The financial cost of climate change – to businesses, communities, and individuals – is becoming clear as its impacts increase in severity and frequency. According to Aon’s 2024 Climate and Catastrophe Insight, economic losses linked to global natural disasters totaled up to $380 billion in 2023. As a response, an increasing number of governments are implementing mandatory climate risk reporting, encouraging businesses to identify, act, and ultimately build resilience to their climate risk exposure. In fact, there are now over 6,273 climate policies across 198 countries aimed at addressing climate risks. But what exactly is climate risk reporting, and what are the main strategies businesses can use to overcome challenges while reporting? Let’s dive in.

What is climate risk reporting?

Climate risk reporting refers to the process by which organizations assess, disclose, and communicate their exposure to climate-related risks. Reports consider both the physical impacts of climate change (“physical risk”) as well as the financial and operational impacts of transitioning to a low-carbon economy (“transition risks”).  

This process involves collecting data on these risks, analyzing their potential impacts on business operations, and then disclosing this information to stakeholders, including investors, regulators, and the public. The goal is to provide transparency on how climate change might affect the organization’s long-term viability and what steps are being taken to mitigate these risks. Currently, there are over 6,273 climate policies across 198 countries aimed at addressing climate risks.  

What is the role of materiality?

The growing number of climate policies and the increasing complexity of climate risk reporting can feel overwhelming. Resources are often limited, so it is crucial for companies to focus their efforts where they matter most. This is where the concept of materiality comes into play. By identifying and prioritizing material issues, organizations can ensure that their reporting efforts are targeted and effective, providing stakeholders with the information they need to make informed decisions.

• Single materiality, also known as financial materiality, refers to the material ESG issues that impact a company’s financial performance. For example, extreme weather events might disrupt supply chains or increase operating costs, which directly impacts an organization’s financial health.  

• Double materiality takes this analysis further by considering not only how the environment impacts the company, but also how the company’s activities affect the environment and society (or its impact materiality). By looking at both inward and outward effects, double materiality provides a more comprehensive view of an organization’s role in the global climate crisis, making it crucial for transparent climate risk reporting.

The importance of double materiality is evident, as we see regulations, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD), mandate that companies embed double materiality into the assessment of impacts, risks and opportunities. This dual approach has gained traction among investors who seek a deeper understanding of their portfolio’s true exposure to climate risks and their environmental impact, helping improve decision-making processes.

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What are physical climate risks?

Acute physical risks refer to sudden, intense weather events like hurricanes, floods, wildfires, and tornadoes. These events are becoming more severe and frequent due to climate change. For businesses, this means a higher chance of damage to property, supply chain disruptions, and rising insurance costs. Essentially, acute risks are short-term shocks that can have immediate and significant impacts on a company's operations and financial performance.

In contrast, chronic physical risks involve slower, long-term changes in climate patterns. These include things like rising temperatures, changing rainfall patterns, and sea level rise. Over time, these risks can affect industries that depend on stable environmental conditions, such as agriculture, which might suffer from droughts or soil degradation. Chronic risks can gradually increase operating costs, reduce the value of assets, or even make certain areas less suitable for business.

Types of Physical Climate Risks

What are the benefits of understanding your exposure to physical climate risks?

While both physical and transition risks are critical, physical climate risk reporting is particularly key for several reasons:

• Direct Impact on Operations: Physical risks can have immediate and tangible effects on business operations. For instance, extreme weather events like hurricanes, floods, or wildfires can disrupt supply chains, damage infrastructure, and lead to significant financial losses. By reporting on these risks, companies can prepare and implement strategies to mitigate such impacts.

• Investor Confidence: Investors are increasingly factoring climate risk into their decision-making processes. Transparent reporting on physical risks helps build investor confidence by demonstrating that the organization is proactively managing these challenges. Companies that ignore or underreport these risks may face higher capital costs or lose access to investment altogether.

• Regulatory Compliance: Governments and regulatory bodies around the world are introducing stricter climate-related disclosure requirements. Companies that fail to report on their physical climate risks may face penalties, legal challenges, or reputational damage. Staying ahead of these regulations through robust reporting practices ensures compliance and reduces legal risks.

• Resilience Building: By understanding and reporting physical climate risks, organizations can develop more resilient business and financial models. This might involve diversifying supply chains, investing in climate-resilient infrastructure, or developing contingency plans for extreme weather events. These measures not only protect the organization but also enhance its long-term sustainability.

• Stakeholder Trust: Customers, employees, and the public are increasingly concerned about climate change. Transparent reporting on physical risks demonstrates a company’s commitment to addressing climate-related challenges, which can enhance its reputation and strengthen relationships with stakeholders.

What is the regulatory landscape saying?

In 2022, almost 60% of the global GDP was covered under proposed or final climate-related financial disclosure requirements. Governments and regulatory bodies around the world are implementing stricter regulations related to climate risk reporting. These regulations often require companies to disclose their process to identify and assess material climate-related risks and their associated impacts. Failure to comply with these regulations can result in financial penalties, reputational damage, and potential legal liabilities.

The world of climate-related financial disclosure can seem complicated, but at its core, it revolves around a few key organizations and standards designed to help companies disclose how climate change impacts their business. Let’s break down the main players and how they are connected.
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ISSB

The International Sustainability Standards Board (ISSB) is an independent, global organization that develops standards for sustainability-related financial disclosures. With a focus on meeting the needs of investors, the ISSB aims to establish a comprehensive global baseline of sustainability disclosures. To achieve this, the ISSB has incorporated the widely recognized framework developed by the Task Force on Climate-related Financial Disclosures (TCFD).

• ‍TCFD

The TCFD framework provides a structured approach to climate-related reporting, focusing on four key areas: governance, strategy, risk management, and metrics and targets. This framework guides companies to disclose how they manage climate-related risks and opportunities, including their approach to identifying and mitigating physical risks like floods, wildfires, and rising sea levels. By integrating the TCFD framework, the ISSB standards offer a standardized approach to climate-related reporting, making it easier to compare information across different companies and industries. While these standards are currently voluntary, many countries are moving towards making TCFD-aligned reporting mandatory.

ESRS

The European Sustainability Reporting Standards (ESRS) provide a comprehensive framework for companies to report on their sustainability performance, including climate-related risks. These standards require companies to assess and disclose how their business might be affected by climate change, including physical risks such as extreme weather events, resource scarcity, and changes in land use. The ESRS emphasizes a "double materiality" perspective, meaning companies must consider both how climate change impacts their business and how their business impacts the climate. This holistic approach encourages companies to thoroughly evaluate all potential physical risks associated with climate change.

SEC

The U.S. Securities and Exchange Commission (SEC) has also stepped up its efforts to enhance climate-related disclosures. Since March 2024, the SEC has required companies to report how climate change affects their business, with a particular focus on how they are addressing both immediate and long-term climate-related risks. This includes disclosing how companies are preparing for extreme weather events (like floods) and gradual changes in climate patterns (like rising sea levels). These new rules aim to increase transparency for investors and encourage companies to proactively manage climate-related risks. By requiring companies to differentiate between short-term and long-term risks, the SEC promotes more effective planning and adaptation strategies.
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Checklist: How to do climate risk reporting with EarthScan?

Below is a checklist of how you can get started with climate risk reporting:

1.        Develop a climate risk reporting strategy‍

• ‍Define the scope: Using the concept of materiality, identify the material areas of your organisation that should be subject to the risk assessment. For example, you may wish to select the most material geographies in which you operate, or the most material assets that you own.‍
• Identify key stakeholders: Identifying key stakeholders ensures climate-related disclosures are relevant and targeted.  Tailoring information to the needs of internal (e.g. leadership, risk management, employees) and external (investors, customers, regulators) stakeholders allows you to address their specific concerns, improving the impact and clarity of your climate risk reporting.‍
• Set reporting objectives, timelines and governance: Establish clear objectives for climate risk reporting and set realistic timelines for achieving them. Ensure strong governance by assigning accountability to specific teams or individuals responsible for overseeing the reporting process, ensuring transparency, and driving continuous improvement. ‍

2. Assess climate risks with EarthScan

• Create your Portfolio of Assets: EarthScan allows you to quickly and easily upload the location coordinates your global assets and add them to your own library.

• Understand your different scenarios: Choose a future climate scenario to see the potential impact of climate volatility on your assets:
  • Business as usual: Emissions continue to rise throughout the 21st century.‍
  • Emissions peak in 2040: Emissions do not increase beyond 2040.‍
  • Paris-aligned scenario: This emissions scenario is Paris-aligned, demonstrating a trajectory where global temperature increases are limited to well below 2°C above pre-industrial levels, with efforts to pursue a limit of 1.5°
• Select your climate-related hazards: EarthScan includes multiple climate hazards including heat stress, precipitation risk, flooding, wind risk, and drought, and we are continuing to expand our coverage of hazards. Select the hazards you want to gather insights on, or for a comprehensive view, assess your combined physical risk exposure.

• ‍Review your risk ratings: Determine which assets are most exposed and vulnerable.

• ‍Assess the financial and operational implications of climate-related risks through time and evaluate the potential impact of climate risks on the organization's profitability, market share, and reputation.

3. Develop a Climate Risk Mitigation & Adaptation Plan

• Identify material areas of exposure: Assess the most vulnerable.
• Identify interventions: Determine appropriate actions to mitigate and adapt to the identified risks. ‍
• Assess the impact and feasibility of interventions: Evaluate the effectiveness and practicality of each proposed intervention. ‍
• Develop an adaptation framework: Create a structured approach to prioritize interventions based on their anticipated impact and alignment with organizational goals.‍
• Set climate targets: Establish specific climate targets that reflect your organization’s commitment to sustainability and resilience.‍
• Monitor progress and make adjustments: Continuously track your progress toward climate targets and adapt the mitigation and adaptation plan as necessary.‍

4. Disclose Climate Risk Information

• Prepare climate-related disclosures: Prepare comprehensive disclosure-ready materials that are clear, concise, and consistent with relevant regulations and frameworks.
• Ensure transparency and accuracy: Provide data points and assumptions that are accurate, transparent, and free from material misstatements
• Communicate climate risk information to stakeholders: Publish your climate disclosure and continue to engage with stakeholders and investors on topics such as climate risk.

5. Ongoing Monitoring and Improvement

• ‍Continuously assess climate risks: Regularly reassess climate risks at least annually to stay informed of emerging trends and challenges. For instance, the CSRD mandates that sustainability reporting under the ESRS occurs annually, including determining at each reporting date the material impacts, risks and opportunities
• Proactively communicate material changes within your organisation, industry, and regulatory environment that impact your risk assessment in your disclosures. This ensures that stakeholders are informed of how these changes may affect your climate-related risks and strategies.
• ‍Update climate risk reporting strategies: Communicate material changes within your organization, industry, and regulatory environment that impact your risk assessment in your disclosures. This ensures stakeholders are informed of how these changes may affect your climate-related risks and strategies.‍
• Incorporate climate risk considerations into your strategy: Integrate climate risk considerations into your overarching business strategy and decision-making.

By following this checklist and utilizing EarthScan to implement a comprehensive climate risk reporting strategy, your organization can effectively manage its physical climate-related risks. More importantly, this proactive approach will enhance your resilience and sustainability performance, positioning your organization for long-term success in an ever-changing climate.