How to run a Climate Risk Assessment

Key Steps in a Climate Risk Assessment 

We outline the best practices for conducting climate risk assessments, the data needed, and how businesses can use this information to prepare for an uncertain future. 

Key Steps in a Climate Risk Assessment: Data collection, modelling and analysis  

Predicting future climate trends is challenging due to the inherent unpredictability of weather, which can be volatile and extreme with little warning. Adding to this complexity, gathering accurate climate data was initially costly. However, advancements in technology and the establishment of standardised frameworks in recent years have made it more feasible. Now, collecting climate risk data can be a valuable tool to help businesses assess the potential impacts of climate change on their operations and guide their adaptation strategies.

1. Businesses begin by collecting vast amounts of data on their performance under various operating conditions. This can include using the Internet of Things (IoT) and interconnected sensors to monitor physical operating environments in real-time.

2. Next, models are created to simulate high-risk climate scenarios. These models are then applied to the collected data, allowing companies to stress-test how their operations would fare under these hypothetical, but data-driven, conditions.

3. The modelled data is then analysed to assess how different aspects of the business perform during extreme weather events. This includes evaluating operations, machinery, production, real estate, staffing levels, and output. The results are used to understand how the business’s resilience may evolve over time, identifying patterns that can help mitigate climate risks and strengthen the business’s long-term adaptability.

Key Steps in a Climate Risk Assessment: Potential vulnerabilities  

To help understand which data is useful and informative to collect, businesses first need to identify what could potentially pose a risk to the business from a climate change perspective and what vulnerabilities these might expose. The types of events that might expose vulnerabilities as a result of climate change might include: 

• Floods 

• Droughts  

• Extreme heat 

• Extreme cold  

• Air pollution.  

Climate Risk Assessment: Potential impacts 

Once the factors that might expose vulnerabilities within a business have been identified, a business then needs to identify the potential impact these climate event. These can be broadly separated into three categories: 

1. Climate Risk Assessment: Operational impacts  

Any climate developments that affect the weather can also have an impact on renewable operations, for example, droughts could affect the output of hydroactivity due to a lack of water, while extreme heat could affect solar output due to its negative impact on the transition technology e.g. solar panels are not able to withstand heat of more than 26 degrees. This may have a knock-on effect on carbon pricing, with renewable producers increasing the price of renewable energy due to increased supply and decreased demand.   

2. Climate Risk Assessment: Business Operational impacts 

A key challenge in conducting useful analysis is balancing the long-term effects of climate change with more immediate business needs. Currently, businesses lack sufficient historical data to meaningfully assess the long-term impact of climate change on their operations. However, as more data is gathered over time, modeling becomes more accurate, enabling better short-term forecasting—such as predicting how a climate event might affect the business within the next five years.

3. Climate Risk Assessment: Policy impacts 

In addition to considering operational requirements affected by climate change, businesses must also consider mandatory policies and regulations that may affect them in the instance of an extreme weather event. Carbon emission-related water shortages, for example, could lead to certain industries falling short of regulatory frameworks, such as failing to cool equipment or machinery to required levels during periods of drought, leaving them non-compliant.  

Tools and Frameworks for Climate Risk Assessment 

Industry-standard tools and frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD), help businesses assess the impact of climate change. Established in 2015 by the G20 and the Financial Stability Board, the TCFD encourages voluntary risk disclosure, increasing available data for climate projections while also promoting transparency. This allows future clients or investors to make more informed decisions when engaging with these businesses. Key considerations for companies voluntarily reporting under the TCFD include infrastructural, market, economic, reputational, legal, and policy risks. The information is disclosed across three main areas:

• Physical Risk

• Transitional Risk

• Liability Risk

If successful, the initiative aims to not only help businesses better forecast climate risks, but also provide valuable insights for other companies and the broader market.

Integrating Climate Risk into Business Strategy 

To effectively manage climate risk, businesses should integrate these assessments into their overall strategy. Distinguishing between direct and indirect risks, such as supply chain disruptions or changes in consumer behaviour, can help businesses proactively mitigate climate-related vulnerabilities and improve long-term resilience.

Indirect Risks  

Climate change can affect a business and/or its supply chain and impact business operations, output, finances, and expansion. As these elements tend to be easier to spot and determine, alternatives can sometimes be found to help reduce risk, for example, by opting for alternative suppliers, changing energy generation methods, or moving operations to an area unaffected by climate change.  

Direct Risks  

These factors are beyond a business's control, such as shifts in consumer behaviour, socio-economic trends, or changes in political and economic conditions. They can impact a company's profitability and market performance relative to competitors, and influence how easily or cost-effectively key resources, like materials, can be sourced.

Incorporating climate risk assessments into business operations is essential for future-proofing against climate change impacts. By gathering relevant data, utilising industry-standard frameworks, and embedding climate risk into strategic planning, businesses can enhance resilience, mitigate risks, and support sustainable growth.