Climate risk assessment tool

Previously, we highlighted the risks and consequences of climate change – both physical and transition – as companies adjust to a greener economy. Here, we consider how those risks can be assessed and quantified, to mitigate them and develop new business models that turn them into opportunities.

Most clients want to understand climate risks in terms of established business thinking, through KPIs that measure their impact on performance. The risks can broadly be considered as physical (e.g., extreme weather events affecting operations) or transition (e.g., compliance or litigation).

For many companies, the urgent need is compliance with the EU’s Corporate Sustainability Reporting Directive (CSRD), and its broad scope means that many climate risks must now be assessed.

Such regulation gives businesses a template for identifying the main risks that they should measure, for strategic as well as compliance benefits. By assessing the risks, business leaders can identify priorities and make better-informed decisions, to mitigate the biggest risks and identify new opportunities. In Europe, for instance, litigation on environmental or human rights grounds is increasing, and could affect insurance costs, but companies can mitigate the risk by having auditable metrics that substantiate their sustainability policies.

We created Deloitte’s climate risk assessment tool to help organisations understand the impact of climate risks on established (financial) KPIs and new sustainability indicators. Our tool takes a three-step approach: analyse the climate risks; quantify them with data and scenario analysis; and visualise the results through a clear dashboard.

We start by developing a deep understanding of the physical and transition risks that could affect the business. Physical risks include heatwaves, flooding and hurricanes; transition risks include changing energy use, increasing circularity, regulatory compliance and litigation. In turn, each risk could have a combination of physical, financial, operational and reputational impacts on the business, through damage to buildings or machinery, regulatory penalties, lawsuits or increased insurance premiums. Our tool focuses on these business, rather than environmental, impacts, but they are increasingly connected. For example, polluting a local water supply might once have carried no business cost, but current legislation imposes penalties that translate the environmental impact into a tangible business cost.

In addition to assessing the physical and transition climate risks, our analysis examines the company’s readiness to manage them, by analysing its current documentation, methodologies and tools. Many climate risks involve factors never before considered part of business practice, so auditable processes for managing them might not yet exist: a risk in itself.

We quantify the risks by developing complex scenarios that model possible business trajectories under different global circumstances. As a result, we can compare how different scenarios might affect the business, to quantify the likelihood and severity of many risk factors.
Our scenario analysis assesses how multiple variables interact, drawing on the science-based models and datasets used by leading environmental agencies (e.g., IPCC, SSP, NGFS, IEA). These models allow us to project climate and socio-economic circumstances over different timespans, from a few years ahead right through to 2100.

By adding industry- and company-specific input data, we can tailor the tool to suit particular sectors and businesses. In fact, an important part of this step is ensuring the business has the relevant internal data available, not only to measure and monitor its impact on the environment and society, but also to comply with transparent and auditable disclosure.

The resulting analysis is presented through an accessible and informative dashboard, which shows how decisions on significant factors will impact financial or other KPIs. Such factors might include time horizons, climate scenarios or decisions about assets and locations in the business portfolio.
We work with each client to customise the dashboard’s information and layout for their requirements, and the tool’s flexibility means it can adapt easily, to reflect the whole enterprise or focus on specific risks, business units or assets. In particular, the reporting can be tailored to different stakeholder needs, as a clear presentation of the possible outcomes or mitigation steps around climate risk.
The example below reflects our work with a client to examine the impact of heatwaves on business finance, by considering three climate change scenarios over the period to 2100. It includes financial results, drill-down filtering, geographic mapping, scenario trends, and comparisons of risk costs.

Our climate risk assessment tool is not the whole solution, but it’s a great place to start. Turning climate risks into business opportunities might involve a major transformation, but a clear analysis can reveal the risks and benefits, and help monitor progress. To learn more, contact Ivan Kukhnin or Tatiana Budishevskaia.