Nexio Projects: Addressing climate risk calls for proactive management

The continuing impact of climate change is more than just an environmental issue; it has now become a major financial problem for businesses around the world. Competitive advantage now hinges on proactively addressing climate-related risks, according to Nexio Projects expert Herman Grové.

Climate risk creates direct financial risk because of its impact on operations, supply chains, and market access in a wide range of industries. This is true now more than ever, as the climate continues to change and major natural disasters become increasingly routine around the world.

“Climate-related risks are now recognized by investors, regulators, and boards as systemic, shaping everything from credit ratings to supply chain strategy,” says Grové.

“The economic effects of climate change are already significant: Studies estimate that, on a business-as-usual pathway, climate damages could shave up to 17% off global GDP by mid-century, driven by hits to infrastructure, productivity, agriculture, and public health. This is not an abstract future scenario; it is a trajectory that will directly affect asset values and corporate performance within current planning horizons.”

Different types of risk

Climate risk comes in different forms. For example, there are physical risks: These are both acute and chronic hazards caused by climate change itself. This includes floods, storms, wildfires, and heatwaves that can shut down facilities, damage assets, and interrupt logistics.

The chronic risks, Grové notes, include “rising temperatures, changing precipitation patterns, and sea-level rise that can undermine asset productivity, strain infrastructure, and slowly erode margins.”

Over the past several years, these types of risks have been on full display. Wildfires in Europe, floods in Asia, and prolonged droughts in the Middle East and Africa have caused incalculable economic losses and disrupted utilities, transport, infrastructure, and manufacturing across the world.

“These losses demonstrate how conducting climate risk assessments is no longer optional for organizations with long-lived assets or global supply chains,” Grové notes.

There are also transition risks, or in other words, those that come with the global shift towards a more sustainable climate. These include changes in regulations, the markets, or in technology, all of which can leave the private sector scrambling to keep up.

“As climate regulations tighten, companies may face higher operating costs, stranded assets, or sudden shifts in demand if they are not prepared. Transition risks can also materialize through supply chain fragility, where suppliers fail to adapt to new standards or technologies,” says Grové.

Climate risk is now financial risk

The current reality is that climate risk is no longer just about sustainability. Real-world events can (and do) destroy assets, halt production, and cause companies a lot of money in extensive downtime.

Organizations with viable proactive strategies use scenario analysis to test how different climate futures may affect their business models and investments. Those scenarios include, for example, different warming pathways, with at least 1.5 degrees Celsius or 2 degrees Celsius above pre-industrial levels increasingly likely in the not-so-distant future.

“Conducting a climate risk assessment gives companies a deeper understanding and a clear baseline from which to develop and respond to related customer expectations, such as decarbonization strategies, credible transition plans, science-based or other emissions-reduction targets, transparent reporting, and product carbon footprint disclosures,” Grové adds.

Impacts on business

Grové gives a number of examples in which climate risk affects businesses around the world:

• Wildfires in Los Angeles caused up to $275 billion in economic losses, including to utilities, telecommunications, manufacturing, and to the travel sectors.
• Droughts reduced hydropower capacity by 20% in several different regions around the world in 2023. This resulted in manufacturers needing to stop production and started a ripple effect across global supply chains, underscoring vulnerability beyond direct operations.
• Floods in Germany caused a painful $1.4 billion in total damages to German rail company Deutsche Bahn’s infrastructure. The damage also disrupted freight networks, commuter services, and had negative effects on regional economies, hitting Deutsche Bahn’s reputation at the same time.

Businesses can be better prepared for these kind of disruptions by having operational continuity plans in place, ensuring insurance and risk transfer, maintaining good access to capital, and keeping up a good reputation and market position.

“In short, businesses that are prepared for the challenges of climate change are better positioned to weather volatility and capture emerging opportunities in low-carbon markets,” notes Grové.

Regulatory landscape

Regulators around the world are making financial reporting mandatory and creating both compliance imperatives and strategic opportunities for prepared businesses. For example, the Task Force on Climate-related Financial Disclosures (TCFD) provides the foundational framework now underpinning mandatory regulations worldwide.

There is also the EU’s Corporate Sustainability Reporting Directive (CSRD), which mandates climate risk analysis and adaptation. It integrates both physical and transition risks into the financial reporting that organizations need to carry out.

“With over 30 jurisdictions now requiring climate risk-related disclosures, navigating the increasingly complex regulatory landscape can be challenging,” says Grové.

“As a first step, utilize the TCFD as the common foundation and basis. From there, layer jurisdiction-specific adaptions for efficient regulatory compliance and to avoid doubling efforts when needing to comply for multiple jurisdictions.”

Practical steps for getting started

Grové notes that businesses can start with pragmatic steps. It is best to start small and build progressively, to prioritize high-impact assets like critical operations and supply chains, and to embed climate risk within larger risk frameworks.

“Climate risk manifests as physical disruption and transition pressures but when managed proactively becomes a source of resilience and advantage. Businesses integrating climate risk into strategy protect value, satisfy regulators, and lead markets. The imperative is clear: Treat climate risk as financial risk to thrive amid uncertainty,” Grové adds.