Notes:
- Physical vs. Transition Risks:
- Physical Risks:Â Direct damage from climate events (floods, hurricanes, wildfires) affecting assets, supply chains, and operations.
- Transition Risks:Â Financial risks associated with the transition to a low-carbon economy (e.g., policy changes, carbon taxes, technology shifts, reputational damage).
- TCFD & IFRS S2:
- Task Force on Climate-related Financial Disclosures (TCFD):Â The leading framework for climate risk reporting. Requires disclosure on governance, strategy, risk management, and metrics/targets.
- IFRS S1 & S2:Â The global sustainability standards that are becoming mandatory in many jurisdictions (e.g., EU, UK).
- Scenario Analysis: Boards must conduct scenario analysis (e.g., 2°C, 1.5°C, 3°C warming scenarios) to understand the resilience of the business model under different climate futures.
- Asset Stranding:Â The risk that assets (e.g., coal plants, fossil fuel reserves) may become worthless before the end of their useful life due to regulations or market shifts.
- Integration with Strategy:Â Climate risk cannot be a siloed issue. It must be integrated into capital allocation, M&A decisions, and long-term strategic planning.