Background
The European Union (EU) has emerged as one of the global leader in climate policy, driven by the urgency of addressing climate change and transitioning towards a sustainable future. In the context of climate change, the Corporate Sustainability Reporting Directive (CSRD) represents one key element in the EU’s regulatory approach to integrating climate-related disclosures into corporate reporting. The focus on climate is reinforced in the European Sustainability Reporting Standards (ESRS) E1, specifically focus on how companies should report on climate-related issues, with a strong emphasis on climate resilience and the analysis of financial climate risks and opportunities. On the risk side, the focus is on two types of climate risk:
- Physical risks: companies must report on the impact of acute (extreme weather events) and chronic (long-term climate changes) physical risks on their operations and supply chains. For example, a manufacturer would need to disclose how rising sea levels or increased frequency of storms could affect its facilities.
- Transition risks: The CSRD requires firms to assess and disclose risks associated with the transition to a low-carbon economy, including regulatory changes, market shifts, technological advancements, and reputation risks. For instance, an energy company would need to report on how future carbon pricing or stricter emissions regulations could impact its business model.
Climate opportunities refer to the potential benefits that businesses can realize by proactively addressing climate change and aligning with sustainable practices. These opportunities arise from adapting to and mitigating climate impacts, innovating in response to evolving market and regulatory landscapes and meeting the growing demand for environmentally responsible products and services.
Growing regulatory requirements and stakeholder interests
Several regulations and frameworks around the world require companies to conduct and disclose climate risk and opportunity analyses. These regulations are increasingly designed to ensure that companies understand and manage the impacts of climate change on their operations and financial performance as well as their impacts on the environment. The goal of climate risk analyses is often on raising awareness of climate topics within the organization. Some key regulations and frameworks are:
- Corporate Sustainability Reporting Directive (CSRD)
- EU Taxonomy Regulation
- Task Force on Climate-related Financial Disclosures (TCFD / IFRS) (mandatory e.g. in the UK)
- Voluntary standards influencing mandatory reporting, like Global Reporting Initiative (GRI)
Also various stakeholders expect companies to conduct climate risk analyses and disclose the findings. Meeting these expectations not only enhances transparency and accountability but also helps companies better understand and manage the financial and operational impacts of climate change, ultimately contributing to long-term sustainability and resilience. These stakeholders include for example:
- Investors and financial institutions
- Regulators and policymakers
- Business customers and end consumers
- Non-Governmental Organizations (NGOs) and advocacy groups
- Local communities and local governments
Regulatory requirements and stakeholder interests lead to particular opportunities and challenges.
Opportunities and challenges
Climate risk and opportunity analyses offer a solid framework for companies to report on their climate resilience, highlighting the crucial need for strategic management of climate risks. These analyses also address stakeholders’ expectations by emphasizing the importance of adaptation and proactive engagement with climate challenges. By conducting climate risk and opportunity analyses, companies can enhance their ability to navigate the challenges posed by climate change, seize new opportunities, and contribute to a more sustainable and resilient business model.
So far, however, companies have often only focused on physical risks. This is partly due to a range of different tools that help to easily quantify physical risks. However, a complete analysis also requires an assessment of transitory risks and opportunities and stakeholder views, which is often missing because these aspects are difficult to evaluate and quantify.
In addition, climate risks require a particularly long-term approach that differs from traditional risk management, which often considers a period up to the year 2100. Climate risks often unfold gradually over decades, such as sea-level rise, shifts in consumer patterns, and temperature increases.
Scenario analysis provides a structured framework for companies to explore the long-term implications of climate change, assess future risks and opportunities, inform strategic decision-making, engage stakeholders and build adaptive capacity. By integrating scenario analysis into their risk management and planning processes, companies can enhance their climate resilience, drive sustainable growth, and create long-term value in a changing climate landscape.
In summary, climate risk analysis enables companies to adopt a proactive and forward-looking approach to managing climate-related risks and opportunities. By enhancing their resilience through systematic risk assessment, adaptive capacity building, stakeholder engagement, and regulatory compliance, companies can navigate the challenges of climate change and position themselves for long-term success in a rapidly changing world.
Climate risk and opportunities at DFGE
DFGE supports companies in assessing climate risks and opportunities and works with our clients to meet the requirements of the ESRS. Among other things, we support our customers in the following areas:
- Fulfill regulatory requirements
- Identify material climate risks (physical and transitory) and opportunities
- Conduct scenario analyses
- Analysis of selected physical risks
- Resilience analysis
- Take the first steps towards comprehensive climate risk management
- Detailed process documentation
If you have any further questions, please contact us at or by phone at +49 8192-99733-20.
