Our industry is engaged in an important dialogue to improve the efficiency and resilience of real assets through transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.
Climate risk assessment has become a core governance and financial reporting requirement for many companies. The European Corporate Sustainability Reporting Directive (CSRD) requires climate risk disclosure from large companies, and California’s Climate Related Financial Risk Disclosure Program aims to follow suit. The International Financial Reporting Standards (IFRS®) developed and maintained by the International Accounting Standards Board’s (IASB) has formalized climate risk standards in their recently released IFRS S2, replacing the earlier Task Force on Climate-Related Financial Disclosures (TCFD) framework as the baseline for institutional investors and capital providers.
Beyond regulation, climate risk is already affecting valuations and operations. Physical climate events drive insurance premium increases and affect property values. Supply chain vulnerabilities to drought, extreme weather, or operational disruption from heat stress pose operational and capital risks. Companies are responding to these pressures but often face challenges in translating operational planning into compliant reporting.
If your company is not yet performing climate risk assessments routinely, a few key actions can start you on the path.
Where to start: consider your stakeholders
As a first step, consider your internal and investment stakeholders. Climate risk disclosure is intended as a chance to communicate to investment stakeholders what the company is doing to mitigate that risk. What do you want investors to know about your climate risk processes and practices? Understanding who these stakeholders are and what they need to know is key to credible climate risk reporting.
Internally, discuss risk categories with staff and leadership to develop high-level alignment on what is relevant to your company. A risk is considered “material” if it could reasonably influence the economic decisions of your stakeholders. Once the company has identified what is material, the disclosure can be framed around a clean narrative and set of priorities that your stakeholders can clearly understand.
Assessing physical risk
Many companies new to climate risk assessment assume they are starting from zero. The good news? In most cases, they are not. Somewhere in their operations, companies are often already identifying, quantifying, and responding to climate related risks in some form. Internal company stakeholders, such as those in operations or enterprise risk management, are a great resource for determining existing practices that may relate to physical climate risks.
For example, 24/7 facilities owners may already have their teams running “extreme weather event” checklists at relevant sites. Insurance departments have likely modeled property loss from major events, such as floods or hurricanes. This type of planning is fundamentally assessing climate risk, and it can be a valuable starting point for incorporating this risk into corporate responsibility reporting and related communications.
Talk to your risk, legal, operations, facilities, investor relations, and insurance teams. Find out what these teams are already monitoring: extreme weather events, physical asset vulnerability, regulatory exposure, and stakeholder expectations around climate performance. After documenting what already exists, many companies learn they are further along than they realized.
Use publicly available resources
More good news: most companies do not need expensive analytics software to get started. To arm you with the information needed to align internal stakeholders and leadership, risk categories can be sourced via the publicly available TCFD final report, Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD, 2017. https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf), which supplies a list of transitional risks and opportunities. The TCFD resource will not help with more advanced assessment steps, such as quantifying financial impact and establishing time horizons, but the tool serves as an excellent starting framework for early activities.
There are also free tools to support physical risk assessment. Within the United States, most counties and cities routinely conduct some form of physical risk assessments. These can be a great resource for identifying local physical risks. For first-time reporters, this publicly available information can help get the process moving.
The next steps: beyond inventory
Once your company has mapped out its existing climate risk efforts, most find the information remains fragmented. Facilities might use one risk framework while insurance uses another, and neither may fully speak to investor concerns. Transition risk might be mentioned in strategy conversations without being quantified or connected to strategic planning. Physical risk may be managed reactively rather than strategically.
Overall, companies often find during the initial phases of climate risk assessment that certain governance processes exist but are not yet positioned as key drivers of decision-making or resource allocation. Developing a mature climate risk assessment requires linking the operational risk to financial impact, ensuring physical and transition risks inform each other, and embedding risk discussion into existing governance structures.
Finally, climate risk assessments should be considered an iterative process. Data access and processes related to reporting generally improve significantly over time. A first assessment often serves to build understanding for stakeholders on broad concepts, and as buy-in for mitigation planning grows, so will the case for more precise and developed assessment methodologies.
This article was written by Erin Hocking, Strategy & Reporting Lead at Brightworks Sustainability. Learn more about Brightworks Sustainability here.
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