What is a climate risk assessment?

Key types of climate risks to assess 

When conducting a climate risk assessment, it’s essential to evaluate both the physical and transition risks your organisation may face. Below is a breakdown of the key types of climate risks that should be assessed: 

1. Physical climate risks

These are the direct impacts of climate change on the natural and built environment – and therefore on your assets, operations, and supply chains. 

Acute physical risks

These are event-driven, extreme weather events:

• Flooding (river, flash, coastal)
• Wildfires
• Storms, cyclones, hurricanes
• Heatwaves
• Landslides

Chronic physical risks

These relate to long-term shifts in climate patterns, such as:

• Rising sea levels
• Changing rainfall patterns
• Prolonged droughts
• Temperature rise affecting growing seasons
• Soil desertification or degradation

2. Transition climate risks

These arise from the economic, policy, legal, and technological shifts required to move toward a low-carbon economy. 

Policy and regulatory risks

• New carbon taxes or emissions limits
• Stricter reporting (eg: Corporate Sustainability Reporting Directive (CSRD), etc) 
• Bans on high-emission activities or products

Technology risks

• Obsolescence of existing technologies
• Cost of adopting low-carbon or clean technologies 
• Pressure to invest in innovation or new R&D

Market risks 

• Shifts in customer preferences (eg: demand for low-carbon products)
• Changes in commodity prices or input costs
• Declining demand for carbon-intensive services or goods

Reputational risks

• Stakeholder scrutiny over greenwashing or inaction
• Loss of brand trust or customer loyalty
• Difficulty attracting investment or talent

Litigation risks

• Lawsuits related to environmental damage, emissions, or human rights linked to climate harm
• Growing legal accountability for inadequate climate disclosure or adaptation 

Climate risk assessment tools and frameworks 

To effectively identify and respond to climate-related risks, businesses can draw on a range of globally recognised frameworks and practical tools. 

Global frameworks for climate risk assessment

The following climate risk assessment frameworks are high-level, widely recognised frameworks used to guide climate risk analysis and disclosure. 

• Task Force on Climate-related Financial Disclosures (TCFD): Outlines how companies should disclose climate-related risks and opportunities across governance, risk management, strategy, and metrics. 
• EU CSRD & European Sustainability Reporting Standards (ESRS – E1 Standard): Mandates double materiality climate risk assessments and disclosures for companies operating in the EU or with EU market exposure.
• International Sustainability Standards Board (ISSB) Standards: Provides the global baseline for climate-related disclosures, fully aligned with TCFD but designed for integration into financial reporting. 

Climate risk assessment tools and platforms

These climate risk assessment tools help companies model, quantify, and visualise physical and/or transition climate risks. 

• CDP Climate Risk Tool: Supports risk identification and disclosure through questionnaires aligned with TCFD and used by thousands of global companies.
• Climate Impact Explorer (S&P): Assesses physical climate risks like flooding, heat, and wildfire at the asset level using location-specific data. 
• Aqueduct (WRI): Maps water-related risks like drought, flooding, and scarcity, particularly useful for supply chain analysis. 
• Climate TRACE: Offers high-resolution, independent emissions tracking by sector and geography for enhanced benchmarking and transparency. 
• C-ROADS and En-ROADS (Climate Interactive): Interactive simulation tools that model the impact of global or organisational climate actions under different scenarios. 

How to conduct a climate risk assessment 

Conducting a climate risk assessment enables businesses to proactively identify and respond to the physical and transition risks presented by climate change. This helps businesses build resilience, meet regulatory expectations, and align with global sustainability standards. Below are the steps involved in carrying out an effective risk assessment for climate change. 

Step 1: Define the scope and objectives

Begin by clarifying the purpose and boundaries of the assessment. Will you assess the climate risk across your entire organisation, specific business units, supply chains, or geographies? Decide on the relevant timeframes (short-, medium-, and long-term) and align your approach with disclosure frameworks like the CSRD, ISSB, or TCFD. 

Step 2: Identify relevant climate risks

Catalogue the physical risks (floods, heatwaves, droughts) and transition risks (policy shifts, carbon pricing, reputational damage) your business could face. Consider both direct operations and upstream/downstream value chains.

Step 3: Conduct climate scenario analysis

Use recognised climate scenarios (eg: 1.5°C, 2°C, or 4°C pathways) to explore how future climate conditions could affect your business under different emissions and policy trajectories. This supports forward-looking, strategic planning.

Step 4: Assess risk exposure and materiality

Evaluate the likelihood and potential impact of every risk. Leverage risk matrices and heat maps to determine which risks are most material to your finances, operations, and strategic objectives. Focus particularly on high-risk assets or geographies. 

Step 5: Integrate climate risk into enterprise risk management (ERM)

Embed climate-related risks into your existing ERM systems so they are considered alongside legal, financial, and operational risks. Assign ownership across departments and ensure risks are regularly reviewed. 

Step 6: Develop mitigation and adaptation strategies

Design targeted actions to reduce exposure and build resilience. This could involve adapting infrastructure, diversifying suppliers, investing in renewable energy, or phasing out carbon-intensive inputs. 

Step 7: Disclose findings through recognised frameworks

Report your climate change risk assessment results in alignment with reporting standards like the ISSB, CDP, CSRD, or TCFD. Clear, transparent disclosure builds trust and supports compliance with emerging regulations. 

Step 8: Monitor, review, and update regularly

Climate risks evolve. Establish systems to revisit your assessment regularly, update assumptions, and adjust your strategies as new data, regulations, or technologies emerge.

Common pitfalls and solutions

Although climate risk assessments are becoming a critical part of corporate sustainability and risk management, many organisations still face practical challenges in carrying them out effectively. Below are some of the most common obstacles and actionable solutions to overcome them. 

Challenge 1: Limited access to reliable data

High-quality, asset-level climate data can be difficult to source, particularly in global or decentralised operations. Most organisations also lack consistent data on supplier practices or emissions. 

Solution: Start with the best available public data and layer in internal business knowledge. Prioritise high-risk regions or operations for deeper analysis, and work towards more granular data over time through supplier engagement and partnerships. 

Challenge 2: Uncertainty in climate scenarios

Future climate risks are inherently uncertain and long-term. This can make it difficult for companies to assess impact severity or justify decisions today based on future projections. 

Solution: Use scenario analysis to explore a range of plausible futures rather than relying on single-point forecasts. Apply frameworks like the TCFD to guide assumptions, and focus on identifying no-regret actions that are beneficial across scenarios. 

Challenge 3: Lack of internal expertise

Climate risk assessment often requires cross-disciplinary knowledge, from environmental science to financial modelling, which many organisations lack in-house. 

Solution: Invest in internal upskilling (through training or partnerships) and involve cross-functional teams early, especially from procurement, operations, and finance. For deeper assessments, consider external consultants or sector-specific platforms that support guided analysis. 

Challenge 4: Difficulty translating climate risk into business impacts

Even when risks are identified, it can be difficult to link them to tangible financial, strategic, or operational outcomes. This is particularly the case for transition risks like reputational exposure or policy change. 

Solution: Map risks to operational or financial metrics. For example, asset downtime, supply chain costs, insurance premiums, and carbon pricing exposure. Leverage materiality assessments to prioritise risks most relevant to your value chain and sector. 

Challenge 5: Siloed or fragmented assessments

Climate risks are often assessed in isolation by sustainability teams, with little integration into enterprise risk management or strategic planning processes. 

Solutions: Embed climate risk into existing ERM and business continuity frameworks. Assign accountability across departments and ensure findings inform investment, strategy, and board-level decision-making. 

Challenge 6: Focusing only on physical risks

Many companies overlook transition risks like changing regulations or stakeholder expectations, which can be just as material, if not more so, than physical climate impacts.

Solution: Adopt a balanced assessment that includes both transition and physical risks, aligned with standards like the TCFD and ISSB. Engage public affairs, legal, and investor relations teams to help identify exposure to reputational and policy risks. 

Conclusion 

Climate risk assessments are increasingly shaping how companies allocate resources, evaluate long-term strategy, and engage with stakeholders. What once felt like a distant concern is now a source of competitive advantage. By integrating climate risk into core business planning, companies build resilience, but also uncover new opportunities for efficiency, innovation, and growth. 

The key is capability — and that starts with education. Our corporate sustainability training equips teams across operations, finance, procurement, and strategy with the knowledge and tools to conduct robust climate risk assessments and embed climate thinking into everyday decisions. Explore our solutions today to start building internal expertise, reduce regulatory risk, and unlock long-term value.