Assessing Climate Risks (Physical & Transition) Aligned with TCFD

Climate risk assessment is more than a compliance exercise — it’s a lens through which organizations can understand their vulnerabilities and resilience in the face of a changing planet. Whether you’re in finance, manufacturing, or agriculture, integrating both physical and transition risks into your strategy is vital for long-term success.

Tip: Think of climate risks as two sides of the same coin: physical risks are tied to the environment itself, while transition risks arise as the world shifts to a low-carbon economy.

Among the leading frameworks, the Task Force on Climate-related Financial Disclosures (TCFD) stands out for its comprehensiveness and market acceptance. Its recommendations cover governance, strategy, risk management, and metrics & targets — but it’s not alone.
The Network for Greening the Financial System (NGFS) and the Partnership for Carbon Accounting Financials (PCAF) offer complementary guidance.

You don’t have to follow every framework verbatim; instead, align them to your organization’s context.

Establishing clear oversight and integrating climate considerations into your strategic planning sets the foundation for credible assessment.

• Board & Management Roles: Define who is accountable for climate risk. This could be a dedicated sustainability committee or a cross-functional risk subcommittee.
• Strategic Integration: Incorporate climate scenarios into business planning. Ask: How would a 2°C or 4°C world change our operations, investments, and supply chains?

Governance Window Who holds the reins?

• Board-level oversight ensures climate risk is part of enterprise-wide risk appetite
• Executive champions link day-to-day management with long-term strategy

Here you map the landscape of potential impacts and openings.

Physical Risks focus on environmental hazards:

1. Acute: Events such as hurricanes, floods, and wildfires that strike suddenly.
2. Chronic: Long-term shifts like sea-level rise, temperature increase, and precipitation changes.

Transition Risks emerge as economies decarbonize:

• Policy & Legal: Carbon pricing, regulation, liability risks.
• Technology: Disruption from new low-carbon innovations.
• Market & Reputation: Changing consumer preferences and investor expectations.

Assessing climate risks involves both qualitative judgment and quantitative analysis. A robust process might look like this:

• Scenario Analysis: Run multiple plausible future states (e.g., a delayed policy response vs. early, aggressive mitigation). Evaluate impacts on key business metrics.
• Risk Matrix: Plot likelihood versus impact for each risk to prioritize.

Scenario Snapshot Example: In a 2°C scenario, increased flood frequency might disrupt two key production facilities, leading to $5–10M in annual losses. In a 4°C scenario, chronic heat stress could reduce crop yields by 15%.

Once risks are identified and assessed, turn insights into action:

• Adaptation Measures: Reinforce infrastructure, diversify supply chains, adopt climate-resistant materials.
• Emissions Reduction: Set science-based targets, invest in renewables, retrofit facilities.
• Engagement: Work with policymakers, suppliers, and communities to build collective resilience.

Transparency builds trust. TCFD recommends disclosing:

• Governance: Board and management oversight processes
• Strategy: Detailed description of climate impacts and strategic responses
• Risk Management: How risks are identified, assessed, and managed
• Metrics & Targets: Quantitative performance indicators (e.g., greenhouse gas emissions, water usage, or internal carbon price)

Where possible, quantify your metrics and link them to material financial outcomes.

Disclosure Checklist

• Have you published your scenario analysis results?
• Are your emissions targets aligned with global goals? (e.g., Science-Based Targets)
• Do you explain the methodologies behind your metrics clearly?

Climate risk assessment is an ongoing journey, not a one-off report. As science evolves and regulations tighten, revisit your analyses, update your scenarios, and refine your strategies. By embedding climate resilience into your governance and operations today, you’ll be better prepared for whatever tomorrow brings.