Climate risk is now a business risk — are you ready?

Climate-related impacts are intensifying and affecting businesses globally. In this guest article, EcoOnline partners G&A break down the types of impact for which companies are at risk, why companies must proactively assess their climate risks, and how scenario analysis can help with strategic planning and regulatory compliance.

Table of contents

Click on a specific section below to navigate to that area:

• 1. Introduction
• 2. What is climate risk?
• 3. Why should companies analyze their climate risks?
• 4. How can companies assess climate risk
• 5. The Growing Regulatory Landscape
• 6. Conclusion

Introduction

Earlier this year, the World Meteorological Organization (WMO) confirmed that 2024 was the hottest year on record based on six international datasets and that the global average surface temperature exceeded 1.5°C above pre-industrial levels. As the world continues to warm beyond the 1.5°C threshold established by the Intergovernmental Panel on Climate Change (IPCC), businesses need to consider more severe risks associated with a warming world.

What risks does increased warming pose, and what do businesses need to begin adapting to avoid losses?  

• Flooding: In the U.S. alone, the National Flood Insurance Program paid nearly $8 billion in claims payments in 2024. 
• Unsafe heat days: The U.S. Environmental Protection Agency (EPA) projects that increases in heat could result in over $160 billion in lost U.S. wages per year by 2090 due to unsafe working conditions.
• Wildfires: The UCLA Anderson School of Management estimates reveal property and capital losses ranging from $76 billion to $131 billion from recent California wildfires, with insured losses reaching around $45 billion. The fires also led to a significant $297 million in lost wages for local businesses and their employees in affected regions.

Tallied globally, the World Economic Forum (WEF) estimates that the climate crisis could reduce GDP by 12% for every 1°C of warming, and an individual business that fails to adapt to climate risks could lose up to 7% of annual earnings by 2035.

Communities’ health and stability can suffer as well. The UN Refugee Agency reports that over the past ten years, weather-related disasters have driven 220 million internal displacements, a number that will continue to rise in the future.

Experts anticipate that sustained exposure to smoke from wildfires will result in both short- and long-term health consequences for those with prolonged exposure.

As we continue to see the impacts of climate change on communities and the economy, forward-looking companies will need to include climate-related risk management as an essential component of their business strategies. 

What is climate risk?

Given the intensifying economic and community impacts of climate change, climate risk is increasingly considered within businesses’ enterprise risk assessment programs and frameworks. But what are climate-related risks?

Companies face two types of climate risk: physical and transition.

Physical risks relate to weather events and sea-level rise, among other physical impacts of climate change.  They can be either acute like heatwaves, flooding, and hurricanes, or chronic, referring to longer-term shifts like sea-level rise, rise in annual temperatures, and water stress.

Transition risks are associated with the shift to a decarbonized economy. They include policy and legal, technology, market, and reputational risks.

Why should companies analyze their climate risks?

Understanding your company’s exposure to climate-related risks is vital for long-term resilience. A robust climate risk assessment allows businesses to:

• Identify operational vulnerabilities to extreme weather and shifting climate trends
• Integrate climate risks into risk management and corporate strategy
• Drive innovation by revealing opportunities for developing new, more sustainable products and services
• Demonstrate proactive risk governance to investors, insurers, customers, boards, and regulators

Companies that proactively invest in a strong climate adaptation strategy are safeguarding their future business operations. By accurately forecasting climate risks and weaving them into their strategic planning, businesses can minimize potential disruptions and maximize financial returns. According to the Alliance of CEO Climate Leaders, every dollar invested in climate resilience can yield between $2 and $19 in avoided losses, based on data from CDP.  

How can companies assess climate risk?

We recommend that companies use scenario analysis to conduct a climate-related risks & opportunities assessment. Scenario analyses evaluate how a company’s sites, operations, and financial performance may be affected under various future possible climate conditions. The scenarios should encompass both physical changes and the societal and economic shifts of transitioning to a low-carbon economy.

For physical risks, assessments can utilize established scenarios from the IPCC, known as the Shared Socioeconomic Pathways (SSPs). The SSPs help project how a company’s exposure to various climate-related perils might change in the future, given different levels of global warming. SSPs are considered the gold standard for climate modeling because they offer a comprehensive framework for exploring a wide range of plausible future socioeconomic developments.

Unlike past scenario sets, SSPs provide detailed narratives describing how global society, demographics, and economies might evolve, influencing factors like population growth, economic development, technological progress, energy use, and environmental policies.

We use the following three SSP scenarios to analyze a company’s physical climate-related risk:

• Low Emissions – SSP1 – RCP 1.9
  
  • Pathway toward rapid sustainability with strong climate policy and green energy advancements. 
• Middle-of-the-Road – SSP2 – RCP 4.5
  
  • Continuation of current trends with moderate climate action and mixed energy sources. 
• High Emissions – SSP5 – RCP 8.5
  
  • Fossil-fuel-intensive development with limited climate policy, leading to high emissions. 

By analyzing these three scenarios, we help clients understand their physical risks in different global contexts, ranging from a worst-case to a best-case outlook.

For transition risks, businesses can leverage the Network for Greening the Financial System (NGFS) scenarios to understand how shifts in market dynamics, legal and policy frameworks, technological advancements, and reputational considerations could impact their business models and financial performance. NGFS scenarios offer extensive detail and synergize well with the SSPs. Other transition risk scenarios are available from the International Energy Agency’s (IEA) energy transition scenarios and the SSPs themselves.

Companies may also consider other bespoke scenarios or combine elements from various sources to tailor their analysis to their specific industry, geographic footprint, and strategic priorities.

Additional Considerations: The Growing Regulatory Landscape

Assessing climate-related risks is not only valuable to businesses from a strategic lens, but also from a regulatory perspective. Increasingly, regulations around the world require some form of climate-risk or scenario analysis. These include:

• California SB 261: On January 1, 2026, companies with revenue over $500 million that do business in California will need to disclose climate-related risks produced in line with the Task Force on Climate-related Disclosures (TCFD) framework. See here for more information on the California laws.
• CSRD: The Corporate Sustainability Reporting Directive (CSRD) requires eligible companies to conduct a scenario analysis including both physical and transitions risks.
• IFRS: Companies that operate in one of 140 jurisdictions that have adopted the International Sustainability Standards Board (ISSB) Standards will have to disclose climate-risk assessments following the TCFD framework. See here for more information about where the ISSB standards are adopted and the mandate timeline in each jurisdiction.

Conclusion

Climate-related impacts will be more intense and more frequent as temperatures continue to rise. Businesses can look to proactively address their risks and incorporate smart risk management planning into long-term strategy.

As more regions start to mandate climate risk assessments, businesses should take this chance to critically re-evaluate their future operations, going beyond regulatory compliance.

If your organization needs assistance with understanding its climate-related risks & opportunities, please contact G&A. We draw on our decades of sustainability reporting experience to help our clients create robust TCFD aligned climate risk reports. Our climate risk software solution, CLEAR, helps companies understand their physical climate risks across their asset portfolio, building a robust foundation for climate risk reporting.