How to Conduct a Climate Risk Assessment

Oct 26, 2023

Major climate risks include rising temperatures, heat waves, droughts, rising sea levels and associated floods, an increase in storm intensities, and more. More information can be found on this EEA page.

Risks affecting businesses can be both acute and longer-term (chronic). In addition to physical risks, one also needs to consider the risks related to the transition to a climate-neutral economy (for example changes to the regulatory landscape, shifting consumer pressures/preferences, and investor expectations all create transition risks for operating companies). 

Task Force on Climate-Related Financial Disclosures (TCFD) is one of the more widely used sources that provide instructions for identifying and assessing climate-related risks and their potential impact on the company and its financials. Their core suggestions for assessing and disclosing climate-related risks can be found here.

Steps for conducting a Climate Risk Assessment

  1. Gather Climate Data:

Collect relevant climate data and information, such as historical climate trends, future climate projections, and local climate hazards (e.g. higher heat or cold, flooding, wildfires, severe storms, etc.). You can access climate data from sources like government agencies, climate research institutions, and international organizations.

  1. Identify Assets and Vulnerabilities

List and categorise your assets, including physical infrastructure as well as supply chains. Try to assess the vulnerabilities of these assets to climate-related impacts. Consider factors like location, sensitivity, and exposure.

  1. Assess Potential Impacts

Analyse how climate change may affect your assets and operations. Consider both direct impacts (e.g., increased flooding) and indirect impacts (e.g., changes in customer demand due to climate-related shifts).

  1. Evaluate Likelihood and Severity

Assess the likelihood and severity of different climate-related impacts. You can employ risk assessment methodologies like quantitative risk analysis, scenario planning, and stress testing.

  1. Prioritise Risks

Prioritise climate risks based on their potential impact and likelihood. This helps you focus on addressing the most critical risks first.

  1. Develop Mitigation and Adaptation Strategies

Once you've identified and prioritised risks, develop strategies to mitigate or adapt to these risks. These strategies may involve changes in infrastructure, operations, policies, or investments.

  1. Integrate Climate Risk into Decision-Making

Incorporate climate risk considerations into your decision-making processes. This may involve integrating climate risk assessments into strategic planning, capital budgeting, and operational decisions.

  1. Monitor and Review

Regularly monitor the climate risks and their impacts. Climate change is an evolving issue, and it's essential to stay up-to-date with the latest data and research.