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The Environment and Climate Change risk assessment process

According to the World Economic Forum, which compiles the annual Global Risks Report, Environment and Climate Change risks are the ones that appear in the first positions, but also with the most complex correlations between them, according to the likelihood of occurrence (Likelihood) and the severity of the impact they will have (Impact) at the level of societies and businesses.

In addition to the above approaches, there is of course an interest in more "tangible" and more widely communicable information, which so far we are used to see in Corporate Social Responsibility Reports or ESG reports. These, too, are areas of interest and reporting.

The risk assessment process follows the basic principles of risk assessment and is usually carried out using widely accepted techniques for identifying operational risks. This involves determining the likelihood that an organization's activities will cause damage to the environment or contribute to Climate Change and determine their impact. Impacts are assessed in either economic or technical terms and relate to the impact of each risk on the environment on the one hand and on the organization itself on the other.

Environment and Climate Change risks are the ones that appear in the top positions, but also with the most complex interrelationships between them. [Source: World Economic Forum, Globar Risks Report 2020]

With regard to Climate Change risks, a similar logic is followed to assess the risks that Climate Change may bring to an organization's activity. The broad categories of risks in this case are 'natural risks' and 'transition risks'.

Natural hazards refer to negative consequences due to changes in weather conditions, the occurrence of extreme weather events, chronic changes in the geomorphology of the surrounding area where a business operates and so on.

Transient risks are the indirect impacts of Climate Change on business activity. For example, the need to transition to cleaner/greener technologies, greater public awareness of environmental issues, changes in legislation on emissions of pollutants through the imposition of fines and limits, the imposition of the 'Carbon tax' are among other areas that may create financial risks for an organisation.

However, it is worth noting here that Climate Change, apart from the risks it poses, can also bring about positive changes in the way businesses operate and create opportunities. For example, the melting of ice on land and sea can be an opportunity for international shipping because it will create new sea routes that were previously unavailable, and for agriculture because it increases the area of arable land. The expanded use of the Arctic Ocean for shipping from China to Europe and North America, as a compensation for the already known routes through the Suez Canal [1], and the use of Siberia for agriculture [2], is already becoming apparent. In addition, warming in some parts of the world may also lead to an increase in demand for certain products and services (e.g. air conditioning).

In general, the steps to be followed for assessing Environment and Climate Change risks (and opportunities) are:​

  • identifying potential activities along an organization's value chain that may cause damage to the Environment or that may be directly or indirectly affected by Climate Change

  • the assessment of the damage they may cause

  • the identification of the likelihood of risks occurring

  • the identification of actions to mitigate such risks

  • recording the results of the assessment

  • the use of performance indicators, metrics and other elements to monitor the evolution of the risk

  • the review of the evaluation at regular intervals

See our proposal for quantification and risk management with one click

The findings of the risk assessment are often information reported in the annual reports and accounts of companies in the context of the disclosure of financial and non-financial information. In general, there is increasing interest from financial institutions, investors, customers and other stakeholders in presenting environmental and climate change risks and opportunities as evidence of corporate social responsibility and sustainability of a company's operations.

Both the European Union's Non-Financial Reporting Directive (NFRD) and the TCFD guideline on climate-related information reporting (Task Force on Climate-related Financial Disclosures) need to rely on the quantification of risks. They also recommend, as far as possible, testing future scenarios concerning socio-economic developments and the projection of risks/opportunities into the future, taking into account the strategy of the organisation concerned.

Temperature change according to Representative Concentration Pathways (RCPs) scenarios that take into account socio-economic developments (eg global population, use of Renewable Energy Sources, development of environmentally friendly technologies, consumption of fossil fuels, etc.).

In a business as usual scenario (RCP 8.5), the temperature rise based on the models could reach 1.5 to 1.8 ° C in 2040, and 5 ° C in 2100.

[Source: IPPC (2013); Knutti, R. and Sedláček, J. (2013)]

To assess future risks based on Climate Change developments, the different Representative Concentration Pathways (RCPs) scenarios [3,4] can be used [3,4], which essentially take into account the socio-economic developments on the planet and depending on the path of greenhouse gas concentrations, model the evolution of the climate and estimate the changes that Climate Change may bring about (see figure).

At the operational level, both the NFRD and TCFD guidelines suggest testing two scenarios to investigate how Climate Change may affect an organisation's operations: an optimistic and a moderate one in terms of GHG concentrations and the evolution of Climate Change [5], such as:

(a) RCP2.6 which predicts a temperature rise of <2 degrees C, and,

(b) RCP4.5 which predicts a temperature increase of >2 degrees C.

Thus, the products of the models, i.e. the forecasts related to the changes, are considered together with the other operational data of the company concerned in order to record, quantify and prioritise direct and indirect, natural and transitional risks/opportunities that may be faced in the future.

Finally, the combination of presenting data for the reporting period and projecting these data into the future presents a more complete picture of a company's Sustainability and how it contributes to the global goals of mitigating environmental problems and climate change, but also how it is shielded against risks that may occur in the medium to long term.

[3] IPCC, 2013: Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Stocker, T.F., D. Qin, G.-K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex and P.M. Midgley (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, 1535 pp. [4] Knutti, R., Sedláček, J. Robustness and uncertainties in the new CMIP5 climate model projections. Nature Clim Change 3, 369–373 (2013).


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