Climate Risk Analysis and Adaptation in Companies

Pipelines on a factory siteClick to enlarge
Even industrial production is affected by climate change.
Source: Thorsten Schier/

Companies increasingly have to deal with climate risks and, if necessary, implement adaptation measures. To this end, there are clear requirements in the EU taxonomy, the European Sustainability Reporting Standards (ESRS) and other frameworks that are mandatory for some companies to apply.

What are corporate climate risks?

For companies, climate risks are possible negative consequences of climate change. In the corporate context, a distinction is made between physical and transitory risks.

What are physical climate risks from a corporate perspective?

Physical climate risks for companies are, for example, possible damage to buildings. They result from climate hazards such as drought, water shortage, heat, heavy rainfall and even rising sea levels. Some of these problems have so far been known as natural hazards, whose probability of occurrence and severity are increasing due to climate change.

What are transitory climate risks?

Transitory climate risks arise for companies in particular from the successive decarbonization of the national economy, i.e. from the effects of an ambitious climate protection policy. This includes tighter emissions trading, stricter efficiency regulations and the promotion of sustainable technologies.

Corporate Sustainability Reporting Directive

The planned European Corporate Sustainability Reporting Directive (CSRD) will require large companies to report in accordance with European Sustainability Reporting Standards (ESRS). The ESRS " S1 Climate Change" defines detailed reporting requirements on physical and transitory risks and how they are managed.

IFRS Sustainability Disclosure Standards

The International Financial Reporting Standards Foundation (IFRS), whose standards contribute to the international harmonization of business reporting, has also initiated the development of IFRS "Sustainability Disclosure Standards" in 2021. Two draft standards are now available, namely IFRS S1 General Requirements and IFRS S2 Climate-related Disclosures. The IFRS standard on climate-related disclosures also defines more detailed reporting requirements on physical and transitory risks and their management.

Both the European and the international standard on climate-related reporting are based on the recommendations of the "Task Force on Climate-related financial Disclosures" (TCFD) and in some cases go beyond them.

EU taxonomy

In the European Union, large companies must also report in accordance with the EU taxonomy. The EU taxonomy is a classification system regulated by law that uses requirements to determine whether certain economic activities contribute significantly to European environmental goals, including climate protection and adaptation to climate change. This requires reporting of, among other things, sales, investments, and operating expenditures.

Recommendations on robust climate risk and vulnerability assessment

A robust climate risk and vulnerability assessment is required for companies wishing to achieve taxonomy compliance under the EU Taxonomy Regulation with respect to significant contributions to climate adaptation for certain economic activities. The relevant legal requirements are defined in Annex 1, Appendix A of Delegated Regulation 2021/2139. Taxonomy compliance also means that these economic activities meet several Do No Significant Harm (DNSH) requirements. Among these DNSH requirements is that climate change adaptation is met.

To facilitate the implementation of these requirements, the German Environmental Agency has developed the recommendation "How to perform a robust climate risk and vulnerability assessment for EU Taxonomy reporting?". Like a guidance, these recommendations describe how companies can practically proceed in order to meet the legal requirements of the taxonomy.

The recommendations are in accordance with the FAQs of the European Commission on the EU.

The recommendations were presented and discussed at a webinar on March 19, 2023. The slides and recordings can be found here:

Webinar CRA 19-03-2023