What are the main types of climate-related financial risk?

Climate-related financial risk is usually grouped into physical risk, from acute events such as floods and chronic shifts such as sea level rise; transition risk, from policy, technology, market and reputational change on the path to a lower-carbon economy; and liability risk, from legal claims. IFRS S2 counts legal risk as part of transition risk.

How often should companies update climate scenario analysis?

Under IFRS S2, a company assesses its climate resilience every year but does not have to redo its scenario analysis annually. According to a March 2026 ISSB fact sheet, the analysis should be updated at least in line with the company's strategic planning cycle, using an approach commensurate with its circumstances.

Is climate risk disclosure mandatory in the United States?

Federal climate risk disclosure is not mandatory in the United States, because the SEC climate rule never took effect. California's SB 261, which requires climate-related financial risk reports, is on hold while an appeal proceeds, so that reporting is voluntary for now. Elsewhere, 28 jurisdictions had adopted the ISSB standards in some form as of April 2026.

What is Climate Risk in Financial Planning?

Climate risk in financial planning means treating climate-related risks as inputs to budgets, forecasts, capital allocation and financing decisions, rather than as a separate sustainability topic. It asks how floods, heat, carbon prices, new technologies and lawsuits could change an organization's cash flows, asset values, insurance and cost of capital over the planning horizon.

A common way to sort these risks uses three channels, a framing Mark Carney set out as Bank of England governor in a 2015 speech at Lloyd's of London:

Physical risk: damage and disruption from acute events such as storms, floods and heatwaves, and from chronic shifts such as rising seas and changing rainfall.
Transition risk: costs and repricing that come with the move to a lower-carbon economy, through policy, technology, markets and reputation.
Liability risk: claims from parties who suffer climate-related losses and seek compensation from those they hold responsible.

IFRS S2 uses just two categories, physical and transition, and counts legal risk as part of transition risk.

The concept overlaps with climate risk disclosure but is not the same thing. Disclosure reports risk to investors; financial planning acts on it. The two should tell one story.

Why It Matters

Physical losses are large, and a growing share comes from floods, storms and wildfires rather than peak perils such as major hurricanes. Munich Re's review of 2025 counted about $224 billion in natural disaster losses, $108 billion of them insured. Floods, severe thunderstorms and wildfires alone caused $166 billion, above their 10- and 30-year averages, and roughly half of all 2025 losses were uninsured.

Transition costs are spreading. The World Bank's State and Trends of Carbon Pricing 2026 finds that nearly 30% of global emissions are now covered by a direct carbon price across 87 policies, which raised more than $107 billion for public budgets in 2025. The EU's carbon border adjustment mechanism entered its definitive period on January 1, 2026, extending carbon costs to importers.

Liability risk is real but still maturing. The LSE Grantham Research Institute's 2026 snapshot counted 249 new climate cases in 2025, bringing the total since 1986 to more than 3,600, with more than 50 strategic cases filed against companies. Suits seeking damages from companies for their contribution to climate change have not yet produced an order to pay, while cases challenging misleading transition claims are the most common kind brought against corporations.

Disclosure rules now ask for the numbers. IFRS S2, effective for periods beginning on or after January 1, 2024, requires companies that apply it to disclose the anticipated effects of climate risks on their financial position, performance and cash flows, taking into account how those risks are included in financial planning. As of April 2026, 28 jurisdictions had adopted IFRS S1 and S2 in some form. In the United States, the SEC climate rule never took effect, and California's SB 261 is on hold while an appeal proceeds, so its reporting is voluntary for now.

How It Works / Key Components

Map exposures

Planning starts with where assets, suppliers, customers and revenue sit relative to physical hazards, which policies and technologies could change costs or demand, and where legal exposure lies. IFRS S2's test for what matters is practical: risks that could reasonably be expected to affect cash flows, access to finance or cost of capital.

Use scenarios as stress tests, not forecasts

IFRS S2 requires scenario analysis to assess climate resilience, using an approach proportionate to a company's exposure and resources. The ISSB's March 2026 fact sheet says resilience is assessed annually, while the scenario analysis itself is updated at least in line with the strategic planning cycle. Model uncertainty is real: in December 2025 the Network for Greening the Financial System warned that the paper behind the chronic physical risk estimates in its latest long-term scenarios had been retracted, and it plans a revised method for its next vintage at the end of 2026. Test decisions against a range of outcomes rather than anchoring a budget to one model's damage estimate.

Translate results into the plan

Planning area	Where climate risk shows up
Capital budget	Hardening or relocating exposed assets; replacing carbon-intensive equipment early
Operating budget	Insurance premiums and deductibles, energy and carbon costs, supply disruptions
Revenue forecast	Demand shifts toward lower-carbon products; sales lost during outages
Asset values	Impairment tests, useful lives and residual values that assume stable climate and policy
Financing	Cost of capital, covenants, lender requirements and insurance availability

Tools such as an internal carbon price help test capital projects against transition risk before commitments are made.

Keep the accounts consistent

Assumptions in climate disclosures should match those in the financial statements. In November 2025 the IASB issued climate-based examples on reporting uncertainties after stakeholders said information in financial statements sometimes looked inconsistent with what companies reported elsewhere.

Council Fire's Approach

We help finance, sustainability and operations teams work from one set of climate assumptions. That starts with an exposure map across sites, suppliers and markets, followed by a few decision-relevant scenarios built with the people who own the budgets, not a scenario library no one uses. We translate the results into capital, operating and financing choices, and we check that the story told in disclosures, board materials and the accounts is consistent. Where a program needs ongoing monitoring, we build dashboards through Council Fire Labs that track exposures and risk indicators against the plan.

Frequently Asked Questions

Which climate scenarios should a company use?

Common starting points are public reference sets, such as the NGFS scenarios for macro-financial effects, IEA energy scenarios for transition pathways and IPCC-based projections for physical hazards. Pick a range that includes at least one rapid-transition case and one high-warming case, and document your assumptions. Scenario choice matters less than whether the results change a decision.

How does climate risk affect the cost of capital?

Lenders, investors and insurers price the risks they can see, so exposed or carbon-intensive assets can face higher premiums, tighter loan terms or reduced insurance coverage. Clear evidence of how risks are measured and managed, including credible adaptation and transition plans, can help a company make its case to capital providers.

Who should own climate risk in financial planning?

Ownership works best when the finance function leads, with sustainability and operations teams supplying data and expertise. The board should oversee the process, and IFRS S2 asks companies to disclose the governance processes and controls they use for climate risks. Our guide for the chief financial officer covers how that role typically fits.

What is Climate Risk in Financial Planning?