Tara Dunn
9 days ago
Climate risk is often discussed as a reporting or compliance topic. However, it is also a question of business resilience: how exposed organisations are to disruption, how prepared they are to adapt, and how well they can navigate a rapidly changing operating environment.
This blog-post introduces how we think about climate risk. It explores what climate risk means, why it matters for businesses today, and how it shows up across different parts of the value chain.
In practical terms, climate risk refers to the potential impacts of climate change on a company’s operations, assets, supply chains, and long-term performance. This understanding aligns with the Intergovernmental Panel on Climate Change’s framing of risk as the intersection between climate-related hazards, exposure, and vulnerability. It highlights why impacts can vary widely across geographies, sectors and value chains.
In practice, however, climate risk is anything but simple. It is characterised by deep uncertainty, the increasing frequency of disruptive events, and potentially significant financial consequences.
To make climate risk manageable, commonly used frameworks such as the TCFD distinguish between two overarching categories:
Physical risks refer to the direct and indirect impacts of climate change on assets, operations, and supply chains. These include acute risks such as storms, floods, and heatwaves, as well as chronic risks such as sea level rise, water stress, and long-term temperature increases. Read more about physical climate risks here.
Transition risks arise from the shift towards a low-carbon, climate-resilient economy. They include risks related to regulatory and policy changes, shifts in markets and customer preferences, and technological change. These risks can have significant financial and reputational implications, particularly for carbon-intensive industries and businesses with complex global supply chains.
From a business perspective, understanding exposure to climate risk is therefore not a discretionary exercise to be addressed once budgets allow. It deserves a central role in shaping business strategy and how that strategy is delivered. Assessing and acting on climate risks is increasingly critical to ensuring long-term business viability.
Climate risk affects businesses on multiple levels, from board-level strategy to day-to-day operational decisions. It can influence strategic decisions on where to invest or divest, where to grow, and how to allocate capital. It affects access to finance and insurance and can have a material impact on asset values, as highlighted by central banks and supervisors through initiatives such as the Network of Greening the Financial System. For insurers, climate risk also challenges traditional risk assessment and pricing approaches, which have historically relied on past loss data that is becoming less reliable of future risk. Climate risk also tests operational resilience, shaping decisions on sourcing, site locations, and how to ensure safe working conditions for employees. At the same time, it is a governance and accountability issue: who owns climate risk internally often determines how seriously it is taken and how effectively it is managed.
In summary, climate risk is not a sustainability side topic. It is a core business risk that needs to be assessed, monitored, and addressed on an ongoing basis, informing core business decisions.
What this looks like in practice, and who is already doing this today, are questions we will explore in future posts.