Climate Risks and Opportunities Defined

Note: Content on this page is reproduced from: Recommendations of the Task Force on Climate-related Financial Disclosures.

There are two categories of climate risks:

• Transition Risks: Risks related to the transition to a lower-carbon economy.
• Physical Risks: Risks related to the physical impacts of climate change.

Climate-related opportunities relate to efforts to mitigate and adapt to climate change, such as resource efficiencies and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, and building resilience along the supply chain.

Climate-Related Risks, Opportunities, and Financial Impact

Transition Risks

Transition risks are those associated with the pace and extent at which an organization manages and adapts to the internal and external pace of change to reduce greenhouse gas emissions and transition to renewable energy. Transitioning requires policy and legal, technology, and market changes to address mitigation and adaptation requirements related to climate change (see Table 1). Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organizations (see Table 2). Alternatively, if an organization is a low-carbon emitter and in the renewable energy or climate transition market, they could experience market, technological, and reputational opportunities.

Table 1. Climate-Related Transition Risk Categories

Transition Risk Categories
Policy and Legal	Policy actions around climate change continue to evolve. Their objectives generally fall into two categories—policy actions that attempt to constrain actions that contribute to the adverse effects of climate change or policy actions that seek to promote adaptation to climate change. The risk associated with and financial impact of policy changes depend on the nature and timing of the policy change. As the value of loss and damage arising from climate change grows, litigation risk is also likely to increase. Reasons for such litigation include the failure of organizations to mitigate impacts of climate change, failure to adapt to climate change, and the insufficiency of disclosure around material financial risks.
Technology	Technological improvements or innovations that support the transition to a lower-carbon, energy efficient economic system can have a significant impact on organizations. To the extent that new technology displaces old systems and disrupts some parts of the existing economic system, winners and losers will emerge from this "creative destruction" process. The timing of technology development and deployment, however, is a key uncertainty in assessing technology risk.
Market	While the ways in which markets could be affected by climate change are varied and complex, one of the major ways is through shifts in supply and demand for certain commodities, products, and services as climate-related risks and opportunities are increasingly considered.
Reputation	Climate change has been identified as a potential source of reputational risk tied to changing customer or community perceptions of an organization's contribution to or detraction from the transition to a lower-carbon economy.

Source: This table's content is reproduced from Recommendations of the Task Force on Climate-related Financial Disclosures

Table 2. Examples of Climate-Related Transition Risks and Financial Impacts

Climate-related Transition Risks	Potential Financial Impacts
Policy and Legal
Increased pricing of GHG emissions Enhanced emissions reporting obligations Mandates on and regulation of existing products and services Exposure to litigation	Increased operating costs (e.g., higher compliance costs, increased insurance premiums) Write-offs, asset impairment, and early retirement of existing assets due to policy changes Increased costs and/or reduced demand for products and services resulting from fines or judgements
Technology
Substitution of existing products and services with lower emission options Unsuccessful investment in new technologies Costs to transition to lower emissions technology	Write-offs and early retirement of existing assets Reduced demand for products and services Research and development expenditures in new and alternative technologies Capital investments in technology development Costs to adopt/deploy new practices and processes
Market
Changing customer behavior Uncertainty in market signals Increased cost of raw materials	Reduced demand for goods and services due to shift in consumer preferences Increased production costs due to changing input prices (e.g., energy, water) and output requirements (e.g., waste treatment) Abrupt and unexpected shifts in energy costs Change in revenue mix and sources, resulting in decreased revenues Re-pricing of assets (e.g., fossil fuel reserves, land valuations, securities valuations)
Reputation
Shifts in consumer preferences Stigmatization of sector Increased stakeholder concern or negative stakeholder feedback	Reduced revenue from decreased demand for goods/services Reduced revenue from decreased production capacity (e.g., delayed planning approvals, supply chain interruptions) Reduced revenue from negative impacts on workforce management and planning (e.g., employee attraction and retention) Reduction in capital availability

Source: This table's content is reproduced from Recommendations of the Task Force on Climate-related Financial Disclosures

Physical Risks

Physical risks are those associated with the impacts from climate change. These risks can be event driven (acute) or associated with longer-term shifts in climate patterns (chronic), as described in Table 3.

Table 3. Climate-Related Physical Risk Categories

Physical Risk Categories
Acute	Acute physical risks refer to those that are event-driven, including increased severity of extreme weather events, such as cyclones, hurricanes, heat or cold waves, or floods.
Chronic	Chronic physical risks refer to longer-term shifts in climate patterns (e.g., sustained higher temperatures, sea level rise, changing precipitation patterns) that may cause sea level rise or chronic heat waves.

Source: This table's content is reproduced from Recommendations of the Task Force on Climate-related Financial Disclosures

Physical risks may have financial implications for organizations, such as direct damage to assets and indirect impacts from supply chain disruption. Organizations' financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting organizations' premises, operations, supply chain, transport needs, and employee safety. Table 4 presents examples of climate-related physical risks and financial impacts.

Table 4. Examples of Climate-Related Physical Risks and Financial Impacts

Climate-related Physical Risks

Potential Financial Impacts

Acute Increased severity of extreme weather events such as cyclones and floods Chronic Changes in precipitation patterns and extreme variability in weather patterns Rising mean temperatures Rising sea levels

Reduced revenue from decreased production capacity (e.g., transport difficulties, supply chain interruptions) Reduced revenue and higher costs from negative impacts on workforce (e.g., health, safety, absenteeism) Write-offs and early retirement of existing assets (e.g., damage to property and assets in "high-risk" locations) Increased operating costs (e.g., inadequate water supply for hydroelectric plants or to cool nuclear and fossil fuel plants) Increased capital costs (e.g., damage to facilities) Reduced revenues from lower sales/output Increased insurance premiums and potential for reduced availability of insurance on assets in "high-risk" locations

Source: This table's content is reproduced from Recommendations of the Task Force on Climate-related Financial Disclosures

Climate-Related Opportunities

Efforts to mitigate and adapt to climate change also produce opportunities for organizations through, for example, resource efficiency and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, maximizing new policies that subsidize efficiencies and clean energy, and building resilience along the supply chain. Climate-related opportunities will vary depending on the region, market, and industry in which an organization operates. Table 5 describes the five opportunity categories from TCFD.

Table 5. Climate-Related Opportunity Categories

Opportunity Categories
Resource Efficiency	There is growing evidence and examples of organizations that have successfully reduced operating costs by improving efficiency across their production and distribution processes, buildings, machinery/appliances, and transport/mobility—in particular in relation to energy efficiency but also including broader materials, water, and waste management. Such actions can result in direct cost savings to organizations' operations over the medium to long term and contribute to the global efforts to curb emissions. Innovation in technology is assisting this transition; such innovation includes developing efficient heating solutions and circular economy solutions, making advances in LED lighting technology and industrial motor technology, retrofitting buildings, employing geothermal power, offering water usage and treatment solutions, and developing electric vehicles.
Energy Source	According to the International Energy Agency (IEA), countries will need to transition a major percentage of their energy generation to low emission alternatives such as wind, solar, wave, tidal, hydro, geothermal, nuclear, biofuels, and carbon capture and storage to meet global emission-reduction goals. Investments in renewable energy capacity are exceeding investments in fossil fuel generation. The trend toward decentralized clean energy sources, rapidly declining costs, improved storage capabilities, and subsequent global adoption of these technologies are significant. Organizations that shift their energy usage toward low emission energy sources could potentially save on annual energy costs.
Products and Services	Organizations that innovate and develop new low-emission products and services may improve their competitive position and capitalize on shifting consumer and producer preferences. Some examples include consumer goods and services that place greater emphasis on a product's carbon footprint in its marketing and labeling (e.g., travel, food, beverage and consumer staples, mobility, printing, fashion, and recycling services) and producer goods that place emphasis on reducing emissions (e.g., adoption of energy-efficiency measures along the supply chain).
Markets	Organizations that pro-actively seek opportunities in new markets or types of assets may be able to diversify their activities and better position themselves for the transition to a lower-carbon economy. In particular, opportunities exist for organizations to access new markets through collaboration with governments, development banks, small-scale local entrepreneurs, and community groups in developed and developing countries as they work to shift to a lower-carbon economy. New opportunities can also be captured through underwriting or financing green bonds and infrastructure (e.g., low-emission energy production, energy efficiency, grid connectivity, or transport networks).
Resilience	The concept of climate resilience involves organizations developing adaptive capacity to respond to climate change to better manage the associated risks and seize opportunities, including the ability to respond to transition risks and physical risks. Opportunities include improving efficiency, designing new production processes, and developing new products. Opportunities related to resilience may be especially relevant for organizations with long-lived fixed assets or extensive supply or distribution networks; those that depend critically on utility and infrastructure networks or natural resources in their value chain; and those that may require longer-term financing and investment.

Source: This table's content is reproduced from Recommendations of the Task Force on Climate-related Financial Disclosures

A situational analysis can help an organization determine where they stand in terms of analyzing and disclosing climate-related opportunities and how they might improve. Common progress at four different phases of organizational engagement are as follows:

• No activity: Organization has not analyzed and publicly disclosed climate-related opportunities with the potential to have a substantive financial or strategic impact on its business.
• Entry-level: Organization has analyzed but not publicly disclosed climate-related opportunities with the potential to have a substantive financial or strategic impact on its business.
• Intermediate: Organization has analyzed and publicly disclosed climate-related opportunities with the potential to have a substantive financial or strategic impact on its business.
• Advanced: Organization has analyzed and publicly disclosed climate-related opportunities with the potential to have a substantive financial or strategic impact on its business and incorporates findings into its business strategy and decisions.