Climate Risk Quantification: Three Things Corporates Need to Know
Climate risk reporting has become a staple in sustainability disclosures, but unpredictable policies and data gaps make it challenging for companies to understand their exposure.
Over the past decade climate risk reporting has become a staple in corporate sustainability disclosures. Both investors and regulators are asking companies to show their exposure to climate risks, how they affect their business and the governance systems in place to manage those risks. With the European Sustainability Reporting Standards (ESRS) and later the IFRS Sustainability Disclosure Standards (IFRS SDS), the impetus to provide detailed information has increased.
The unpredictability of global climate policies and lack of data makes it challenging for companies to understand their risk exposure and prepare for reporting. As disclosures mature, there is an increasing expectation to provide quantitative disclosures, particularly on the financial effects arising from the identified risks.
In this article, we discuss what to consider when quantifying climate risks.
What are companies expected to report?
The leading climate and sustainability reporting frameworks such as IFRS SDS and ESRS ask companies to report on their exposure to material climate risks and opportunities, and their potential financial effects on the organization, operations, and business model.
While the IFRS SDS and the ESRS allow for qualitative disclosures, they ask companies to provide quantitative disclosures on the financial effects of climate risks and opportunities where possible. However, there are caveats based on data availability and risk model uncertainties.
Under the IFRS SDS, companies are expected to quantify current and anticipated financial effects of climate risks and opportunities.
In the case of anticipated financial effects, IFRS S2 allows some leniency, such as through the application of proportionality mechanisms. A company may decide not to quantify risks if it is unable to do so using reasonable and supportable information available at the reporting date without undue cost or effort, or if it lacks the skills, capabilities or resources to do so. However, in all cases, companies are expected to include relevant qualitative information and explain why quantitative information has not been provided.
If climate risk is considered not material, companies should explain how this conclusion has been reached so that stakeholders understand that non-materiality reflects a robust process rather than a lack of attention.
The first set of ESRS, adopted in December 2023, required companies to quantify their current and anticipated climate-related financial effects. However, the simplified draft ESRS that were submitted to the European Commission in December 2025 align more closely with the disclosure requirements of IFRS S2, when it comes to quantifying the financial effects of climate. Currently the legislative processes for simplification are underway and the European Commission is expected to adopt the simplified draft my mid-2026.
What is climate risk?
Climate risk refers to two types of risks, physical and transition risk.
Physical climate risk refers to risks associated with changes in natural phenomena because of climate change. Physical risk assessments often rely on climate and hazard models that assess the potential physical impact on company assets and value chain.
Transition risks refer to risks associated with the transition to a low carbon society. Transition risk assessments can be more complex to assess, as they review how a company may be affected by changes in policy, technologies, and markets.
Risks are not just associated with company operations but also the overall company value chain and, where relevant, a company’s dependence on infrastructure. Focus should always be on risks that can have a material impact on the company.
Assessing climate risk is a complex exercise that requires numerous data sets covering both current operational data, and forward-looking assumptions and expectations on future corporate performance and societal developments.
As a result, companies who are new to climate risk assessments tend to start with qualitative climate risk disclosures.
How can companies leverage scenario analysis?
The goal of a climate risk assessment is to understand how a company may be affected by potential future changes in the atmosphere or policy environment. To understand future risk exposure, it is common to use climate scenarios.
Scenario analysis is not intended to predict the future, but to inform strategy and risk management under different plausible conditions.
The purpose of climate scenarios is to explore different potential futures. The scenarios are centered around specific narratives and assumptions with regards to socio-economic conditions, policy, technological development and energy use, and how these may affect the concentration of greenhouse gases in the atmosphere.
Conducting scenario analysis helps companies identify potential climate-related physical risks, transition risks, and transition opportunities under different climate futures.
Qualitative assessments create narratives around the climate risks and opportunities that can materially affect the company under various scenarios. Quantitative assessments seek to quantify the financial impact of the risks and opportunities on the company.
Risks assessments for physical vs. transition risks
Physical risk
For physical risks, the methodological principles are straightforward; increased concentrations of greenhouse gases in the atmosphere in combination with land-use changes and broader changes in the Earth’s climate system lead to increases in climate hazards that directly or indirectly impact business operations, including property damage from tropical cyclones or floods, and reduction in productivity due to heat stress.
Conducting a detailed physical risk assessment is a challenging exercise, and in a best-case scenario combines regional risk models with asset specific parameters. This information can then be used to quantify the probability of financial impacts on the company.
Transition risk
For transition risk, the crux lies in identifying a company’s specific exposure. Certain components, such as energy costs and exposure to carbon pricing mechanisms, can be modelled using the variables provided in scenarios. Other risks can be more challenging to assess due to the limits set by data availability and sector specific guidance.
What to do with the results?
Conducting a climate risk assessment is a vital step in understanding how an organization will be affected by climate change. The output should function as an input for corporate strategy and risk management and provide decision-useful information for investors and other stakeholders.
Climate risk methodologies are still in the early stages of development, and the market is learning how to use the outputs. Key is to understand how to interpret the analysis. In general, results should be understood as directionally informative rather than precisely predictive.
Climate risk assessment involves a variety of assumptions combined with scientific inputs that are constantly evolving. An overemphasis on quantified outputs can give a false sense of precision. Regardless of the methodology chosen companies should be transparent with their approach and provide sufficient context for stakeholders to understand the inputs, assumptions, and confidence levels leading to the results.
Finally, climate risk assessments are not one-off exercises. They are best understood as ongoing processes that evolve over time, supporting a more refined understanding of a company’s risk exposure.
Ultimately, with a focus on materiality, decision usefulness, and transparency companies will not only strengthen stakeholder trust but also build the resilience needed in a rapidly changing risk landscape.