Climate Risk (Physical and Transition)

Climate risk refers to the financial and business risks arising from climate change, categorised as: (1) Physical risks — acute (extreme weather events: storms, floods, heat waves) and chronic (gradual changes: sea-level rise, temperature shifts, precipitation pattern changes); and (2) Transition risks — risks arising from the transition to a low-carbon economy, including policy and regulatory changes, technology shifts, market changes, and reputational impacts. Both IFRS S2 (Climate-related Disclosures) and ESRS E1 (Climate Change) require companies to disclose physical and transition climate risks and their financial implications.

IFRS S2 Climate-related Disclosures (ISSB, June 2023); ESRS E1 (Climate Change), Commission Delegated Regulation (EU) 2023/2772; TCFD Recommendations (2017, incorporated into IFRS S2).

Under IFRS S2 and ESRS E1, companies must conduct climate scenario analysis using at least two scenarios (one aligned with a 1.5°C pathway; one higher-warming scenario) and disclose how each climate risk type could affect cash flows, financing, and business strategy over short, medium, and long-term horizons. Manufacturers with energy-intensive operations, physical asset exposure, or carbon-intensive supply chains face the most material climate risks and should quantify financial impacts.