Climate risk 101: physical, transition, and what to assess first

Climate change reaches a business on two distinct fronts, and confusing them muddles both planning and disclosure. Understanding the difference is the starting point of any climate risk conversation.

Physical risk

Physical risks are the direct impacts of a changing climate on your assets and operations: flood, heat, storm and water stress affecting sites, supply routes and working conditions. They can be acute — a single event that halts a facility — or chronic, like rising cooling costs and shifting growing seasons that erode margins year after year.

Transition risk

Transition risks come from the economy’s response to climate change rather than the climate itself: carbon pricing and border adjustments, tightening disclosure rules, customers demanding emissions data from suppliers, financing that depends on climate performance, and shifting market preferences. For most businesses today, transition risk arrives first — usually as a customer questionnaire or a regulation with a deadline.

Where emissions data fits

Your emissions inventory is the connective tissue between the two. It shows where carbon costs would land, which activities are exposed to tightening rules, and what a customer or lender will see when they assess you. An organisation that knows its footprint — site by site, source by source — can locate its transition exposure instead of guessing at it.

A practical first assessment

Start with three questions. Which of our sites and suppliers sit in physically exposed locations? Which regulations and customer requirements will reach us, and when? And can we produce the emissions evidence they will ask for? The third question is the one you can act on this quarter — and it strengthens your answer to the other two.