Importance of Climate Risk Assessment for Today’s Businesses
Importance of Climate Risk Assessment for Today’s Businesses
Complete Guide on the Types, Benefits and Challenges of Climate Risk Assessment
- Last Updated
Natural hazards are no longer an exceptional or isolated event in the age of environmental variability. Globally, they are becoming frequent and severe leading to loss of lives, property and other damages. From floods, wildfires, to earthquakes, the damage is irreversible. Today, businesses face an impending threat to operations, but there is a long-term challenge to sustainability and development. It is estimated that climate change can shrink the global economy up to 10% by 2050. A report by Association of Chartered Certified Accountants (ACCA) found that only 20% of organizations surveyed have identified climate-related risks across their operations. Lack of preparedness leaves both physical assets and financial systems at risk, as disruptions spread through supply chains and capital markets, threatening not just profits, but long-term feasibility.
With 83% of cities already facing extreme climatic risks, it is no longer a choice to measure the risk of climate. It has been a fundamental procedure for creating impregnable systems and attainment of sustainable development. Risk assessments and ESG Risk Assessment help in smarter planning, sound investments, and better decision-making by identifying the potential impacts of places and actions where climate threats overlap with infrastructure and operations.
The Science Behind the Risk
The growing urgency to address climate change is firmly backed by scientific evidence. Extensive research from global institutions demonstrates how rising greenhouse gas emissions, increasing global temperatures, and extreme weather events are directly linked to human activities.
River floods are expected to increase significantly with global warming. Alfieri et al. (2016) found that under a 4°C warming scenario, more than 70% of the global population and GDP could face over 500% increase in flood risk. Asia, Europe, and the US are projected to experience the highest impacts. The flood risk is projected to increase by the end of the 21st century in 65%, 78%, and 78% of the analyzed landmass for the sustainability, regional rivalry, and fossil-fuelled development scenarios, respectively and future drought risk is projected to rise significantly, Hossein Tabari (2021). According to Zhang et al. (2024), wildfire hotspots are expected to shift towards higher latitudes, escalating risks to new geographies that were previously considered to be less vulnerable. As per Thomas R. Knutson (2015) the intensity of cyclone is likely to rise in coming future.
Climate Risk
Climate risk refers to the potential negative effects of climate change on different aspects of the environment, society, and businesses. High greenhouse gas emission from anthropogenic activities cause rise in the global average temperature by 1.1 degree C (United Nation). This rise has significantly affected the Earth’s weather patterns and natural ecosystems, as well as the way humans live and work. Organizations and governments need to execute short and long-term mitigation and adaptation plan.
Types of Climate Risk
Physical Risk
It refers to the potential negative threats on infrastructure, operations, supply chains etc., that are caused by changing climate conditions. They include acute risks like cyclone, floods, heatwaves, droughts, and chronic risk like sea level rise and temperature.
Transition Risks
These refers to the financial and strategic risks that arise for businesses, governments, and investors as the world shifts from a high-carbon to a low-carbon economy.
Understanding Climate Risk Assessment
The term ‘climate risk assessment’ refers to a systematic analysis of the vulnerability of a system (that system could be of any dimension, a business operation, city or country) for both present and future climate risks. As climate change intensifies, companies bear increasing systemic and ESG risks. Estimates suggest that annual fixed asset losses from climate-related hazards could reach between $560 and $610 billion by 2035. Even physical climate risks and losses would pose a threat of 5% to 25% in projected EBITDA by 2050 in some of the industries, especially those that are resource-intensive or located in high-exposure areas. We know that the effect of the climate change will continue to rise in the future. Therefore, the assessment of the climate risk will become critical to businesses, which in turn will enable them to see which part is weak and is being a threat to business. Organization will make informed decisions using this information in ways that eventually make them resilient.
Scenario analysis is a key component of climate risk assessment, helping decision-makers to comprehend various risks in the future of alternative climates. There are various scenarios that use the assessment, of which two are widely used. First is the Representative Concentration Pathways (RCPs) which looks at the greenhouse gas level in the atmosphere, and the second one is the Shared Socioeconomic Pathways (SSPs), which includes assumptions about the global state and population growth, urbanization, economic growth, and governance. In the case of transition risk (regarding areas such as energy, manufacturing, and finance), analysts can use scenario pathways offered by the International Energy Agency (IEA), the Intergovernmental Panel on Climate Change (IPCC), NGFS Climate Scenarios (Network for Greening the Financial System), etc.
Benefits of Conducting Climate Risk Assessment
Climate risk management is a strategic necessity for long-term business continuity and value creation. Following are the benefits:
Operation Resilience
Climate modelling helps to find the occurrence and severity of extreme weather conditions such as floods, droughts, cyclones, heatwaves, etc., which are on the increase. It can directly interfere with the operations as well as indirectly so, damaging the facilities, stop the production and delay delivery. Climate risk assessment assists companies in determining exposed assets, determine exposure, and create adaptation mechanisms.
Financial Protection
Climate risk, both physical risk (storms, wildfires) and transition risk (carbon pricing, regulatory changes) can have major financial impact on companies. Now, many insurers and investors both assess the climate risk before any decision. Companies that fail to disclose risk may face lower investment along with higher insurance premiums.
Regulatory Compliance
More government and financial regulators around the world are pushing climate risk disclosures and ESG Risk Assessment. Framework like the Task Force on Climate- related Financial Disclosures (TCFD) help to assess and report climate risk.
Reputation
A transparent climate risk strategy and ESG Risk Assessment improve credibility, enhances brand image, strengthens business resilience and strengthens stakeholder trust. Such companies which do not take actions can undergo backlash, boycotts that scar reputation and even hurt the market share.
Challenges in the Current Climate Risk Assessment
Data gaps and technology constraints
Poor quality and scarcity of data make it difficult to make any projection. Also, lack of data for certain location and long-term project make climate projections difficult.
Complexity of climate modelling
Climate modelling uses atmospheric sciences, mapping, and powerful computers, but the problem is, it is hard to make any accurate projection because of inconsistency and uncertainty in future emissions.
Lack of standardization in methodologies
There is no globally recognized method for climate risk assessment, climate risk financial assessment and climate risk management, so the lack of uniformity makes it difficult to compare results. Hence, it becomes tricky to formulate a methodology for any assessment.
Integration and scalability
There is lack of guidance in converting physical climate risk into financial impacts, which creates problems during capital allocation and overall budgeting.
Conclusion
Climate risk assessment has now become a core part of business strategy and policy planning. By systematically identifying the risk such as physical risk, transition risk, and climate related financial risks, organizations can better anticipate disruptions, safeguard assets, and capture emerging opportunities in the low-carbon economy. Proactive approach to climate risk assessment and ESG Risk Assessment strengthens business resilience against climate impacts but also builds stakeholder trust and ensures long-term value creation. As climate risks increases, companies and policymakers that integrate robust assessment frameworks today will thrive in an uncertain future.
Why Choose InCorp Global?
At InCorp, we bring together deep expertise in climate science, risk frameworks and industry-specific expertise to deliver tailored risk assessments that go beyond compliance. We provide end-to-end expertise to help organizations move from risk awareness to actionable strategies. Some are listed below:
- Identification of Actual and Potential risk
- Climate Risk modelling and ESG Risk Assessment
- Climate Related Financial Risk Assessment and Climate Related Solution
- Scenario Assessment and Financial impact
- Regulatory and Disclosure Alignment
- Risk Management Strategies
- Decision Making Support
Authored by:
Prakhar Gupta | Sustainability & ESG
FAQs
Climate risks can directly affect production efficiency, production costs and supply chains. Assessing these risks enables companies to plan mitigation strategies, comply with regulatory frameworks (like SEBI, BRSR and TCFD), and safeguard long-term financial stability.
Climate risk analysis forms the backbone of the pillar in ESG reporting. It allows businesses to integrate resilience adopted in sustainability goals, demonstrate proactive governance, and align with disclosure standards such as TCFD and CDP.
Typical inputs include location data for facilities, energy and water use, production data, supply chain details, and regional climate projections (using RCP or SSP scenarios). This data supports both qualitative and quantitative analysis.
Most organizations begin with qualitative screening (high/medium/low risk ratings) and then move to quantitative modelling, where climate scenarios, probability, and financial impact are estimated using scientific datasets and tools like CMIP6 or IPCC projections.
Trust structure is not recognised in many countries as a separate legal entity. Therefore, subject to interpretation of Double Tax avoidance treaties, many times, specific or non-discretionary trusts provide a tax-efficient structure, particularly when the beneficiaries are non-residents.
It is best to conduct a detailed assessment every 5 years, or whenever there’s a significant change in operations, location, or climate policy. Annual reviews can track risk mitigation progress and update adaptation strategies.
Start by mapping critical assets and supply chains, screening for potential hazards, and prioritizing high-risk areas. Engaging with ESG or climate consultants can help with data modelling, scenario analysis, and developing an adaptation roadmap.
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