Insights
Understanding Climate and Sustainability Risks and Opportunities
As climate change continues to reshape the business environment, organisations are increasingly expected to understand not only their environmental impact, but also how climate-related developments could affect their operations, financial performance and long-term strategy.
In a two-part thought leadership series published by the ISCA Chartered Accountants Lab, Shing Shian explores how organisations can identify and assess climate- and sustainability-related risks and opportunities, as well as how climate scenario analysis can support more informed and resilient business decision-making.
Part 1: Understanding Climate Risks and Scenario Analysis
The first article introduces the foundations of climate-related risk assessment and the growing importance of climate disclosures under frameworks such as IFRS S1 and IFRS S2.
One of the key distinctions discussed is between physical risks and transition risks. Physical risks arise from the direct effects of climate change, including extreme weather events, flooding, rising temperatures and other longer-term changes in climate conditions. Transition risks, on the other hand, arise from the shift towards a lower-carbon economy and may include new regulations, carbon pricing, technological changes, evolving market expectations and changing consumer behaviour.
While these developments can create risks, they may also present new opportunities for organisations that are able to adapt early, develop lower-carbon products and services, or respond effectively to changing market conditions.
The article also introduces climate scenario analysis as an important tool for assessing these uncertainties. Rather than attempting to predict exactly what the future will look like, scenario analysis allows organisations to explore several plausible futures and consider how their businesses may perform under different climate and economic conditions.
Organisations may draw upon recognised climate scenarios developed by organisations such as the Network for Greening the Financial System (NGFS), International Energy Agency (IEA) and Intergovernmental Panel on Climate Change (IPCC). By evaluating different scenarios across short-, medium- and long-term time horizons, businesses can better understand where their most significant climate exposures may lie.
Importantly, climate scenario analysis does not have to begin with highly complex modelling. Organisations can start with more qualitative assessments and progressively strengthen their analysis as their climate data, internal capabilities and understanding of the risks improve.
Part 2: Translating Climate Risks into Financial Impacts
The second article takes the discussion a step further by examining how organisations can translate identified climate risks and opportunities into financially meaningful information.
Identifying that a company could be exposed to higher carbon prices, increasing energy costs or greater flood risk is an important first step. However, for scenario analysis to become useful for management and investors, organisations should also consider what those changes could mean for areas such as revenue, operating expenses, capital expenditure, asset values, insurance costs and financing.
The article discusses a range of financial indicators that organisations may consider, including earnings at risk, operating cost impacts, capital expenditure requirements, transition costs, asset impairment, financing costs and potential green revenue opportunities.
A practical process is outlined, beginning with understanding the organisation’s operations, geographical exposure and key climate-related risks. Organisations can then select scenarios and data inputs that are relevant to these exposures before deciding on an appropriate analytical approach.
The level of analysis can vary depending on the organisation’s circumstances and resources. A company may begin with a relatively straightforward sensitivity analysis, for example by assessing the potential impact of a 10%, 15% or 20% increase in energy prices. More advanced approaches may involve asset-level physical risk assessments, scenario-based financial modelling or incorporating climate assumptions into valuation techniques such as discounted cash flow analysis.
Ultimately, the objective of climate scenario analysis is not simply to develop a sophisticated model. The value lies in helping management understand whether the organisation’s current strategy and business model are resilient under different possible futures.
The analysis can therefore support broader strategic questions: How vulnerable are our key operations? What investments may be required to adapt? Which risks require immediate action and which may emerge over the longer term? Where could climate-related opportunities arise? And how should these considerations influence future business decisions?
Moving from Compliance to Strategic Decision-Making
Together, the two articles highlight an important shift in how organisations should approach climate-related disclosures.
Climate scenario analysis should not be viewed solely as a reporting or compliance requirement. When applied effectively, it can provide organisations with a structured way to explore uncertainty, understand the financial implications of climate change and strengthen their long-term strategic resilience.
Organisations do not need to have all the answers from the beginning. What is important is establishing a structured approach to identifying risks and opportunities, developing relevant scenarios, improving the quality of data and analysis over time, and ultimately integrating these insights into business and financial decision-making.
To read Shing Shian’s full articles on the ISCA Chartered Accountants Lab, please visit the links below:
Climate and Sustainability Risks and Opportunities (Part 1 of 2)
Climate and Sustainability Risks and Opportunities (Part 2 of 2)