India’s Third National Communication, submitted to the United Nations Framework Convention on Climate Change (UNFCCC) in 2023, reports that the country is experiencing a full range of climate change impacts, from floods and droughts to heatwaves and glacier melt. These impacts are evident across sectors including biodiversity and forests, agriculture, water resources, coastal and marine ecosystems, human health, gender, and urban infrastructure. (Source: Impact of Climate Change, PIB Delhi, posted on 25 July 2024)
Climate risk today is a strategic consideration for every business. Understanding how changing climate patterns affect operations, supply chains, assets, and financial performance is essential for informed decision-making.
What is climate risk?
Climate risk is the potential for climate change and associated policy and market responses to adversely affect an organization’s assets, cash flows, operations, or reputation. Central banks and scenario frameworks now link climate scenarios to financial stress testing and capital planning. At the same time, acute weather events and chronic changes are moving asset values and insurance cost dynamics in real time.
The result is that climate risk assessment is becoming central to strategy and capital allocation instead of remaining a separate sustainability exercise.
What is Climate Risk Assessment?
Climate risk assessment is a structured process to identify, analyze, and evaluate climate-related threats to operations, assets, and strategy. Following established methodologies such as Task Force on Climate-related Financial Disclosures (TCFD) and the IPCC’s risk assessment approach, it involves hazard identification, exposure analysis, vulnerability assessment, and risk quantification to measure the likelihood and potential impact of climate hazards like floods, droughts, heat stress, and cyclones.
Why Climate Risk Assessment Matters Now
Increasing regulatory requirements, investor focus, and expected physical climate impacts make climate risk assessment essential for Indian businesses. The RBI’s draft climate guidelines and SEBI’s BRSR framework urge companies to disclose climate-related risks. Global investors now screen portfolios for climate exposure, rewarding firms with credible climate risk management strategies.
Types of Climate Risk
Understanding the taxonomy of climate risks helps businesses develop targeted response strategies.
1. Physical Risks
Acute Physical Risks: These stem from specific weather events: cyclones, floods, heat waves, droughts, and wildfires. For instance, coastal manufacturing facilities could face cyclone-related disruptions, while inland operations may have to contend with water stress during droughts.
Chronic Physical Risks: Long-term shifts in climate patterns such as rising temperatures, sea level rise, changing precipitation patterns, and ecosystem degradation that have the potential to create sustained operational challenges.
2. Transition Risks
Transition risks arise from policy, technological, market, and reputational shifts during the global transition to a low-carbon economy. These changes can affect asset values, operational costs, and long-term business models.
1. Policy and Legal Risks
These risks stem from evolving climate policies, carbon regulations, and disclosure mandates that influence business compliance requirements and costs. Companies must adapt to new rules on emissions, energy efficiency, and sustainability reporting. For instance, India’s Energy Conservation (Amendment) Act, 2022 established the framework for a national carbon credit trading scheme. As carbon pricing becomes operational, high-emission sectors such as cement, steel, and power will face higher cost pressures and potential competitive disadvantage.
2. Technology Risks
Technology risks emerge when innovations that support decarbonization disrupt existing operations or assets. The rapid scale-up of renewable energy, electric mobility, and energy storage can render traditional technologies obsolete. For example, coal-based thermal power plants are experiencing accelerated depreciation as solar and wind generation reach grid parity, affecting returns on long-term investments in fossil infrastructure.
3. Market Risks
Market risks arise when shifts in consumer demand, investor expectations, and supply chain standards alter the competitiveness of products and services. Businesses that delay low-carbon transitions may lose contracts or customers. For instance, global buyers in textiles, automotive, and electronics now require suppliers to disclose emissions and science-based targets, making climate performance a determinant of market access.
4. Reputational Risks
Reputational risks occur when stakeholders perceive a company’s climate action as insufficient or inconsistent. Allegations of greenwashing or failure to meet sustainability commitments can erode trust among investors, consumers, and regulators. Companies are increasingly evaluated on the climate performance of their entire value chain, making transparent reporting and credible targets essential for brand resilience.
Global and India Policy Landscape
There is a growing global shift toward standardized climate risk disclosure and scenario analysis, guided by frameworks such as TCFD and IFRS S2, which set requirements for governance, strategy, risk management, and metrics. Key standards include ISO 14091 for vulnerability assessment and adaptation planning, GRI Standards for consistent climate disclosures, PAS 2060 for carbon neutrality, and the Science Based Targets Initiative for emission reduction benchmarks.Countries such as the UK, EU member states, Japan, and Australia have embedded climate risk assessment into regulatory frameworks, mandating disclosures and scenario analysis for critical sectors.
In India, rising climate impacts and evolving regulations make climate risk assessment increasingly important. The country’s diverse geography creates varied risk profiles: coastal states face cyclones and sea level rise, northern regions contend with glacial melt and flooding, while central and western areas face increasing drought frequency. Indian regulators and industry bodies are aligning reporting standards with global norms, requiring companies to integrate granular local hazard data with international scenario frameworks to meet both regulatory and investor expectations.
Climate Risk Assessment: Step-by-Step
A practical climate risk assessment for corporates, asset owners, and financial institutions typically follows these five steps:
- Define scope and objectives – Set decision goals, boundaries, stakeholders, and timelines. Identify assets, operations, suppliers, and markets to assess.
- Map exposure – Locate assets and operations geographically, linking them to hazard-prone areas and critical supply chain points.
- Assess hazards and vulnerability – Identify relevant climate hazards for each location and time horizon. Analyze how exposed assets are likely to be affected.
- Run scenarios and quantify impacts – Use recognized scenario sets such as NGFS to model physical and transition risks. Translate findings into financial terms such as expected losses, cost changes, and asset value shifts. Generative engines can streamline this step by producing rapid scenario narratives.
- Prioritize actions and embed governance – Rank risks by impact and controllability. Define adaptation and mitigation strategies, embed monitoring indicators, and align disclosures with TCFD/IFRS S2 standards.
Building Climate Resilience: The Strategic Imperative
Climate risk assessment isn’t the destination. It’s the foundation for building resilient businesses capable of thriving through climate transition and physical impacts. Companies that embed climate thinking into strategy, operations, and innovation position themselves as preferred partners in evolving supply chains, attractive investments for climate-conscious capital, and employers of choice for talent prioritizing purposes.
At Envint, We Help Build Climate Resilience
We have helped leading Indian corporates across sectors assess transition risks and site-based climate risks to evaluate exposure to floods, heat stress, and other hazards.
Write to us at connect@envintglobal.com to begin your climate risk journey.