Climate risk

Climate risk refers to the potential adverse effects of climate change on natural and human systems. For organizations, these risks are usually grouped into two broad categories: physical risks, such as extreme weather and rising sea levels, and transition risks, linked to the shift toward a low-carbon economy. Understanding climate risk is essential for companies to act, reduce their impact, and adapt to an uncertain future.

Types of climate risk

Physical risks

Physical risks arise directly from a changing climate and are usually split into two types:

• Acute risks: extreme weather events such as hurricanes, floods, droughts, and wildfires, which cause immediate damage.
• Chronic risks: gradual shifts such as rising sea levels, higher average temperatures, and ocean acidification, which cause long-term effects.

Transition risks

Transition risks stem from the effort to mitigate climate change and move to a low-carbon economy:

• Policy and legal risks: changes such as carbon pricing or stricter emission regulations.
• Technology risks: rapid advances in clean technology that make existing assets obsolete.
• Market risks: shifts in demand, such as a decline in fossil fuel consumption.
• Reputational risks: damage to a company's reputation from climate inaction or high carbon exposure.

How climate risk is disclosed

Investors and regulators increasingly expect companies to assess and disclose climate risk. The widely used physical-versus-transition framework was popularised by the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was disbanded in 2023 and its recommendations have been taken forward by the IFRS Foundation through the climate disclosure standard IFRS S2. In the EU, climate risk disclosure is also embedded in corporate sustainability reporting.

The role of carbon footprint measurement

Measuring the carbon footprint, the greenhouse gas emissions of an organization, product, event, or individual, is a fundamental step in managing climate risk. It enables companies to:

• Identify and quantify emission sources across Scope 1, Scope 2, and Scope 3, helping to prioritise action.
• Assess exposure: a high carbon footprint can signal greater vulnerability to policy, technology, and market risks.
• Set reduction targets against a clear baseline.
• Implement mitigation strategies and track progress toward net zero.
• Communicate performance transparently to build stakeholder trust.

Regulatory and legal framework

International agreements such as the Paris Agreement and national laws such as Spain's Climate Change and Energy Transition Law 7/2021 set the frameworks for climate action and risk management. These policies promote the measurement and reduction of emissions and the disclosure of climate-related information.

Understanding and managing climate risk, alongside mitigation and adaptation, is essential for building a resilient and sustainable business. At Manglai we help companies measure their carbon footprint and prepare their sustainability reporting. Discover how Manglai can help you.