What climate risk assessments actually involve

A climate risk assessment identifies and quantifies the potential financial impacts of climate change on a company's operations, assets, supply chains, and markets. It covers two categories: physical risks, the direct effects of changing climate conditions such as extreme heat, flooding, drought, and sea-level rise on facilities and supply chains, and transition risks, the financial impacts of the shift to a low-carbon economy, including carbon pricing, regulatory change, technology shifts, and changes in market demand. A credible assessment uses climate scenarios to model these risks under different warming pathways, typically aligned with TCFD or IFRS S2 requirements.

Why it's harder in practice than it looks

Climate scenario selection requires technical literacy and defensible rationale

Assessment quality depends on choosing appropriate scenarios. Using only a 1.5C scenario understates physical risk; using only a high-warming scenario understates transition risk. Most assessments should examine at least two scenarios reflecting different policy trajectories. The selection and justification of scenarios must be documented for both internal governance and external disclosure.

Physical risk data at asset level is often missing or low quality

Physical climate risk assessment requires location-specific climate projections mapped against the company's asset base, supply chain nodes, and key supplier locations. Many companies do not maintain accurate property and supply chain location data at the granularity required, and commercial climate data tools vary significantly in quality and coverage.

Translating physical risk into financial impact is genuinely difficult

Estimating the financial cost of a one-in-50-year flood event at a key manufacturing facility, including lost revenue, recovery costs, and supply chain disruption, requires actuarial-quality assumptions that most sustainability teams cannot produce independently. Without financial quantification, risk assessments remain qualitative and do not integrate effectively with enterprise risk management.

TCFD and IFRS S2 requirements are more demanding than many companies realise

Both frameworks require climate risks to be integrated into the company's mainstream financial reporting, with quantified financial impact where material, and with board-level oversight documented. Meeting these requirements demands engagement from finance, treasury, legal and risk functions, not just the sustainability team.

What good looks like

A credible climate risk assessment covers both physical and transition risk across a meaningful time horizon (short, medium, and long-term), uses at least two climate scenarios with documented rationale for their selection, quantifies financial impact for material risks, integrates findings into the company's enterprise risk register and risk management processes, and is reviewed by the audit committee. The output feeds directly into TCFD, CSRD or IFRS S2 disclosures and informs capital allocation and strategic planning decisions.

When to bring in external support

Climate risk assessment requires climate science knowledge, financial modelling capability, and scenario analysis expertise that most sustainability teams do not hold simultaneously. Leafr's network includes climate risk specialists and TCFD practitioners who have delivered assessments across financial services, real estate, manufacturing and infrastructure sectors, providing outputs that are assurance-ready and board-presentation quality.

Frequently asked questions

What are physical climate risks?

Physical climate risks are the direct effects of changing climate conditions on a company's operations, assets and supply chains. Acute physical risks include specific weather events such as storms, floods, wildfires and extreme heat. Chronic physical risks are longer-term shifts such as rising average temperatures, changing precipitation patterns, sea-level rise, and increased water stress. Both types can affect asset values, operating costs, supply chain reliability, and revenue.

What are transition climate risks?

Transition risks arise from the shift to a low-carbon economy. Policy and legal risks include carbon pricing, regulatory requirements, and litigation exposure. Technology risks involve the displacement of carbon-intensive processes by lower-carbon alternatives. Market risks include shifting consumer preferences toward low-carbon products. Reputational risks arise from stakeholder perceptions of a company's climate performance and lobbying positions.

What climate scenarios should companies use?

TCFD recommends using scenarios that include a 1.5C or well-below 2C pathway and at least one higher-warming scenario. The most widely used sources are the IPCC's Representative Concentration Pathways (RCPs) and Shared Socioeconomic Pathways (SSPs), the IEA's World Energy Outlook scenarios, and the NGFS (Network for Greening the Financial System) scenarios. For financial institutions and corporates with significant financial assets, NGFS scenarios are increasingly standard.

Is climate risk assessment mandatory?

TCFD disclosure is mandatory for UK premium-listed companies, large UK companies (LLPs included from 2022), and certain financial institutions. IFRS S2 (climate disclosures) is mandatory for companies required to use IFRS Accounting Standards with jurisdiction-level adoption of ISSB standards. CSRD requires climate risk disclosure as part of the ESRS E1 standard. Many other jurisdictions and frameworks reference TCFD as the expected disclosure standard for climate risk.

How does climate risk assessment relate to insurance?

Physical climate risk assessments provide data that directly informs property and casualty insurance requirements. As insurers update their own physical risk models and pricing, companies with detailed climate risk assessments are better positioned to challenge premium increases, structure appropriate coverage, and identify underinsured exposures. In some markets, insurers are beginning to require evidence of climate risk management capability as a condition of coverage renewal.