Climate risk is still treated by many companies as content for the sustainability report: something produced by the ESG area, presented to the board once a year, and little connected to real investment, procurement and expansion decisions. This separation is becoming unsustainable — literally. The climate has already entered the balance sheet; The question is whether the company's management noticed.
Two types of risk that most people confuse
The structure of the TCFD — Task Force on Climate-related Financial Disclosures — divides climate risk into two large blocks, and understanding the difference between them is the first step to treating them seriously.
Physical risks are the most intuitive: extreme weather events that damage assets, disrupt operations or render entire regions unsuitable for certain uses. An industrial plant in an increasing flood zone, a supply route that passes through regions with accelerating cyclone frequency, a portfolio of commercial properties in coastal cities at risk of structural flooding. These risks are already quantifiable with climate data models and already affect asset valuations.
Transition risks are less visible in the short term, but equally material. They involve the economic consequences of the policies, regulations and market changes necessary to decarbonize the economy: carbon pricing, restrictions on fossil fuels, changing customer preferences, abandonment of technologies. Assets that rely on inputs with a high carbon footprint or that operate with emissions-intensive processes face increasing pressure from both regulators and investors.
What TCFD and ISSB standards require in practice
The ISSB — International Sustainability Standards Board — published the IFRS S1 and S2 standards in 2023, which transform the disclosure of climate risks from a voluntary practice into an accounting obligation for companies in markets that adopt the standards. Brazil, through the CVM, has already signaled movement in this direction for public companies.
What concretely changes: climate risk is no longer a separate chapter and becomes part of the explanatory notes of the balance sheet, with the same rigor of materiality required for other financial risks. This means that auditors will question assumptions, boards will be held accountable for omissions, and institutional investors will use this information for allocation decisions.
For managers who still treat climate as a reputational issue, the ISSB is the clearest sign that this phase is over. The question is no longer “should we disclose our climate risk?”, but “can we measure and quantify our climate risk with sufficient credibility for inclusion in financial statements?”
Where risk is already visible: insurance, real estate and supply chains
Three sectors are already feeling the impact in a concrete way, and their dynamics are an early indicator of what is coming for other segments.
In the insurance market, some regions in the United States, Australia and Europe are already seeing insurers withdrawing or making coverage economically unfeasible. Florida has lost several significant insurance companies in recent years. In Brazil, extreme weather events in the South are already putting pressure on actuarial models. When the insurance disappears, the risk does not disappear — it is transferred entirely to the asset owner or public authorities.
In the real estate market, physical risk models are already used by private equity funds and FIIs to adjust valuations based on projections of flooding, water stress and extreme heat over horizons of 10 to 30 years. Assets that appear solid today may have significantly reduced liquidity in the future when these models become part of standard due diligence.
In supply chains, geographic concentration in vulnerable regions creates risks of interruption that recent events in Rio Grande do Sul have made tangible for any Brazilian executive. Companies that mapped their supply chain solely in terms of cost and lead time now need to add a layer of climate resilience.
How a leader should look at this
The most common trap is to treat climate risk as just another compliance item — something to be managed by the sustainability area with external consultancy and delivered in the annual report. This model produces sophisticated reports and operational decisions that completely ignore what the reports say.
What changes when climate risk is treated as a real business risk: it enters the company's risk governance model, with defined owners, quantified scenarios and direct integration with capital decisions. The strategy area and the CFO need to be part of this conversation, not just the ESG area.
The first step is exposure mapping: which assets, operations and suppliers are in regions of high physical risk, and which parts of the business depend on inputs or processes with high transition risk. This mapping is the starting point for prioritizing where the company needs to invest in resilience, diversification or divestment.
This exercise rarely reveals only risks. He also points out opportunities: markets that will grow with the energy transition, competitive positions that become stronger when competitors with greater exposure leave the market, and cost advantages for those who decarbonize before carbon pricing makes decarbonization urgent and expensive.
Climate is not an ESG agenda. It is a strategic variable that will reconfigure the cost of capital, asset valuation and competitive positions over the next decade. The clearest sign that a company has not yet understood this is when the CFO and strategy director are unable to answer, without consulting the ESG area, what percentage of fixed assets are in high physical risk zones by 2035.
Also read
- TCFD in practice: how to structure climate risk disclosure
- Sustainable data centers: the environmental cost that became a public issue
- ESG beyond the report: how emission targets become supply chain constraints
- Carbon market in Brazil: what to expect and how to prepare
- Electrification: what changes when everything starts to turn on socket
- Distributed solar energy and the business model that emerged around it