Climate Risk

Climate risk is the set of potential financial and operational threats posed to an organization by climate change. These threats are typically divided into physical risks, which are the direct consequences of a changing climate, and transition risks, which result from the process of adjusting to a lower-carbon economy.

Physical risks can be acute, such as damage from hurricanes or wildfires, or chronic, like rising sea levels or prolonged heatwaves affecting agricultural yields or labor productivity. Transition risks include policy changes like carbon taxes, legal liabilities, shifts in technology that render existing assets obsolete, and changes in consumer preferences that impact revenue streams.

For finance and planning teams, quantifying these potential impacts is critical for effective risk modeling and strategic planning. By incorporating climate-related variables into financial models and using scenario planning, organizations can assess their resilience, make informed capital allocation decisions, and meet increasing demands for climate-related financial disclosures from investors and regulators.