Climate Risk
Definition
Climate risk refers to the potential negative impacts of climate change on organisations, economies, and ecosystems. It is typically divided into physical risks (extreme weather, sea-level rise) and transition risks (policy changes, technology shifts, market repricing). Understanding climate risk is essential for long-term strategic planning and investment decisions.
Why It Matters
Climate risk disclosure is now mandated or strongly encouraged by regulators worldwide, following TCFD recommendations. Financial institutions increasingly integrate climate risk assessment into lending, insurance, and investment decisions.
Related Terms
TCFD (Task Force on Climate-related Financial Disclosures)
The Task Force on Climate-related Financial Disclosures (TCFD) developed recommendations for companies to disclose climate-related financial information across four pillars: governance, strategy, risk management, and metrics/targets. Although the TCFD itself was disbanded in 2023 after its work was taken over by the ISSB, its framework remains influential. TCFD-aligned disclosure is now mandatory or recommended in many jurisdictions.
Materiality Assessment
A materiality assessment is a structured process for identifying and prioritising the ESG topics that are most significant to an organisation and its stakeholders. It typically involves stakeholder engagement, peer benchmarking, and analysis of business impact to determine which issues warrant strategic focus and disclosure. The output is usually a materiality matrix ranking topics by importance.
ESG Integration
ESG integration is the systematic inclusion of environmental, social, and governance factors into investment analysis and decision-making processes. Unlike negative screening or exclusion, ESG integration uses ESG data alongside traditional financial analysis to build a more complete picture of risk and opportunity. It is the most widely practised responsible investment approach globally.
Double Materiality
Double materiality is the principle that companies should report on sustainability matters from two perspectives: how ESG issues affect the company's financial performance (financial materiality) and how the company's activities impact people and the environment (impact materiality). This concept is central to the EU's CSRD and European Sustainability Reporting Standards. It represents a broader view than the single financial materiality approach used by ISSB.