Corporate Climate-Risk, Regulations, and Assessment
By Ben Moscona
Climate risk assessments are not only a regulatory requirement for many companies, but also a useful business asset.
As of November 2024, the European Union and the state of California have mandatory climate financial risk disclosure regulations for large corporations. Although the coming Trump administration is likely to rescind current SEC climate disclosure rules, the EU’s CSRD (Corporate Sustainability Reporting Directive) and California’s Senate Bills SB 219 and SB 261 (Climate Corporate Data Accountability Act) are not going anywhere, and will apply to many companies.
In addition to complying with regulation, assessing climate risk is important from a business perspective for risk assurance, strategy, investor relations, ESG goals, and more. Climate-related risks and opportunities remain underappreciated in industries that aren’t currently evaluating climate risk extensively (insurers, Real Estate Investment Trusts, and large banks).
Regulatory Context
Regulatory requirements around climate risk disclosures are mandated through California’s SB 219 and SB 261, and the EU’s CSRD.
California Climate Rules
The California’s Climate Corporate Data Accountability Act mandates that public and private companies doing business in California with annual revenues of at least $500M must disclose climate-related financial risks starting on January 1, 2026 using the Task-Force on Climate Related Financial Disclosures (TCFD) framework. For more on the California climate rules, click here.
CSRD
The European Union’s CSRD requires companies operating in the EU that meet employee count, turnover and balance sheet thresholds to disclose their environmental and social risks, as well as their mitigation plans, according to the European Sustainability Reporting Standards (ESRS). For more on CSRD and its eligibility requirements, click here.
How to Consider Climate Risk
Climate risk can be subdivided into two categories: physical and transition risk.
Physical risks are directly climate-related, including both acute and chronic risks like natural disasters and increases in extreme heat.
Transition risks occur from the world moving away from fossil fuels – including costs associated with regulatory compliance, changes in market demand for products, and reputation.
Scoping climate risk presents unique challenges as it involves both geographic and temporal scope (the extent of time considered). Assessing the correct scope for each will be unique to every business. Defining the right scope will limit resource requirements while targeting evaluation for the most relevant risks.
Depending on the depth of analysis, prioritizing certain geographical regions can be an effective way to focus and scope a climate risk assessment. It is important to consider which geographies are most important from the perspectives of your stakeholders (employees, supply chains, and customers)?
From a time frame perspective, climate risks can be complex. While we are already feeling the effects of climate change, the more severe impacts lie further in the future, with climate projections diverging significantly beginning around 2050. To address this, tying risk assessment time frames to capital expenditure decisions can provide a tactical and strategic approach.
Additional considerations when assessing climate risk:
Jurisdictions where your company operates, to ensure compliance with relevant regulations
Materiality of climate risk from an internal perspective to align with business priorities
Integration with Enterprise Risk Management
Choosing the most relevant and accurate climate projections to use
Leveraging Climate-Risk Assessments as a Business Asset
Climate risks can often be reframed as opportunities – to mitigate risk, identify dependencies, and create strategic business advantages. Assessing physical and transition risks can uncover diverse opportunities, from enhancing supply chain resilience, to creating competitive advantage, to even equipping customers and third-party suppliers with information that help both parties meet sustainability and business objectives.
Many companies are already creating climate resilience without realizing it through initiatives like flexible time off or remote work, which allow employees to respond more flexibly to the impacts of climate change. Conducting climate risk assessments also signals to investors that the business takes a long-term strategic approach to sustainability. Physical climate risk modeling is already big business for insurers, REITs, and large banks. Transition risk is just as large of a risk and opportunity, but undercapitalized.
Low, Medium, and High Effort Approaches to Climate-Risk Assessment
Climate risk assessment isn’t all or nothing.
Low Effort (Compliance)
Establish geographical and temporal scope
Choose climate projection(s) to use throughout
Identify compliance requirements, commonalities and differences across jurisdictions
Identify, map, and prioritize risks and opportunities using TCFD and ESRS classifications
Develop understanding of existing and potential risk mitigation strategies
Medium Effort
Conduct light quantitative modeling for the most salient physical or transition risks
Model cost of compliance in different jurisdictions
Carry out stakeholder interviews to understand different perspectives across the company
High Effort
Conduct extensive quantitative modeling and scenario analysis for material physical and transition risks
Perform deeper assessment of mitigation strategies and stakeholder interviews on how to improve these strategies
Expand geographic scope beyond priority regions
Create and analyze scenarios and what-if analyses across different time frames and geographies
Get in touch and learn more about how Bespoke ESG can help you prepare a robust climate risk assessment, ensure compliance with regulations, and identify strategic opportunities for your business.
Disclaimer: The information provided in this document is for general informational purposes only and does not constitute legal advice. Regulatory advice is provided solely within the scope of contracts between Bespoke ESG and its clients.