How Do I Identify My Company's Climate-Related Risks?

"Climate change doesn't affect our business": Think again

A common first reaction to this section of an ESG report is to assume it simply does not apply. Software companies, consultancies, and agencies in particular often think climate risk is only relevant to farms, factories, or coastal businesses.

In practice, almost every company faces some form of climate-related risk, even if it is modest. An office-based consultancy might face rising energy costs, new regulatory requirements, or shifting customer expectations. None of these require a warehouse near a floodplain to be relevant.

The goal of this section is not to predict the future with certainty or produce a scientific risk model. It is to identify the risks that are reasonably foreseeable and material to your business, and describe them clearly. A thoughtful, well-reasoned assessment based on how your business actually operates is entirely sufficient.

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What is a climate-related risk?

A climate-related risk is an event or development linked to climate change that could negatively affect your company's operations, finances, customers, employees, or long-term business model.

That is a broad definition on purpose. It might mean a physical event, like a storm disrupting your supply chain, or a market shift, like customers increasingly preferring suppliers with strong sustainability credentials. Both count as climate-related risks, even though they look very different.

You do not need advanced modelling, scenario analysis, or external consultants to complete this section well. A clear, honest assessment of how climate-related developments could affect your specific business is what is being asked for.

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The two main categories: physical risks and transition risks

Almost every climate risk you identify will fall into one of two categories.

Physical risks

Physical risks come from the direct physical effects of climate change or extreme weather. Examples include:

• Flooding
• Storms
• Heatwaves
• Drought
• Wildfires
• Water scarcity
• Damage to facilities or equipment
• Supply chain disruption caused by extreme weather

Physical risks are often split into two types, and it is worth understanding the difference:

• Acute physical risks are sudden, event-driven risks: a specific storm, flood, or heatwave that disrupts operations for a short period.
• Chronic physical risks are longer-term, gradual shifts: rising average temperatures or long-term changes in water availability that slowly affect how a business operates over years.

Both are worth considering, though acute risks are often easier for SMEs to describe concretely, since they can point to specific scenarios (for example, a severe storm disrupting deliveries for several days).

Transition risks

Transition risks arise not from the physical effects of climate change, but from society's shift toward a low-carbon economy. Examples include:

• New legislation or regulatory requirements
• Carbon pricing
• Higher energy costs
• Changing customer expectations
• Changing investor expectations
• New requirements from suppliers or business partners
• Shifting market demand
• Reputational risks
• Difficulty attracting or retaining talent
• New reporting obligations

For many SMEs, particularly office-based businesses like software companies, consultancies, and professional service firms, transition risks are often more relevant than physical risks. A consultancy is unlikely to be significantly affected by flooding, but is quite likely to face customer procurement requirements, new regulatory obligations, or rising energy costs. It is worth giving transition risks real consideration rather than defaulting to only physical risks because they are more intuitive.

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Think about your own business

The most useful climate risk assessments are grounded in what your company actually does, not a generic list borrowed from elsewhere.

• An office-based consultancy might reasonably focus on:
  • Regulatory changes affecting reporting obligations
  • Customer expectations around sustainability credentials
  • Rising energy prices
  • Business continuity during extreme weather events
• A manufacturer might additionally consider:
  • Factory or production disruptions
  • Raw material availability
  • Water availability for production processes
  • Transportation disruption affecting deliveries
• A logistics company might focus on:
  • Fuel costs
  • Infrastructure disruptions (roads, ports, rail)
  • Extreme weather affecting delivery schedules
  • Vehicle availability, including any shift toward alternative fuel vehicles

Use these as a starting point for thinking through your own operations, not as a checklist to copy. The strongest disclosures reflect genuine consideration of your specific business, customers, and supply chain.

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Describe each risk consistently

Once you have identified a handful of risks, describe each one using the same structure. This makes your disclosure easier to read and demonstrates a genuine, considered assessment rather than a list of buzzwords. For each risk, cover:

• Risk description: What the risk actually is
• Risk category: Physical or transition (and acute or chronic, if physical)
• Potential business impact: How it could affect your operations, finances, or customers
• Likelihood: How probable this risk is, even in general terms (e.g., low, medium, high)
• Expected timeframe: Near-term, medium-term, or long-term
• Existing or planned mitigation measures: What you are already doing, or plan to do, to manage the risk

For example, a risk description might note that new customer procurement requirements around sustainability data are a transition risk with medium likelihood over the next two to three years. The mitigation would be the company's own ESG reporting process, which is exactly what you are doing by completing this report.

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Don't forget opportunities

Climate-related change is not only a source of risk; it can create opportunities too. Where relevant, briefly mention any you have identified, such as:

• New products or services responding to sustainability demand
• New advisory or consulting offerings
• Greater operational efficiency from resource or energy improvements
• Renewable energy adoption
• Sustainable procurement practices
• Competitive differentiation from strong ESG credentials
• Innovation driven by changing market needs
• Stronger customer relationships built on shared sustainability goals

You do not need an extensive opportunities section: a few sentences noting genuine opportunities relevant to your business is enough to round out the assessment.

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Keep the assessment proportionate

You do not need to identify dozens of risks to complete this section well. For most SMEs, identifying three to eight meaningful risks, described clearly with real business context, is entirely sufficient.

Quality matters far more than quantity here. A short list of well-reasoned, specific risks demonstrates a genuine assessment. A long list of generic risks, vaguely worded and copied from elsewhere, demonstrates the opposite, even if it looks more thorough at first glance.

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Common mistakes to avoid

• Saying there are "no climate risks": This is rarely accurate. Even office-based businesses typically face at least some transition risk, such as regulatory change or shifting customer expectations.
• Copying generic climate risks from the internet: Risks that do not reflect your actual business are easy to spot and add little value.
• Focusing only on physical risks: Many SMEs, especially office-based ones, will find transition risks more relevant and should give them equal consideration.
• Ignoring regulatory or market changes: These are often among the most immediate and tangible risks for SMEs, and should not be overlooked in favour of more dramatic physical risks.
• Forgetting to describe mitigation actions: A risk described without any mitigation looks unmanaged, even if your company is already taking sensible steps.
• Confusing climate risks with general business risks: A risk needs a clear connection to climate change or the transition to a low-carbon economy to belong in this section. General risks like currency fluctuation or staff turnover do not qualify unless there is a climate-related angle.

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Example structure (illustrative only)

Here is an outline showing how you might organise your climate risk assessment. This is not a complete example, but a guide to what belongs in each section:

1. Physical risks: Any weather or environmental risks relevant to your facilities, supply chain, or operations.
2. Transition risks: Regulatory, market, or reputational risks arising from the shift to a low-carbon economy.
3. Climate-related opportunities: Any genuine opportunities your company has identified.
4. Assessment methodology: A brief note on how the assessment was carried out (for example, internal review by management, considering the company's operations and sector).
5. Monitoring and future reviews: How often the assessment will be revisited and updated.

Use only the sections genuinely relevant to your company, and keep each one grounded in your specific operations rather than general statements about climate change.

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How Wardn helps

Wardn helps companies identify and document climate-related risks in a structured way, making it easier to capture both physical and transition risks relevant to their specific operations. Assumptions and reasoning behind each identified risk can be documented alongside it, and the assessment can be updated year after year as circumstances change, rather than starting from scratch each reporting period. This also helps companies produce a structured disclosure aligned with the VSME Standard's expectations around climate-related risk reporting.

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Frequently asked questions

Does my office-based business really face climate-related risks?

Yes, in almost all cases. Even companies with no physical operations beyond an office typically face transition risks, such as new regulatory requirements, rising energy costs, or shifting customer expectations around sustainability.

What's the difference between physical risks and transition risks?

Physical risks come from the direct effects of climate change or extreme weather, such as flooding or storms. Transition risks come from society's shift toward a low-carbon economy, such as new legislation, carbon pricing, or changing customer and investor expectations.

How many climate-related risks should we identify?

There is no fixed number, but for most SMEs, three to eight meaningful, well-described risks is sufficient. A short, specific list is stronger than a long, generic one.

Do we need to use climate modelling or scenario analysis to complete this section?

No. A thoughtful, well-reasoned assessment based on your company's actual operations is sufficient. Advanced climate modelling is not expected for an SME completing a VSME-based ESG report.

Should we include climate-related opportunities as well as risks?

Yes, where relevant. Briefly noting genuine opportunities, such as new sustainable products, operational efficiencies, or competitive differentiation, adds balance to the assessment and reflects a fuller picture of how climate change affects your business.

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