Navigating climate-related risks and regulatory requirements

Climate-related risks are having an increasing impact on companies, operations, and value chains. At the same time, requirements around transparency and reporting are growing, driven in part by frameworks such as the ESRS and the EU Taxonomy. For many organisations, this creates a need to identify, analyse, and understand how climate change may affect their business model, assets, and long-term development.

A climate risk analysis helps create a clearer picture of an organisation's exposure to both physical climate risks and transition risks. The analysis can serve as a basis for sustainability reporting, double materiality assessments, strategic decision-making, and climate adaptation work

What is a physical climate risk?

Physical climate risks refer to the direct effects of climate change and can be divided into acute and chronic risks. Acute risks include, for example, floods, storms, heavy rainfall, and heatwaves, while chronic risks may include rising temperatures, changing precipitation patterns, drought, or rising sea levels over time.

These risks can affect businesses through, for example, damage to assets and infrastructure, disruptions in supply chains, production losses, or increased operating and insurance costs.

What is a transition risk?

Transition risks arise in connection with the shift toward a more sustainable, climate-neutral society. These risks can be linked to factors such as changing legislation, increasing regulatory requirements, technological development, shifting energy markets, or changing customer and investor expectations.

For businesses, this can mean higher costs, changing market conditions, or the need for investments and adjustments to meet future requirements and expectations.

Tailored climate risk analysis

BDO helps companies carry out climate risk analyses in line with established frameworks and regulatory requirements. The analysis is based on a company's geographic exposure, assets, and value chain, and can be conducted at either a high level or a more detailed level, depending on the organisation's needs and circumstances. We tailor our approach, scope, and delivery to the specific questions at hand, the data available, and the purpose of the analysis.

The climate risk analysis draws on climate data, scenario-based assessments, and established methodologies, such as the TCFD recommendations and principles under the ESRS and the EU Taxonomy. Where needed, the analysis is supplemented with expert judgment and manual analysis to ensure a relevant, business-specific risk picture. For some organisations, the analysis can also serve as important input for work such as ISO 14001 implementation, broader risk management, or analyses related to nature-related risks and biodiversity, where climate change may affect factors such as ecosystems, water resources, and land use.

The results can support ESRS reporting, EU Taxonomy work, strategic planning, and the prioritisation of climate adaptation measures.

Climate risk analysis as a basis for strategic decision-making

BDO approaches climate risk analysis based on a company's business model, value chain, and strategic priorities. For the analysis to be practically useful, it needs to reflect how the business operates, which parts of the value chain are most critical, and where the greatest risks and dependencies lie.

We often find that the most significant climate-related risks aren't limited to a company's own operations, but also exist among suppliers, within logistics chains, on the customer side, or in connection with market developments and future regulatory requirements. That's why we work to place these risks in a broader business context and link them to potential financial consequences, for example, effects on investments, operations, insurance costs, delivery capability, or long-term profitability.

For us, a climate risk analysis isn't just about identifying risks, it's about creating a decision-making tool that can be used within the business. Companies need to decide for themselves which risks they want to accept, manage, or prioritise going forward, and the analysis should support those decisions.

Social implications can and should also be factored into the analysis. For example, the impact on employees, local communities, and other stakeholders in connection with climate change or transition measures. For many organisations, it therefore becomes important to ensure that the climate risk analysis can serve as a shared basis for multiple applications, such as sustainability reporting, double materiality assessments, risk management, strategic planning, and climate adaptation work.

Common challenges in climate risk analysis

Working with climate risk analysis often requires integrating new types of risks, data, and regulatory requirements into existing processes and decision-making structures. For many companies, this presents both practical and strategic challenges as sustainability reporting requirements continue to evolve.

Regulatory requirements and complex frameworks
Many organisations find it challenging to interpret and apply the various regulations and standards linked to climate risk and sustainability reporting. The challenge often lies both in understanding which requirements are relevant to the business and in integrating climate-related risks into existing risk management and reporting.
Long-term and uncertain risk perspectives
Unlike many traditional business risks, climate-related risks tend to unfold over longer time horizons. At the same time, scenario analyses and climate risk assessments are based on future developments and uncertain variables, which can make the analyses complex to carry out and interpret in practice.
Limited data and integration into corporate governance
Access to relevant climate data varies across geographies and risk types, while many companies still lack established processes for integrating climate risk into strategy, investment decisions, and corporate governance. To create long-term value, climate risk analyses therefore often need to be connected to risk management, sustainability goals, and strategic planning.
Climate risk analysis as support for long-term development
Climate risk analysis is not only about regulatory compliance. By building an understanding of how climate change and the transition to a more sustainable economy may affect the business, companies are better equipped to manage future changes, strengthen their resilience, and generate a solid basis for strategic decision-making.