Climate Change Risk Assessments: Why they matter and how to get them right

CCRAs evaluate a company’s exposure to physical risks across its geographical footprint and value chain, as well as transition risks based on its operational models, business relationships and strategy. When properly leveraged, the CCRAs provide valuable insights into how companies can prepare for potential future scenarios, including climate hazards and the risks that should be monitored. Ultimately, companies can benefit from timely and more cost-effective management of climate-related risks and identify opportunities, driving long-term resilience and supporting communication of their climate strategy to their stakeholders. Examples of benefits include:

Cost savings and operational resilience:

• Reduce exposure to extreme weather disruptions and supply chain risks.
• Lower insurance premiums and operational costs through improved risk management.

Regulatory and reputational benefits:

• Avoid penalties by aligning with the International Sustainability Standards Board (ISSB) climate standards which are being integrated into national laws worldwide.
• Simplify and strengthen sustainability reporting and integrate climate risk into financial disclosures, demonstrating strong risk management and enhancing reputation.

Competitive and financial advantages:

• Maintain investor confidence and access to capital by demonstrating climate preparedness.
• Identify new market opportunities, technological advancements, business models, product innovations, and low-carbon revenue streams.
• Strengthen corporate reputation and attract talent, business partners, and customers by meeting sustainability expectations.

Improved decision-making and updated governance:

• Develop long-term strategic plans that are flexible across a range of plausible climate scenarios.
• Use climate risk stress-testing to optimise capital investment and resilience planning.

Common challenges when undertaking climate change risk assessments and recommended solutions

Challenge 1: Uncertainty about requirements and frameworks

Many companies are starting from scratch, uncertain about which requirements apply to them, what frameworks to follow, and how climate risks are material to their business.

Recommendations:

• Identify what is driving your need for a climate change risk assessment. Regulations, investors, or market expectations often determine which framework or disclosure requirement you should follow—whether it's TCFD, ISSB standards, or regulatory mandates like CSRD. Compliance teams can determine whether a company falls within the scope of a jurisdiction’s regulations, which are often based on size, revenue, or employee count.
• Compare the frameworks to align with the most rigorous one while satisfying the others. For example, a company with global operations may need to provide climate risk disclosures for California and the EU, so knowing that the EU’s CSRD requirements would also satisfy California’s is key.
• Review your existing enterprise risk matrix to determine whether any identified risks are climate-related or driven by physical or transition indicators. Often starting by considering your current risks being exacerbated by rapid changes in the physical climate or the global economy can make these risks easier to understand.

Challenge 2: Short-term focus on risks

Enterprise risk management (ERM) systems and processes are often focused on the short term (<10 years), failing to meaningfully consider climate-related risks and opportunities over longer time frames (10 to 25 years).

Recommendation:

• Align ERM processes with climate science (projected changes in temperature and carbon reduction targets) and regulatory frameworks (e.g. TCFD and ISSB) by stress testing against various long-term physical and transition climate scenarios.

Challenge 3: Unfamiliarity with scenario analysis

Companies are unsure how to choose the right scenarios and apply scenario analysis to be aligned with regulations.

Recommendations:

• Identify publicly available and frequently updated physical and transition scenarios, such as the Intergovernmental Panel on Climate Change (IPCC) and World Energy Outlook (WEO), respectively).
• Including a high emissions scenario and a transition scenario aligned with limiting climate change to 1.5°C.
• Include both a high emissions scenario and a low emissions scenario, aligned to 1.5°C.
• Use guidance from regulatory frameworks (TCFD & ISSB) to determine if all the potentially material risks and opportunities have been identified.
• Conduct competitive benchmarking as similar businesses are likely to be affected by common external forces and engage cross-functional teams to validate assumptions and ensure practical applicability.

Challenge 4: Limited scope of physical climate risk data

Existing physical climate risk data tends to be limited to present-day risks from acute climate hazards such as flooding and wildfires that relate to insurance liabilities. The impacts of other physical risks, like water and heat stress, and transition risks, like policy shifts and market changes, as well as climate-related opportunities remain poorly understood.

Recommendations:

• Engage with climate experts to ensure a balanced and comprehensive CCRA by incorporating both physical and transition risks as well as climate-related opportunities.
• Beyond current physical risks of interest to insurance providers, consider the less obvious risks that are posed to increase over time and become more material beyond the short time horizons, like heat stress and water stress that can be detrimental to equipment and personnel but are often overlooked.
• Explore each transition risk category to understand what issues the company will face if operations and plans unfold in a starkly different economy. For many of these transition risks, there are related opportunities; for example, if a transition risk is dependency on fossil fuels to mitigate this risk, they may be able to invest in renewable energy procurement, improve energy efficiency, or diversify into low-carbon technologies, turning a potential liability into a competitive advantage.

Challenge 5: Lack of integration with sustainability goals

Some companies are not holistically thinking about how their climate risks relate back to their sustainability goals or other metrics they already track.

Recommendations:

• Integrate CCRA outputs into ERM and follow guidance from broader sustainability reporting frameworks.
• Incorporate climate risk and opportunity insights into your strategy and set relevant targets and metrics that enable the management and measurement of climate-related risks and opportunities.
• Build on existing data and processes in place (e.g. emissions tracking, supply chain risk assessments, and corporate risk registers) to create a comprehensive approach that not only satisfies regulatory disclosure requirements but actively manages identified risks.

From obligation to opportunity: Leveraging climate change risk assessments

A well-structured climate change risk assessment is not just a compliance exercise—it is a strategic tool that enables businesses to future-proof operations, secure investor confidence, and stay-ahead of evolving regulations. By identifying key risks, such as extreme weather disrupting operations, or carbon pricing impacting costs, companies can develop proactive strategies, such as decarbonisation roadmaps and transition plans, to mitigate risks before they escalate. Businesses can enhance resilience by strengthening supply chains, integrating climate risks into financial planning, and aligning with evolving regulations. Raising awareness of these risks across teams ensures preparedness and buy-in, reducing resistance to future changes. Companies that proactively model scenarios and stress-test strategies will be best positioned to adapt, comply, and capitalise on new opportunities in a shifting landscape.