Assessment of Climate Risks – Physical and Transition Risks, Qualitative and Quantitative
Climate Risk and Opportunity Analysis
Climate change affects businesses in two ways: through physical risks (extreme weather events and long-term climatic changes) and transition risks (political and regulatory developments, technological advances, market shifts and reputational factors). Both can affect revenue, costs, assets, financing costs and supply chains. These impacts are increasingly being scrutinised by regulators, banks, investors, insurers and customers.
The Corporate Sustainability Reporting Directive (CSRD) acts as a key driver, extending reporting obligations and climate risk requirements across entire value chains – from banks and insurers to customers and suppliers. By systematically identifying and assessing climate risks using scenario analysis, companies can turn regulatory requirements into a strategic advantage.
A Climate Risk and Opportunity Analysis (CSRD context: ESRS 2 / IRO-1, SBM-3 und ESRS E1-2 / E1-3 und E1-11) is therefore more than a compliance exercise. It provides a foundation for business resilience, capital allocation and access to financing. DFGE supports companies throughout the process – from risk identification and impact chain analysis to scenario-based assessments and quantitative evaluation, as well as integration into Enterprise Risk Management (ERM) and sustainability reporting.
- Delegated Regulation: (EU) 2026/1563
- Blog post: The Value of Early Climate Risk Analysis
- Blog post: The Contribution of Climate Risk and Opportunity Analysis to Enhanced Climate Resilience
- Blog post: The Dissolution of the TCFD and Its Implications
- White paper: CSRD and Climate-Related Sustainability Reporting
- White paper: Climate Risks and Opportunities
- TCFD Website
Understanding Physical and Transition Climate Risks and Opportunities
Climate risks impact the respective business model rather than functioning as a separate type of risk. They are therefore analyzed along two axes: physical and transitional risks—in each case, examining the chains of effects through which they influence revenue, costs, and assets.
Important: ESRS and most frameworks require an assessment of both risks and opportunities. The same drivers that create risks (e.g., CO₂ prices, changes in demand, the need for adaptation) also open up market opportunities—such as more efficient products, resilience services, or new markets. A Climate Risk Analysis should therefore always take these opportunities into account as well.
Physical Risks
Physical climate risks arise from the direct impacts of climate change on locations, infrastructure, resources, and people.
- Acute: Extreme weather events such as heavy rain, flooding, storms, heat waves, droughts, and wildfires.
- Chronic: Long-term changes such as rising temperatures, altered precipitation patterns, water scarcity, sea-level rise, and soil degradation.
- Typical impacts: Damage to production and storage facilities, increased water and cooling requirements, disruptions to logistics and supply chains, raw material shortages, declining labor productivity, and restrictions on the insurability of sites.
Transitional Risks
Transitional climate risks arise from the transition to a climate-neutral economy and changes in policy, technology, and the market.
- Political and legal: CO₂ pricing, emissions trading, CBAM, statutory limits, energy efficiency requirements, disclosure obligations, and climate-related litigation.
- Technological: Transition to lower-emission technologies, investment needs, existing emission-intensive facilities (locked-in emissions), and loss of asset value (stranded assets).
- Market-related: Changes in customer demand, fluctuating energy and commodity prices, and new requirements for suppliers, financing, and insurance.
- Reputational: Accusations of greenwashing, criticism from stakeholders and the media, and impacts on employer attractiveness.
- Typical impacts: Higher investment and operating costs, write-downs, changes in product portfolios and margins, adjustments to procurement and supply chains, and changes in access to capital and competitive position.
Impact Chains
From Climate Impact to Financial Magnitude
The real added value arises when climate risks are described as impact chains: from the climate impact through the operational consequences to the financial impact. This logic enables comparability, integration with ERM, and a common language across functional areas.
Reference framework: Climate driver → Climate impact → Exposure/vulnerability → Operational impact → Financial impact → Mitigation measure.
- Example Chain (physical, acute): Heavy rainfall event → Flooding of a production site (SSP5-8.5, 2050) → 3-week production outage, restoration costs, disrupted logistics → Decline in revenue and additional costs of X million euros, rising insurance premiums → Measures: Flood protection, site redundancy, adjustment of insurance strategy.
- Example chain (transitory): Increase in the CO₂ price and expansion of CBAM → higher procurement and manufacturing costs for emission-intensive intermediate products → margin pressure and need for price adjustments with key customers → decline in EBITDA of X million euros on the target path, investment needs for decarbonization → Action: Decarbonization roadmap, product/supplier switching, price clauses.
- Example chain (opportunity): Increasing demand for climate-resilient products and proven adaptation performance → differentiation in competitive bidding → higher probability of winning contracts and price premium → revenue potential of X million euros → Action: Product development, proof of adaptation, communication.
Relevance
Why conduct a Climate Risk Analysis?
The 8 CRO Elements
What are the components of a Climate Risk and Opportunity Analysis?
For each element of the Climate Risk Analysis, DFGE identifies which existing data sources (e.g., ISO certificates, financial planning, risk registers, governance protocols, scenario and loss data) can be used and which specific documents will be created or refined over the course of the project. This results in an integrated climate risk analysis that equally addresses both internal management needs and external requirements from the CSRD (ESRS E1), TCFD, IFRS S2, CDP, or general stakeholder inquiries.
- 1. Scope & System Boundaries—Locations, business units, value chains, time horizons.
- 2. Risk and Opportunity Inventory—Structured distinction between physical and transitory, acute and chronic.
- 3. Impact Chains & Impact Model—Impact chain logic with drivers, effects, and indicators.
- 4. Scenario Framework – Selection and justification of climate and transition scenarios for each time horizon.
- 5. Assessment Methodology & Quantification – Criteria, metrics, damage/cost assumptions, monetization.
- 6. ERM Integration – Integration with the risk register, risk tolerance, limits, planning, and reporting.
- 7. Governance & Responsibilities – Approval, oversight, operational responsibilities, and implementation.
- 8. Management & Updates – Measures, KPIs, monitoring cycle, and updating the analysis.
Do you have questions about our individual services? If so, please feel free to contact us!
Services
DFGE-Services for Climate Risk Analyses
- Structured readiness check based on the 8 CRA elements
- Initial screening of existing documentation (risk registers, reports, scenario assumptions)
- Systematic gap analysis, including an assessment of relevance
- Identification of the most significant gaps and risks
- Prioritized recommendations for action
- Presentation of results tailored for management, including a gap matrix and CRA readiness status
- Comprehensive identification of physical and transitional risks and opportunities
- Development of impact chains, including an impact model
- Scenario definition (climate and transition pathways) and justification of assumptions
- Qualitative and quantitative assessment, including monetization and sensitivity analyses
- Integration with ERM, risk-bearing capacity, and financial planning
- Definition of KPIs, thresholds, and monitoring
- Preparation of a consistent, ESRS-compliant analysis and reporting document
- Review of your own climate risk analysis or individual elements
- Alignment with CSRD/ESRS reporting, the EU Taxonomy, CDP, and Climate Transition Plan (CTP)
- Facilitation and content development for CRA workshops
- Development of individual components, e.g., impact chains, scenario frameworks, quantification models
- Support in establishing processes and reporting tools
- Sparring partner for internal project teams or end-to-end project management
- Long-term support for updates and further development
DFGE can assist you with your CR&O Analysis – please contact us.
Your Advantages
Climate Risk and Opportunity Analysis with the DFGE
- Flexibility – Tailored to your company and your value chain; adaptable to company size, industry, data availability, and objectives. From risk identification to monetary valuation.
- Practical and immediately implementable – Results can be integrated into existing risk and management processes; they are not designed as a separate system.
- Expertise – Over 25 years of consulting; experience in climate strategies, risk analysis, and ESG. In-depth knowledge of regulatory requirements such as CSRD/ESRS, the EU Taxonomy, TCFD/IFRS S2, as well as scenario and quantification methods. A combination of scientifically sound methods and pragmatic recommendations for action.
- The DFGE Network – Access to international experts and partners from relevant industries; best-practice examples and innovative approaches; support in integrating supply chain perspectives.
FAQ | Frequently Asked Questions About Climate Risk and Opportunity Analysis
1. Which companies are affected - and is it worth conducting an analysis even if a company isn’t required to report under the CSRD?
The impact is not limited to any specific industry: Physical risks affect locations, procurement, and logistics, while transitional risks stem from CO₂ prices, CBAM, and technological and customer requirements. Both are systematically assessed in Scope (Element 1) and in the Risk and Opportunity Inventory (Element 2)—rather than being assumed across the board. Even without a specific reporting requirement, the analysis is worthwhile because the requirements are passed down along the value chain: Banks, insurers, and customers are increasingly requesting climate risk and decarbonization data directly from their business partners.
2. Does this result in duplicate work in addition to the existing risk management?
No – the analysis is deliberately not designed as a parallel world. It leverages your existing data ecosystem (risk registers, sustainability reports, emissions inventories, site, insurance, and financial data) and feeds into ERM integration (Element 6): Climate risks are incorporated into existing processes via registers, risk matrices, limits, reporting channels, and responsibilities. The result is a unified risk language rather than a separate special report.
3. What data is required - and how are missing data points handled?
The starting point is what already exists: reports, certificates, planning documents, and risk documents. The gap analysis provides a structured overview of what information is available and where gaps exist. Missing data does not hinder the analysis: it is accounted for through well-founded assumptions, ranges, and sensitivity analyses, and is transparently identified as an assumption—ensuring that the results remain reliable and can be updated later.
4. How reliable are the results given the uncertainty of future scenarios?
The goal is not to provide a point estimate, but rather a robust range. Based on defined climate and transition scenarios, documented damage and cost assumptions, and sensitivity analyses, monetary metrics such as costs, revenue, EBITDA, and asset-at-risk, as well as break-even CO₂ prices, are derived. This makes it possible to discuss climate risks using the same logic as market or credit risks—and the assumptions remain verifiable and compatible with TCFD and IFRS S2.
5. Is a Climate Risk Analysis needed in addition to the existing Climate Transition Plan?
The two instruments complement each other. The Climate Transition Plan (CTP) outlines the path to decarbonization (ESRS E1-1), while the climate risk analysis assesses risks and opportunities and translates them into financial metrics. The risk analysis provides the rationale for investment needs, prioritization, and the handling of locked-in emissions and stranded assets—thereby strengthening the CTP’s credibility with banks, investors, and insurers. The analysis can be directly integrated with your existing CTP framework. A comprehensive Transition Plan can therefore address both climate mitigation and climate adaptation.
