Climate and transition risk analysis
Climate change represents one of the greatest threats to modern business. Organizations face two key types of risks: physical climate risks (floods, droughts, heat waves) and transition risks arising from the transition to a low-carbon economy (changes in legislation, technologies, markets). Climate and transition risk analysis has therefore become essential for long-term business sustainability.
The European Union, through the introduction of the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS), has set clear requirements for climate risk data disclosure. CSRD requires organizations to include data on environmental, social, and governance impacts in their annual reports, with a special emphasis on climate risks. ESRS defines how organizations should report on these aspects, including disclosure of climate risk management, risk identification and assessment, management strategy, targets and metrics, and scenario analysis.
Methodologies and practical approaches to analysis
The analysis of climate and transition risks, as part of ESG ON, is carried out using a predefined methodology.
Through scenario analysis, an organization assesses the potential impacts of different climate scenarios on its operations: a low-emissions scenario (warming limited to 1.5°C), a medium-emissions scenario (2-3°C), and a high-emissions scenario (above 4°C).
Organizations also use sensitivity analysis to understand how sensitive different aspects of their business are to climate variables, and value chain analysis to assess risks along the entire chain, from suppliers to end users.
Climate and transition risk analysis begins with identifying relevant risks: physical acute and chronic risks, regulatory risks (stricter CO₂ emission regulations), technological risks, market risks, and reputational risks. This is followed by assessing the materiality of risks based on probability and potential impact on business. Based on this assessment, the organization develops risk management strategies that are then integrated into the overall business strategy.
Climate and transition risk analysis: challenges and opportunities
For organizations facing challenges in conducting climate and transition risk analysis. ESG ON offers comprehensive support in meeting CSRD and ESRS requirements. ESG ON is based on a ready-made methodological process for conducting the analysis, which includes an audit trail and a direct connection to data points in ESRS standards. The advantage of the tool is the AI assistant that helps in automatically filling in data points, which significantly reduces the time required to prepare a climate and transition risk analysis.
Key features of ESG ON include:
- Adaptation of climate risks for the local environment (e.g. Slovenia).
- Predefined scenarios aligned with ESRS and CSRD requirements.
- A dedicated module for calculating an organization's carbon footprint, supporting the collection of emissions data in the value chain.
- Audit trail.
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