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Climate change is no longer a distant horizon. Its impacts are already visible, and their consequences are very real for French companies. Resource strain, rising energy prices, new regulatory requirements... Faced with this reality, companies must now integrate climate risks into the heart of their strategy to ensure their long-term viability in a rapidly changing environment.
Understanding climate risks means assessing how weather phenomena, regulatory developments, or market shifts can directly or indirectly affect a company's operations.
The goal is twofold: to strengthen the resilience of business models against climate-related hazards, while meeting the growing demands of non-financial reporting, imposed by European regulations (CSRD, CS3D, SFDR, etc.).
The two main categories of climate risks for businesses
Climate risks can be divided into two broad categories: physical risks and transition risks. These two dimensions reflect different but complementary realities of climate change and its effects on businesses.
On one hand, physical risks encompass all damages directly linked to climate disruption that cannot be avoided:
- Natural disasters (floods, droughts, forest fires, coastal flooding, etc.);
- Scarcity of certain resources (water, raw materials, etc.);
- Rising temperatures and heatwaves;
- Etc.
Their consequences often result in a drop in productivity (- 50% from 33 - 34°C), supply chain disruption or difficulties accessing raw materials, thereby compromising operational continuity.
The transition risks, meanwhile, are indirect risks linked to the shift toward a low-carbon economy:
- Regulatory changes (CSRD, GHG emissions reporting, tertiary decree, carbon tax, etc.);
- Financial risks associated with the investments required to become a more sustainable business (renovations, purchasing new equipment, R&D, etc.);
- Financial risks linked to market shifts (energy price volatility, etc.);
- New investor expectations regarding sustainability;
- Changes in consumer behavior;
- Etc.
For businesses, transition risks can lead to a devaluation of assets, obsolescence of certain products or services, or the emergence of additional costs linked to carbon taxation.
🔎 Focus: beyond physical and transition risks, companies are increasingly exposed to reputational risks. Poor management of climate issues can harm their appeal to investors, talent, and consumers.
Climate risks must be considered across the entire value chain
It is important to keep in mind that the effects of climate change are numerous and can impact your entire value chain : from raw material sourcing to the distribution of finished products.
The table below provides concrete examples of risks related to climate change, as well as their impact on different links in the value chain.
| Cause (physical and transition risks) | Consequence | Impact on the company |
|---|---|---|
| Depletion of oil and uranium | Rising energy prices | Higher production costs |
| Floods & wildfires | Disruption of the raw materials supply chain | Production delays / reduced activity |
| Water scarcity | Nuclear plants shut down due to insufficient river flow to cool reactors | Rising energy prices and higher production costs |
| A distributor / subcontractor's non-compliance with new environmental regulations | Need to switch distributor / subcontractor | Lower productivity & potentially higher rates from the new provider |
| Shifting consumer habits, favoring eco-designed products | Impact on demand | Obsolescence of products or services sold |
ℹ️ $1 billion: this is the cost of the losses announced by Toyota following the floods in South Africa in April 2022 (destruction of 4,300 vehicles and several months of work stoppage leading to a production loss of 45,000 cars).
How can a company assess its climate risks?
Identifying climate risks requires a methodical approach that covers your entire value chain:
- Upstream and downstream mapping : list all your suppliers, partners, transport providers, distributors, and other stakeholders to map your supply and distribution chains. The goal is to identify the physical and transition risks these actors face, which could ultimately impact your business.
- Risk modeling : use digital models (cat models, Climate Value-at-Risk, PACTA, etc.) to assess how economic, political, and environmental variables influence your exposure to the risks identified in step 1;
- Risk prioritization : rank risks based on their probability and impact to prioritize adaptation and decarbonization measures for your value chain.
Once risks are identified, it becomes much easier to define an adaptation strategy to mitigate these impacts.
To carry out these steps, the key tool is double materiality analysis. Introduced by the European CSRD (Corporate Sustainability Reporting Directive), it examines both:
- The impact of climate on the company (or financial materiality): the vulnerability of the organization to climate events, rising energy costs, evolving regulations…
- And the impact of the company on climate (or impact materiality): greenhouse gas emissions, pollution, resource use…
By combining these two approaches, double materiality analysis helps build a comprehensive view of your risks and responsibilities. It's typically presented as a matrix, as shown in our dedicated article: What is a double materiality analysis?
What is the link to the CSDDD?
The CSDDD or CS3D (Corporate Sustainability Due Diligence Directive) is a European regulation that requires certain companies to implement a duty of vigilance extended to their entire value chain.
These companies will therefore need to anticipate and prevent risks related to the environment, human rights, and governance, in connection with their operations and those of their subsidiaries, subcontractors, and suppliers.
However, climate risks are an integral part of the environmental risks to be assessed. The companies concerned must therefore accurately estimate these risks and implement mitigation and prevention measures.
Having entered into force in July 2024, the CSDDD is now being called into question by the European Omnibus directive. Currently under review by the European Parliament, this bill could amend certain obligations, as well as the implementation dates of this directive.
How can you move from risk management to a true resilience strategy?
As you can see, anticipation is the key requirement for a sound climate change adaptation strategy.
Companies must now transform their approach to risk into a comprehensive resilience strategy. In other words, this means fully integrating climate risks into your governance and day-to-day business decisions.
To achieve this, the best approach is to follow the regulatory framework provided by the CSRD directive, and more specifically the ESRS E1standard, which is dedicated to climate change. The latter establishes the fundamental concepts for sustainability reporting in this area. It provides a framework for companies to assess:
- The physical and transition risks linked to their activities and those of their value chain;
- The opportunities for them, associated with the transition to a low-carbon economy (innovation, new markets, energy efficiency);
- The actions (transition plan) to be implemented to mitigate these risks and reduce their environmental impact.
This essential transition plan is the core tool of this methodology. It is based on a rigorous assessment of risks and opportunities for your company. It is a living document that helps you project yourself across different climate scenarios, providing visibility into the consequences for your business.
Conclusion
In the future, the companies that come out on top will be those that have defined a trajectory to account for climate-related uncertainties. These are the businesses that will remain competitive in the face of transitioning markets and increasingly stringent regulations.
Photo credit: Nicolas Houdayer