, wildfire-prone areas, and heat islands. Tools and data sources include:

• GIS software (e.g., ArcGIS, QGIS)

• Climate risk platforms (e.g., Climate Risk Analytics, Carbone 4 ClimINVEST)

• Satellite and remote sensing data

This spatial visibility supports real estate, infrastructure, and logistics risk assessments.

5. Financial Impact Modeling

Financial modeling translates risk exposure into monetary terms. Companies may use:

• Value-at-Risk (VaR) models

• Earnings-at-Risk (EaR)

• Discounted Cash Flow (DCF) adjustments for climate scenarios

This makes climate risk visible at the balance sheet and income statement level, enabling CFOs and risk managers to make informed decisions.

Best Practices in Climate Risk Management

1. Integrate into Enterprise Risk Management (ERM)

Rather than treating climate risks in isolation, embed them within the broader ERM framework. This ensures:

• Consistent risk taxonomy

• Clear accountability and governance

• Alignment with corporate strategy and risk appetite

2. Engage with Stakeholders

Climate risk is cross-cutting and requires input from diverse stakeholders, including:

• Board and executive leadership

• Risk and sustainability teams

• Investors and financiers

• Communities and regulators

Regular engagement fosters alignment and shared accountability.

3. Leverage Technology and Data

Advances in data analytics, AI, and modeling tools are making climate risk assessment more accurate and scalable. Digital platforms can:

• Automate data collection

• Run dynamic simulations

• Visualize complex risk interdependencies

Examples include KPMG’s climate risk tools and WBCSD’s impact guides.

4. Build Internal Capabilities

Organizations should invest in upskilling teams in climate science, financial modeling, and ESG reporting. Cross-functional climate risk committees can help bridge gaps between departments.

5. Disclose Transparently

Transparent reporting builds trust and demonstrates accountability. Use frameworks like TCFD or GRI to disclose:

• Governance structures

• Risk management processes

• Metrics and targets

Regulatory bodies and investors are increasingly demanding detailed disclosures, particularly for high-emitting and climate-sensitive sectors.

Common Challenges and How to Overcome Them

• Data Gaps: Use proxies and engage with data providers. Participate in open data initiatives.

• Uncertainty in Modeling: Adopt multiple scenarios and disclose assumptions clearly.

• Limited Internal Expertise: Collaborate with third-party experts and industry peers.

• Integration into Decision-Making: Align climate metrics with KPIs and financial planning processes.

Strategic Opportunities from Climate Risk Evaluation

While the focus is often on risk mitigation, evaluating climate risks also reveals opportunities to:

• Develop green products and services

• Enter new sustainable markets

• Improve asset allocation and capital efficiency

• Gain competitive advantage in ESG performance

Organizations that proactively assess and address climate-related risks are more likely to adapt successfully and unlock long-term value.

Getting Started: A Roadmap for Enterprises

1. Establish Leadership Commitment: Ensure executive sponsorship and board oversight.

2. Conduct a Climate Risk Baseline Assessment: Identify key risk drivers and data gaps.

3. Develop a Climate Risk Management Plan: Define objectives, tools, timelines, and responsibilities.

4. Implement Tools and Frameworks: Choose the right methodologies and platforms.

5. Monitor and Report Progress: Regularly review outcomes and update strategies.

Conclusion: Building Resilient, Future-Ready Enterprises

In a world increasingly shaped by climate disruption, enterprises that systematically evaluate climate-related risks are better positioned to thrive. It’s not just about avoiding losses—it’s about building resilience, gaining foresight, and contributing to a more sustainable global economy.

By integrating robust climate risk assessments into strategy and operations, businesses can navigate uncertainty, meet stakeholder expectations, and secure long-term value creation.

References:

• ECB Final Guide on Climate-Related and Environmental Risks

• ECB Compendium of Good Practices

• PRI: Assessing Physical Climate Risk in Private Markets

• KPMG Understanding Climate Risk Reporting

• WBCSD Climate Financial Impact Guide

• Carbone 4 ClimINVEST Physical Risk Assessment Guide