Understanding and Managing Climate Risks for Business Resilience

Table of Contents 

1. Introduction
2. What is a climate risk assessment? 
3. Why businesses should conduct climate risk assessments
4. How to conduct a climate risk assessment
5. FAQs
6. Why choose Automic for climate risk assessments

Introduction 

Climate change is intensifying the frequency and severity of extreme weather events, creating significant physical risks and financial consequences for businesses across all sectors. These physical risks – such as asset damage and supply chain disruptions – are increasingly affecting operations and profitability. At the same time, governments globally are introducing regulations to accelerate the transition to a low-carbon economy. Businesses that fail to adapt to governmental regulations quickly face transition risks, including compliance costs, reputational damage, and operational disruptions. 

Despite their differences, both physical and transition risks share one key trait: they carry material financial implications. As such, conducting a robust climate risk assessment is essential to understand how climate change may affect a business’s operations and financial performance and to communicate those insights transparently to stakeholders. In this piece, we explore what climate risk assessment involves and how businesses can conduct them effectively. 

What is a climate risk assessment? 

A climate risk assessment systematically evaluates the impact of physical and transition risks—such as extreme weather, temperature shifts, and decarbonisation—on business operations, assets, and stakeholders. 

With climate-related disasters causing billions in damages annually, businesses must proactively manage these risks to prevent disruption, financial loss, and reputational harm. Climate risk assessments offer a structured approach to identifying vulnerabilities, assessing risks, and developing strategies to enhance resilience, ensure compliance, and support long-term stability. 

Why businesses should conduct climate risk assessments? 

1. Regulatory and compliance requirements

Australia’s mandatory climate reporting regulation, AASB S2, requires reporting entities to assess climate-related physical and transition risks and document their approach. 

Compliance enhances transparency, builds stakeholder confidence, and aligns organisations with global sustainability standards. Failure to comply can result in regulatory penalties, reputational damage, and greater investor scrutiny. 

2. Financial protection and risk mitigation

Ignoring climate risks can lead to significant financial losses due to supply chain disruptions, infrastructure damage, and increased insurance costs. Climate risk assessments help businesses quantify potential risks and develop mitigation strategies. For example: 

• Healthcare: Strengthening supply chain resilience for critical medical supplies and enhancing medical operations to manage increased patient loads caused by climate change. 

• Mining: Implementing heat-resistant operational protocols to ensure continuity in extreme temperatures, minimising disruptions and financial losses. 

• Technology: Enhancing data centre cooling efficiency and diversifying energy sources to reduce reliance on climate-vulnerable power grids. 

3. Competitive advantage and long-term sustainability

Companies that integrate climate risk assessments into their business strategy gain a competitive edge. By addressing climate vulnerabilities early, businesses can enhance resilience, attract sustainability-conscious investors, and meet growing consumer demands for environmentally responsible practices. 

How to conduct a climate risk assessment 

Step 1: Identify climate risks 

The first step in risk assessment is identifying potential climate-related physical and transition risks. Table 1 below outlines the different types of physical and transition risks that business can use to categorise its identified climate risks.  

Table 1: Types of climate-related physical and transition risks. 

 

Step 2: Analyse climate-related risks using selected climate scenarios 

Climate scenarios and climate-related risks are complementary to each other. As per the AASB S2, reporting entities are to use their selected climate scenarios to rank and identify additional scenario-specific climate-related risks. We have also developed a downloaded guide which explains the different types of climate scenarios and how to conduct a scenario analysis, which you can access here. Table 2 below shows an example of how your climate risk table could look like. In this table, we have chosen two climate scenarios to conduct climate risk assessment:

1. SSP ¹ 1 – RCP²1.9 is the best-case climate scenario where the world shifts gradually, but pervasively toward a more sustainable path, emphasising more inclusive development that respects perceived environmental boundaries. Under this scenario, severe weather events are more frequent, but the world has avoided the worst consequence of climate change. At this stage, global emissions fall to zero by 2050.
2. SSP5 – RCP8.5 is the worst-case climate scenario where the world places increasing faith in competitive markets, innovation, and participatory societies to produce rapid technological progress and development of human capital as the path to sustainable development. Under the scenario, current global CO2 levels are almost doubled by 2050 and 2100, average temperature would have risen by 4.4°C. 

Table 2: Ranking of identified climate-related risks.  

 

Step 3: Assess vulnerability, exposure, potential impacts and adaptation capacity 

Once your business’ climate risks have been analysed, the next step is to determine which areas of the business – whether infrastructure, supply chains, or workforce – are most exposed to climate risks. Assess the extent of potential impacts on these areas of the business and evaluate if the business is resilient against those impacts. This process will assist in the ensuring business continuity and develop contingencies for high risks scenarios.  

Concurrently, if your business has been proactively taking action or developing mitigation strategies for climate risks, determine how these actions and/or strategies can assist your business in managing those climate risks impacts.  

FAQs 

How is a climate risk assessment different from traditional risk assessments? 

Traditional risk assessments focus primarily on immediate operational risks, such as financial instability, market fluctuations, or supply chain disruptions. These assessments are typically short-term and react to known risks based on historical data. In contrast, climate risk assessments consider short- and long-term effects of climate change impacts. They incorporate climate projections, future scenario modelling, and regulatory frameworks to assess evolving risks. This broader perspective helps businesses proactively mitigate risks before they escalate into crises. 

How often should assessments be updated? 

Climate risk assessments should be updated regularly, ideally on an annual basis, to reflect the latest climate projections, regulatory changes, and emerging business risks. However, in industries exposed to rapidly evolving and harsh climate conditions - such as mining or agriculture - more frequent updates may be necessary. Additionally, assessments should be revisited whenever a company expands operations, invests in new infrastructure, or faces shifts in regulatory requirements to ensure risk mitigation strategies remain effective. 

Partnering with Automic for climate resilience 

In an era of increasing climate uncertainty, taking proactive measures is essential for long-term business stability. Automic’s tailored climate risk solutions provide organisations with the insights and strategies needed to navigate evolving environmental challenges with confidence.  

Why choose Automic for climate risk assessments 

Here’s what sets us apart: 

• Expert advisory: Our experts work collaboratively with you to develop and implement effective adaptation strategies. 

• Customised solutions: We provide customised solutions tailored to business’ scale and operations, that comply with AASB S2 reporting requirements. 

• Proven results: We help businesses enhance resilience, meet regulatory requirements, and future-proof operations. 

Future-proof your business. Book a consultation with our ESG experts, or explore our ESG services to see how we can support your sustainability goals. 

Download our guide Climate Scenarios Unveiled: Insights from the ASX Top 50

¹ SSP refers to Shared Socioeconomic Pathways which are climate change scenarios that project how global society, economic, and demographics could change by 2100. 

² RCP are climate change scenarios to project future greenhouse gas concentrations.