What is a climate risk assessment?

Quick Answer: A climate risk assessment is a structured process for identifying and evaluating the physical and financial risks that climate change poses to a business. It examines how factors like extreme weather, rising temperatures, and the shift to a low-carbon economy could affect operations, assets, supply chains, and long-term viability. Organisations use climate risk assessments to inform strategy, satisfy investor and regulatory expectations, and prioritise where action matters most.‍

What is a climate risk assessment?

A climate risk assessment is a formal evaluation of how climate change could affect an organisation, now and in the future. It looks at two distinct categories of risk: physical risks (the direct effects of a changing climate) and transition risks (the business consequences of moving to a lower-carbon economy).

Physical risks include events like flooding, drought, extreme heat, and supply chain disruption caused by changing weather patterns. Transition risks include regulatory changes, carbon pricing, shifts in customer demand, and the potential for carbon-intensive assets to lose value.

The output of a climate risk assessment is not a single number. It is a structured picture of where a business is exposed, how significant each exposure is, and what the organisation should do about it.

Physical risk vs transition risk: what is the difference?

Understanding the two categories of climate risk is the foundation of any assessment.

Physical risks divide into acute and chronic types. Acute physical risks are event-driven: a flood that closes a warehouse, a heatwave that disrupts logistics, a storm that damages infrastructure. Chronic physical risks are gradual: rising sea levels affecting property values, long-term water scarcity affecting manufacturing, or shifting growing seasons affecting agricultural supply chains.

Transition risks arise from the policy, technology, and market changes that accompany the shift to a low-carbon economy. These include:

• Carbon taxes or emissions trading schemes that increase operating costs
• Tightening regulations that require disclosure or reduction of emissions
• Changing investor preferences that affect access to capital
• Customer and procurement requirements that favour lower-carbon suppliers

Both categories can affect financial performance, and a thorough climate risk assessment addresses both. Focusing only on physical risks, or only on transition risks, produces an incomplete picture.

Why does a climate risk assessment matter for your business?

Climate risk is increasingly treated as financial risk. Investors, lenders, and major customers now routinely ask for evidence that a business has assessed and is managing its climate exposure.

Several reporting frameworks and regulations require or strongly encourage climate risk disclosure. The Task Force on Climate-related Financial Disclosures (TCFD) has become the dominant framework globally, and the UK has incorporated its recommendations into mandatory reporting requirements for large companies. The UK's Streamlined Energy and Carbon Reporting (SECR) regime, B Corp certification, and procurement frameworks like PPN 006 all reflect the growing expectation that businesses understand their climate exposure.

Beyond compliance, there is a practical business case. A climate risk assessment identifies which parts of your operations are most exposed, which suppliers carry the highest risk, and where investment in resilience would have the greatest return. That information is useful whether or not you face a regulatory deadline.

For smaller businesses and those without dedicated sustainability resource, the assessment also provides a starting point for setting meaningful emissions reduction targets, including those aligned with the Science Based Targets initiative (SBTi).

How is a climate risk assessment carried out?

A climate risk assessment typically follows a structured sequence, though the depth of each stage varies depending on the size and complexity of the organisation.

1. Define the scope and time horizon

Decide which parts of the business are in scope (operations, supply chain, owned assets, leased premises) and over what time period the assessment will look. Climate risks play out over decades, so assessments often consider short (to 2030), medium (to 2040), and long-term (to 2050 and beyond) horizons.

2. Identify relevant risks

Map the physical and transition risks that are plausible given the organisation's sector, geography, and business model. This stage draws on climate science, sector-specific guidance, and knowledge of the regulatory environment.

3. Assess likelihood and impact

For each identified risk, evaluate how likely it is to materialise and what the financial or operational impact would be if it did. This produces a risk register that allows the organisation to prioritise risks.

4. Identify dependencies and exposures

Examine where the business is most exposed: specific sites, key suppliers, energy-intensive processes, or carbon-heavy assets that could become stranded as regulations tighten.

5. Develop a response

Determine which risks require mitigation (reducing the likelihood or impact), adaptation (adjusting operations to cope), or disclosure (reporting the risk to stakeholders). Not every risk requires immediate action, but all identified risks should have an owner and a review date.

How does carbon accounting connect to climate risk?

Carbon accounting and climate risk assessment are closely related but serve different purposes. Carbon accounting measures what a business emits. A climate risk assessment evaluates what climate change could do to the business.

The connection matters because a business's own emissions profile is directly relevant to its transition risk exposure. A company with high Scope 1 and Scope 2 emissions faces greater exposure to carbon pricing and tightening regulations than one that has already reduced its footprint. Accurate emissions data, measured across Scopes 1, 2, and 3 in line with the GHG Protocol, is therefore an important input to a credible climate risk assessment.

This is where Seedling's approach is relevant. By producing a full-scope, GHG Protocol-aligned carbon footprint with clear data sources and assumptions, businesses have the emissions baseline they need to assess transition risk accurately, set SBTi-aligned targets, and produce outputs that satisfy stakeholder and regulatory expectations.

A climate risk assessment without reliable emissions data rests on uncertain foundations. The two processes reinforce each other: better carbon data produces a more credible risk assessment, and a clearer risk picture makes it easier to prioritise where emissions reductions will have the greatest strategic impact.