The intersection of climate science and risk management is increasingly recognized as vital for sustainable development. Climate risk assessment offers a systematic method for evaluating any company’s or operation’s vulnerabilities to climate impacts, ranging from extreme weather events to gradual environmental changes.
We increasingly recognize that climate change poses significant risks not only to communities but also to companies across various sectors, impacting their operations, financial stability, and long-term sustainability. It’s been estimated that the global economy could lose 10% of its total economic value by 2050 due to climate change.
However, the concerning reality is that only 1 in 5 companies have conducted any climate vulnerability assessments or implemented climate adaptation plans.
The process of Climate Risk Assessment not only helps in understanding immediate threats but also facilitates long-term planning and investment in adaptive strategies, ensuring that communities can thrive despite the uncertainties of climate change.
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What is Climate Risk?
Climate risk refers to the potential negative impacts and financial consequences that companies, governments, and societies may face due to climate change.
Understanding climate risk is a matter of survival but also a strategic advantage for businesses and investors.
This understanding can help them adapt and avoid potential asset devaluation and increased operational costs.
Organizations and governments must develop effective strategies for mitigation and adaptation, including comprehensive climate risk assessments that identify vulnerabilities and inform decision-making processes to enhance resilience against the impact of climate change.
These risks can lead to significant damage to infrastructure, disruption of supply chains, and loss of life, posing a threat to public health and safety, economic stability, and ecological systems. They can manifest in two primary categories: physical risks and transition risks.
Physical Risks
We define these risks as those that encompass the direct impacts of climate change, including extreme weather events such as hurricanes, floods, and droughts, as well as long-term shifts like rising sea levels and temperature increases.
Transition Risks
We refer to these as risks that arise from the shift towards a lower-carbon economy, which involves changes in policies, regulations, technologies, and market dynamics.
Liability Risks
These are risks related to potential legal liability for contributing to climate change or failing to adapt to its impacts.
Watch this video from the Brookings Institution about why it’s important to know more about climate risk and its impact.
Why it’s Important to Assess Climate Risk for Every Business or Building/Home
Climate risk assessment is crucial for businesses and homes alike. It reveals vulnerabilities to increasingly frequent and severe climate-related events.
For businesses, this process identifies specific threats, such as floods or heat waves, and their potential economic impact. This information allows companies, organizations, and homeowners to make informed decisions about resources, infrastructure, and operations, enhancing overall resilience.
Homeowners benefit similarly from climate risk assessment. It highlights property value and safety risks, such as rising sea levels, flooding, or wildfires. This information can guide adaptation strategies, insurance choices, and investment decisions.
In both cases, assessing climate risk promotes preparedness and adaptability, helping stakeholders effectively navigate the challenges of a changing climate.
Climate Risk Assessment Methodology
Climate risk assessment methodology involves a systematic approach to identifying, evaluating, and managing the risks posed by climate change. This approach typically consists of the following steps:
1. Define the Scope
The first step in climate risk assessment is to define the scope of the analysis. This includes:
- Identifying the geographic area or assets to be assessed
- Determining the time horizon for the assessment (short-term, medium-term, long-term)
- Selecting the climate variables to be evaluated, such as temperature, precipitation, sea level rise, and extreme weather events.
2. Identify Climate Hazards
The next step is identifying potential climate hazards that could impact the area or assets under consideration. This involves:
- Analyzing historical climate data to establish baseline conditions
- Reviewing climate projections and scenarios to understand potential future changes
- Identifying specific climate hazards, such as flooding, drought, heat waves, and storms
3. Assess Vulnerability
Once climate hazards have been identified, the assessment focuses on evaluating the vulnerability of the area or assets to these hazards. This step includes:
- Identifying the physical, social, economic, and environmental characteristics that could increase or decrease vulnerability
- Assessing the sensitivity of the area or assets to climate impacts
- Evaluating the adaptive capacity of the area or assets to respond to and recover from climate impacts
4. Analyze Risk
The fourth step involves analyzing the risks posed by climate change. This involves:
- Estimating the likelihood of specific climate hazards occurring
- Assessing the potential consequences or impacts of these hazards
- Prioritizing risks based on their likelihood and potential consequences
5. Develop Adaptation Strategies
The final step is to develop strategies to adapt to and mitigate climate risks. This includes:
- Identifying potential adaptation measures, such as infrastructure upgrades, policy changes, or behavioral modifications
- Evaluating the costs and benefits of different adaptation strategies
- Developing an implementation plan for the selected adaptation measures
By engaging stakeholders throughout the assessment process, organizations can incorporate diverse perspectives and insights, ultimately leading to more effective and tailored adaptation strategies.
This comprehensive methodology is essential for building resilience against climate impacts and ensuring sustainable decision-making in the face of uncertainty.
Climate Risk Assessment Frameworks, Resources, Templates & Examples
This section presents a range of examples, templates, and frameworks that illustrate effective methodologies for conducting climate risk assessments.
These resources are designed to guide practitioners through the complexities of assessing climate risks, ensuring that they can tailor their approaches to specific contexts and needs.
From comprehensive frameworks to practical templates, these tools will help stakeholders navigate the challenges posed by climate change and develop strategies to enhance resilience and adaptation.
Climate Risk Assessment – Frameworks
1. ISO 14091
ISO 14091 offers vulnerability, impacts, and risk assessment guidelines related to climate change. It aims to improve understanding of vulnerability and provides a framework for developing and implementing effective climate risk assessments. This standard is particularly useful for organizations seeking to establish a systematic approach to climate risk management.
2. NGFS Physical Climate Risk Assessment Framework
The Network for Greening the Financial System (NGFS) has developed a practical framework for physical climate risk assessment. This framework consists of six key steps, including defining objectives, identifying available data, and estimating impacts. It is designed to be adaptable to specific country needs and emphasizes a staged approach to assessment.
3. CDSB Framework – Advancing and aligning disclosure of environmental and social information
The CDSB Framework sets out an approach for reporting environmental and social information in mainstream reports, such as annual reports, 10-K filings, or integrated reports. It is designed to help organizations prepare and present environmental and social information for the benefit of investors.
4. The Task Force on Climate-related Financial Disclosures (TCFD)
The Task Force on Climate-related Financial Disclosures (TCFD) is an initiative established in December 2015 by the Financial Stability Board (FSB) to enhance transparency regarding climate-related financial risks.
The TCFD aims to develop a framework that helps organizations disclose their climate-related risks and opportunities in a consistent manner. This initiative is particularly significant as it addresses the financial implications of climate change, which can impact investments, lending, and insurance underwriting decisions.
5. CLIMAAX Handbook
The CLIMAAX Handbook provides a structured approach for conducting climate risk assessments at the regional level. It emphasizes inclusive practices and is organized into five iterative steps, focusing on governance, equity, and participatory processes. This framework is designed to facilitate transformative adaptation strategies and resilience-building practices.
Climate Risk Assessment – Resources
1. UNFCCC – Assessing Current Climate Risks
The UNFCCC offers methods for assessing climate risks that range from qualitative evaluations to quantitative analyses. This includes:
- Understanding Relationships: Analyzing how climate factors contribute to risk.
- Using Statistical Methods: Employing regression analysis and dynamic simulations to predict outcomes.
- Identifying Critical Thresholds: To guide assessments, establishing thresholds for various climate impacts, such as drought or flooding.
The UNFCCC and the Paris Agreement influenced the development of climate-related financial reporting standards like IFRS S2 Climate-related Disclosures. You may also read the latest Climate Risk Landscape Report published by the UNEP to gain a more comprehensive understanding.
2. USAID Climate Risk Management Resources
USAID provides a comprehensive suite of resources and online training focused on climate risk management (CRM). This includes tools for assessing climate risks, climate risk profiles, and guidelines for integrating climate considerations into development strategies.
3. Climate Risk Assessment & Management
The Adaptation Community outlines a comprehensive approach to climate risk assessment (CRA) that evaluates how climate change and extreme weather events interact with socio-economic factors.
This framework emphasizes the importance of identifying vulnerabilities and exposures within a system, assessing potential impacts, and determining the overall risk. The process includes:
- Assessment of Climate Hazards: Identifying climate-related hazards that may affect a region or community.
- Impact Evaluation: Estimating the magnitude of expected impacts and potential losses.
- Risk Management Options: Selecting the most effective combination of risk management strategies based on a cost-benefit analysis.
4. MIP4Adapt’s DIY Manual
The MIP4Adapt DIY manual provides a straightforward, step-by-step method for evaluating climate risks and opportunities. This manual is designed for organizations looking to conduct their own climate risk assessments, offering practical guidance and tools for effective risk evaluation.
CDP, formerly known as the Carbon Disclosure Project, is an organization that helps cities and companies disclose their environmental impact and manage climate risks. One of its key initiatives focuses on assisting cities in conducting assessments as well as training for Climate Risk and Vulnerability (CRVAs).
5. CARE Climate Vulnerability and Capacity Analysis Handbook
The Climate Vulnerability and Capacity Analysis handbook provides guidelines for conducting climate vulnerability assessments, emphasizing participatory approaches to identify hazards and assess community capacities. It is particularly useful for NGOs and community-based organizations.
6. Climate Risk Assessment Guidance by CCME
The Canadian Council of Ministers of the Environment (CCME) offers guidance on best practices in climate risk assessment. This document outlines necessary leadership, participatory processes, and frameworks for effective risk assessment.
Climate Risk Assessment – Templates
1. FRG – Climate Risk Assessment Template
This free FRG Risk template helps financial institutions start with a clearly defined strategy for assessing climate risk on their portfolio. Aligned with the ISO 31000 standard for Risk Management, it provides a roadmap for identifying and analyzing climate risks to simplify reporting requirements. The template includes:
- Easy-to-follow example with instructions
- Blank template for your own planning and strategy
- Reference reading recommendations
2. SafetyCulture – Comprehensive Environmental Risk Assessment Template
The Comprehensive Environmental Risk Assessment Template provided by SafetyCulture is designed to help organizations identify and manage environmental risks effectively. This template serves as a structured framework for assessing potential hazards that could impact the environment and the health of individuals in the workplace.
3. AdaptNSW – Climate Risk Assessment Tool
The AdaptNSW Climate Risk Assessment Tool is a resource developed to assist local governments and organizations in in identifying and managing climate risks. This tool is part of the broader AdaptNSW initiative, which aims to enhance climate resilience across the state.
4. CDP Climate Change Questionnaire
CDP (formerly the Carbon Disclosure Project) provides an annual climate change questionnaire that companies can use to report on their climate risks, opportunities, governance, and management. Over 13,000 companies use this template.
5. Adaption Scotland – Climate Risk Screening Template
Adaptation Scotland’s Tool 2 is a Climate Risk Screening Template designed to assist organizations in evaluating climate-related risks. This tool is part of a broader framework supporting strategic and project-level climate change risk assessments.
Climate Risk Assessment – Examples
1. PG&E – Utility Company
Now infamous as the first large corporation to file for bankruptcy due to climate change, PG&E, a major utility company in California, has since conducted extensive climate risk assessments to address the increasing threat of natural disasters such as wildfires.
In 2019, PG&E paid $25.5 billion to resolve liabilities from wildfires caused by its power lines. As a result, PG&E has invested heavily in climate risk mitigation measures such as:
- Hardening the electric system to make it more resilient.
- Clearing vegetation that poses a wildfire risk.
- Implementing real-time monitoring to enable rapid emergency response.
- Conducting preventive power shutoff events during severe weather or high wildfire risk.
- Securing heavy-lift helicopters for emergency response during wildfires.
PG&E’s ongoing efforts in climate risk mitigation reflect a comprehensive approach to enhancing safety and resilience in the face of climate change. Through its RAMP application, sustainability initiatives, and community engagement, PG&E is working to build a safer and more reliable energy system for California.
2. Unilever – Consumer Goods Company
The multinational consumer goods company Unilever has conducted climate risk assessments to understand the potential impacts on its operations, supply chain, and markets. Unilever has identified several key risks, including:
- Disruption to agricultural supply chains from droughts, floods, and temperature changes affecting crop yields
- Damage to manufacturing facilities and distribution networks from extreme weather events
- Shifts in consumer demand and preferences due to climate change
To manage these risks, Unilever has implemented a Climate Transition Plan and is now investing in sustainable agriculture, renewable energy, water efficiency, and climate adaptation measures. The company has also been working with suppliers and communities to build resilience in its supply chain.
3. City of New York – Municipal Government
The City of New York has been conducting climate risk assessments to understand the threats posed by climate change to its infrastructure, services and communities. The city has identified several high-risk areas, including:
- Coastal flooding from sea level rise and storm surges
- Heat waves and urban heat island effects
- Heavy rainfall and inland flooding
- Droughts and water scarcity
To address these risks, New York City has developed a comprehensive climate adaptation plan, including measures like:
- Strengthening coastal defenses and critical infrastructure
- Expanding green infrastructure and urban forestry
- Improving emergency preparedness and response
- Providing cooling centers and assistance to vulnerable populations
- The city is also working to reduce its greenhouse gas emissions to mitigate future climate risks.
4. KPMG – Climate Risk Assessment Report
The KPMG Climate Risk Report 2024 provides an overview of how KPMG is aligning its climate-related financial disclosures with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The report covers key aspects of KPMG’s climate risk management approach. The report highlights KPMG’s ongoing efforts to enhance its climate risk management capabilities.
In Summary
Climate risk assessments are not just about protecting the environment; they are essential for ensuring businesses’ long-term sustainability and survival. As the impacts of climate change become more severe and frequent, organizations that fail to assess and mitigate their climate risks face significant threats to their operations, profitability, and even their very existence.
Without taking proactive measures to address these risks, businesses risk costly disruptions, reputational damage, and potential legal liabilities. Ultimately, the failure to prioritize climate risk assessment puts the environment, the future of businesses, and the global economy at risk.
Organizations that embrace comprehensive climate risk assessment strategies will be better positioned to navigate the challenges ahead and emerge as leaders in a rapidly changing world.
Frequently Asked Questions
What is the first step in conducting a climate risk assessment for a company?
The first step is to define the scope and objectives of the assessment, including which business units, assets, or operations will be evaluated.
What types of climate risks should companies consider?
Companies should consider physical risks (e.g., extreme weather events), transition risks (e.g., regulatory changes), and liability risks (e.g., legal consequences for failing to adapt).
How can companies identify their vulnerabilities to climate change?
Companies can identify vulnerabilities through stakeholder engagement, reviewing past incidents, and analyzing their operations and supply chains for exposure to climate hazards.
How often should companies conduct climate risk assessments?
Companies should conduct climate risk assessments regularly, ideally every few years, or whenever there are significant changes in operations, regulations, or climate conditions.
References
PG&E: Climate Strategy Report
USAID: Climate Risk Management for USAID Projects and Activities
Wall Stree Journal: PG&E: The First Climate-Change Bankruptcy, Probably Not the Last
UNFCC: Framework for Reporting Climate Change Risks & Opportunities in Corporate Reports
