Key takeaways:
- Climate risk is already impacting operations, assets and financial performance
- Both physical and transition risks must be assessed and often overlap
- Scenario analysis is essential for planning and disclosure
- EarthScan enables fast, scalable, and standards-aligned risk assessments
- Climate disclosure is becoming mandatory and a competitive advantage
In October 2024, eastern Spain was hit by a deadly DANA, a high-impact weather system that triggered three days of relentless rain. Flash floods tore through the Valencia and Castellón provinces, destroying roads, power stations and business parks.
One solar energy operator lost two months of production due to substation damage. The total economic cost: more than €10 billion.
Climate risk isn’t a future problem. It’s a business problem. It disrupts operations, damages assets, delays projects, and increases costs.
This guide breaks down what climate risk means for your organisation and how to manage it effectively. You’ll learn:
- The two types of climate risk every business must assess
- Why it’s now a material issue for investors, regulators and insurers
- How to identify risks across your portfolio using trusted frameworks
- How climate risk assessment helps you plan, disclose and build resilience
What is climate risk?
Climate risk is the potential for climate change to negatively affect your business, your assets, or your ability to operate. It includes:
- Physical risks: damage from extreme weather or long-term climate shifts
- Transition risks: business impacts from the global shift to a low-carbon economy
These risks are no longer confined to ESG reports. They’re showing up in financial statements, board agendas, insurance renewals, and investment decisions.
Key takeaway: Climate risk is not just an environmental issue; it’s a financial, operational, and strategic one.
Types of climate risk
Understanding the difference between physical and transition risks is essential for building a climate-resilient business. While both affect your bottom line, they show up in different ways and often require different responses.
Physical climate risk
These are the risks your business faces from actual climate-related events or environmental changes. They fall into two categories:
- Acute risks: Sudden, extreme events like floods, wildfires, and storms
- Chronic risks: Long-term changes like rising sea levels, drought or higher average temperatures
Examples:
- A solar farm in southern Europe suffers outages after heatwaves damage electrical components
- A logistics hub is shut down for weeks due to flooding
- A coastal real estate portfolio faces asset devaluation and uninsurability
Business impacts:
- Damaged assets and higher maintenance costs
- Insurance exclusions or premium hikes
- Downtime and lost revenue
- Long-term changes in location viability
Key takeaway: Physical risks are increasingly non-linear. Small changes in climate can trigger large-scale disruptions.
Transition climate risk
These are risks related to how markets, governments, and consumers are responding to climate change from new policies to shifting investor expectations.
Common transition risks:
- New regulations like CSRD or carbon taxes
- Stranded assets (e.g. fossil fuel infrastructure)
- Pressure from investors or clients to show climate alignment
- Losing contracts due to low ESG scores or lack of disclosure
Examples:
- An infrastructure fund revises its strategy after gas pipeline values drop
- A manufacturer loses market share to greener suppliers
- A real estate firm faces reputational risk after failing to disclose climate risks
Business impacts:
- Higher compliance and reporting costs
- Loss of market share or investment
- Asset devaluation
- Brand and reputational damage
Tip: Transition risk is dynamic. It evolves with policy, technology, and public sentiment. Stay ahead by monitoring regulatory trends.
Quick summary table: Physical and transition risks
Always assess both types of risk together; they often overlap and influence each other.
Why climate risk matters for your industry
Climate risk is a material issue across sectors, not just for sustainability teams. Here’s why it matters:
1. Climate events are causing bigger financial losses
- In 2023, global insured losses from natural disasters reached $108 billion, 22% above the 10-year average
- Europe saw its second-hottest year on record, with wildfires, droughts and floods across Spain, Greece and Italy
- In the UK, weather delays added £2.2 billion to construction timelines annually due to rainfall and extreme temperatures.
- Economic losses from natural disasters in 2024 were estimated at $368 billion, about 14% above the long-term average
2. Investors are pricing in climate exposure
- Asset managers now require asset-level risk assessments before finalising deals
- Portfolios without climate data are flagged as non-compliant or high-risk
Tip: Climate risk is becoming a due diligence requirement, not just a reporting exercise.
3. Insurance and financing are getting harder
- Insurers are raising premiums or reducing coverage for high-risk assets
- Companies with poor disclosure are excluded from green bonds and ESG funds
- Lenders may adjust terms or decline finance for assets with unaddressed climate exposure
4. Disclosure is becoming mandatory
- In the EU, the CSRD requires detailed climate risk reporting. While the directive formally entered into force in 2023, many companies will begin reporting in 2026, based on their 2025 financial year, a delay from the original timeline.
- The ISSB global standards (IFRS S1/S2) are setting up the new baseline for climate disclosure.
- In the US, the SEC has adopted climate disclosure rules (pending legal challenges). California’s SB 261 also requires companies with over $500M in revenue to disclose climate-related financial risks from 2026, aligned with TCFD.
Failing to report isn’t just a legal risk, it creates gaps in your ability to plan, raise capital, and compete.
Key takeaway: Climate risk is now a board-level issue and a strategic priority for capital access.
How to assess and quantify climate risk
Once you understand the types of climate risk your organisation faces, the next step is to assess your exposure. A climate risk assessment helps you identify which assets, operations, or investments are most at risk and why.
For many companies, this process is the foundation for informed decision-making, climate disclosures, and long-term planning.
What is climate risk assessment?
It involves:
- Analysing exposure: Which assets are in risk-prone locations?
- Evaluating vulnerability: How well can they cope with extreme events?
- Estimating impact: What would the financial, operational or reputational damage be?
Tip: Start with high-value or high-risk assets; even a basic assessment can guide priorities.
Why scenario analysis is essential
Scenario analysis helps you understand how risks could evolve under different climate futures. For example, if global temperatures rise by 1.5°C vs. 4°C.
Most climate disclosure frameworks now expect scenario-based analysis:
- TCFD: Recommends using at least two climate scenarios (e.g. a “business as usual” path and a Paris-aligned path)
- ISSB: builds on TCFD and makes scenario analysis a core expectation, especially for companies with material exposure
Key takeaway: Scenario analysis allows your organisation to test the resilience of its strategies and make data-informed plans for adaptation or mitigation.
Assessment methods
EarthScan is Mitiga Solutions’ climate intelligence platform that helps organisations assess, quantify, and manage physical and transition climate risks at the asset level.
It combines advanced Earth system modelling, peer-reviewed climate science, and machine learning to deliver fast, actionable insights without requiring in-house climate expertise.
With EarthScan, teams can:
- Screen entire portfolios for exposure to acute and chronic climate hazards
- Run scenario analyses aligned with ERSE E1 (CSRD), IFRS S2, and TCFD
- Generate disclosure-ready outputs in minutes
Tip: Platforms like EarthScan make it easier to scale climate risk assessments, prioritise adaptation, and stay ahead of evolving regulatory requirements.
Climate risk disclosure & regulation
Climate risk disclosure is no longer optional; it’s becoming business-as-usual across industries and jurisdictions.
Whether you're a sustainability consultant, asset manager, or corporate strategist, understanding the evolving regulatory landscape is essential for compliance, credibility, and resilience.
What’s changing?
Governments and regulators are shifting from voluntary frameworks to mandatory climate risk reporting. Here’s a snapshot of the key frameworks:
Regional regulation to note: In the United States, California’s SB 261 requires companies with over $500 million in annual revenue to disclose climate-related financial risks starting in 2026. The law mandates alignment with the TCFD framework, expanding disclosure obligations beyond publicly listed firms.
Key takeaway: Disclosure is not just about compliance; it’s a strategic opportunity to build trust, attract investment, and demonstrate resilience.
What do these frameworks require?
Most climate disclosure frameworks, including TCFD, ISSB, and CSRD follow a similar structure.
They expect organisations to report on:
- Governance: Who oversees climate risk? Is it discussed at board level?
- Strategy: How could physical and transition risks affect your business model and financial performance?
- Risk management: How are climate risks identified, assessed, and managed internally?
- Metrics & targets: What KPIs are tracked? Are there emissions reduction goals?
- Scenario analysis: Have you tested your strategy under different climate futures?
Tip: A robust climate risk assessment forms the evidence base for disclosure and strengthens your ability to respond to investor and regulatory expectations.
Why this matters now
Even if your organisation isn’t yet required to report, disclosure expectations are expanding rapidly. Investors, insurers, and clients increasingly demand transparency, especially in capital-intensive sectors like energy, infrastructure, and commercial real estate.
If you're operating in the EU, UK, US, or other major markets, you should be preparing to:
- Report on both physical and transition risks
- Use scenario analysis to explore future climate pathways
- Disclose how climate risk affects strategy, assets, and financial planning
- Make data available to regulators, investors, and stakeholders
Early action on climate risk disclosure helps future-proof your business and avoid last-minute compliance challenges.
Conclusion: From awareness to action
Climate change is no longer a distant risk. For many organisations, it’s already showing up in asset downtime, supply chain disruption, and reporting pressure.
Understanding your climate risk is now a business necessity. Whether you’re reporting under CSRD, planning future investments, or safeguarding your assets, assessing risk is the first step to building resilience.
You don’t need to tackle it all at once. Start by identifying which assets are most exposed, which regulations apply to you, and how scenario planning can help you make more confident decisions.
EarthScan makes climate risk assessment faster, clearer, and easier to scale. If your team is preparing for disclosure, investment planning, or asset screening, we’ll show you how EarthScan can support your goals.
Book a demo to see how EarthScan delivers asset-level climate risk insights in minutes.
