CO₂ balances alone are no longer enough. Companies must actively manage climate risks to prepare for a changing world.
You know the drill: collecting emissions data, creating reports, and planning reductions. But climate change brings challenges that go far beyond CO₂ measurements—from extreme weather to new regulations. The latest IPCC report underscores that climate impacts are accelerating, with risks intensifying across sectors and regions. For businesses, this means that traditional carbon accounting is just the starting point.
What you need to know:
Why take action? Climate risk management is not optional—it’s a necessity. It not only protects against damages but also opens up new opportunities—from more efficient processes to better investment conditions. According to McKinsey, companies that proactively manage climate risks can reduce operational disruptions by up to 30% and are better positioned to attract sustainable investment. Integrating climate risk into strategy is increasingly seen as a hallmark of resilient, future-ready organizations.
To meet the challenges of climate change, current regulations require more comprehensive risk assessments. In particular, EU directives oblige German companies to analyze climate risks in detail. A central role is played by the Corporate Sustainability Reporting Directive (CSRD). This expands reporting obligations far beyond simple emissions measurement and requires a double materiality assessment. Learn more about CSRD climate risk reporting.
Additionally, the EU Taxonomy Regulation defines which economic activities are considered environmentally sustainable. The Supply Chain Due Diligence Act requires companies with more than 1,000 employees to fulfill due diligence obligations along their entire supply chain. The Federal Financial Supervisory Authority (BaFin) also requires regulated companies to actively integrate climate risks into their risk management systems.
The German Climate Protection Act increases the pressure even further: instead of a planned reduction of greenhouse gas emissions by 55% by 2030, the target is now 65% by 2030 and 88% by 2040. Non-compliance with these requirements carries significant financial risks.
Violations of these regulations can lead to high costs:
The complexity of these regulations is also highlighted by experts:
“The various reporting systems should be synchronized so that each data point only needs to be reported once. Every CFO could tell absurd stories about how the same data must be reported multiple times. We need more fundamental regulations and less micromanagement. In addition, European and international regulations must be harmonized and interpreted consistently.”
In addition to fines and criminal consequences, violations may also result in liability for damages. Markets are also sensitive: studies show that investors not only assess the risk of stranded assets but also expect financial compensation for these risks.
Assessing climate risks requires a structured approach that considers both physical and transition risks. This distinction forms the basis for targeted measures to minimize risks.
Physical risks arise directly from the impacts of climate change, such as on infrastructure, supply chains, or operations. A distinction is made between acute risks, such as extreme weather events, and chronic risks resulting from long-term climate changes. Industry examples repeatedly show how such risks can lead to significant operational disruptions. For instance, the 2022 heatwaves and droughts in Europe led to water shortages and power plant shutdowns, affecting manufacturing and logistics.
Transition risks, on the other hand, arise from the shift to a lower-carbon economy. These include regulatory changes, market shifts, new technologies, and reputational risks. Sectors such as oil and gas and the automotive industry are particularly affected. The latter faces significant challenges as global demand for electric vehicles rises. Specialized analytical methods are necessary to accurately assess these risks.
A central tool in climate risk assessment is scenario analysis. It helps companies evaluate the financial impacts of climate change under different assumptions. Using projection models, it’s possible to estimate how future weather events might affect business operations. Explore climate risk assessment and management. The TCFD and NGFS provide widely used frameworks and scenarios for such analyses.
“A forward-looking approach will not only protect the solvency of insurers and banks but can also drive preventive measures. When risks are properly assessed, it is more likely that they will be mitigated.”
Mark Branson, President of BaFin.
Early warning systems also play a key role in detecting acute risks such as floods, droughts, or heatwaves at an early stage. Companies should set up monitoring systems and conduct comprehensive risk analyses that assess hazard, exposure, and vulnerability. Since traditional models often fall short in mapping future risks, many companies rely on specialized modeling software. Insights from these analyses feed directly into company-wide ESG strategies.
Embedding climate risk analysis into corporate risk management and business strategy is essential. Companies must consider both their environmental impact and business risks. This aligns with the double materiality of CSRD/ESRS requirements. At the same time, other reporting standards such as CDP or EcoVadis should be considered. Learn about double materiality in CSRD.
“Effective climate risk management has become a priority for all companies... By combining Zurich’s strong capabilities in physical risks with KPMG’s expertise in transition risks, we enable companies to make informed, strategic decisions based on a comprehensive assessment of specific climate risks and considering the entire economic ecosystem.”
Goran Mazar, Partner and Head of ESG Germany at KPMG.
Integrating these analyses requires close collaboration and considers both reciprocal and cascading effects. Careful documentation of all steps in the assessment process is essential to ensure regulatory compliance. Companies should establish clear processes and responsibilities to identify and assess climate-related risks and opportunities. The ability to assess the resilience of the business model to these risks is becoming a central component of ESG strategy.
Moving from simple emissions measurement to a comprehensive approach in climate risk management requires clear and structured actions. Companies must carefully assess and manage both physical and transition risks to reduce threats while identifying opportunities.
Scenario analysis is a valuable tool for understanding the potential impacts of various climate-related risks on companies, strategies, and financial results. It is a core component of the TCFD recommendations and enables simulation of different development paths to make informed adjustments. According to the ESRS, physical risks should be assessed under a scenario of over 4°C global warming, while transition risks should be analyzed using a 1.5°C scenario. NGFS climate scenarios are recognized as the standard.
A practical example shows how effective scenario analyses can be: PwC examined around 30 sites in 11 countries for a German OEM to identify physical climate risks. The initial assessment found that 97% of sites were potentially affected. After a detailed vulnerability assessment, the results were integrated into the company’s risk management and continuously monitored.
To successfully implement scenario analyses, companies should embed them in their strategic planning and involve all relevant internal and external stakeholders. All potential climate impacts should be considered, such as transition risks from a CO₂ tax or physical risks like water scarcity.
Effective climate risk management should be firmly anchored in corporate strategy. A structured approach helps implement adaptation measures in a targeted manner. While KPMG focuses on regulatory and technological changes as well as reputational risks, Zurich Insurance addresses physical risks such as extreme weather events, rising sea levels, and wildfires.
“Effective climate risk management has become a priority for all companies. To sustainably strengthen corporate resilience along the entire value chain, medium- and long-term changes in the risk landscape must be considered now. By combining Zurich’s strong capabilities in physical risks with KPMG’s expertise in transition risks, we enable companies to make informed, strategic decisions based on a comprehensive assessment of specific climate risks and considering the entire economic ecosystem.”
Goran Mazar, Partner and Head of ESG Germany at KPMG
Early warning systems play a key role in dealing with acute risks. Companies should adopt an approach that strengthens their resilience, as traditional, retrospective risk assessments often fall short in predicting the dynamics of climate-related risks.
The complexity of climate risks often requires the expertise of specialized consulting firms. The German Environment Agency (UBA) found that there is “hardly any practical information on dealing with climate risks and especially little information on approaches for companies.” This knowledge gap underscores the need for expert support.
Fiegenbaum Solutions supports companies in transforming from simple emissions accounting to comprehensive climate risk management. Building on established risk management approaches, the company offers services such as climate risk assessments and resilience planning that consider both physical and transition risks. Using life cycle assessments (LCA), impact modeling, and scenario analyses, companies receive a solid basis for decision-making. At the same time, Fiegenbaum Solutions assists with compliance with regulatory requirements such as the CSRD and EU taxonomy and helps develop net-zero strategies and CO₂ reduction pathways that go beyond mere emissions measurement. Discover sustainability consulting services.
Financial institutions have also begun to integrate climate aspects into their investment decisions and risk management practices. According to the UNEP FI TCFD Banking Pilot, over 70% of global banks now incorporate climate risk into credit assessments.
Traditional emissions accounting captures a company’s current emissions, while climate risk management aims to assess and respond to future climate-related risks. These different approaches are reflected in their respective strategies and outcomes, which are explored in more detail below.
As mentioned, climate risk management goes beyond simply recording emissions data and considers the risks that may arise from climate change. While CO₂ accounting focuses on a company’s impact on the environment, climate risk management looks at external climate factors and their potential effects. One example illustrates this difference: a factory can use CO₂ accounting software to measure its emissions daily to reduce them. Climate risk management software, on the other hand, analyzes how rising temperatures or more frequent storms could impact production.
| CO₂ Accounting | Climate Risk Management |
|---|---|
| Focus: Measuring own greenhouse gas emissions | Focus: Analyzing external climate risks |
| Time horizon: Present and past | Time horizon: Long-term future projections (10–30 years) |
| Data sources: Operational data such as energy use, waste, fuel | Data sources: Climate models, geographic data, economic forecasts |
| Outcomes: Emissions reports, reduction strategies, compliance documents | Outcomes: Risk assessments, scenario analyses, adaptation strategies |
| Regulatory requirements: GHG Protocol, CDP, ISSB for emissions reports | Regulatory requirements: SASB and ISSB for climate-related financial disclosures |
While CO₂ accounting is based on current and historical data, climate risk management relies on long-term projections to support strategic decision-making.
The broader perspective of climate risk management offers tangible benefits. Companies can identify and minimize risks early while also unlocking new opportunities. One example is the GEA Group, which, together with PwC, analyzed climate-related risks and opportunities along its entire value chain.
By integrating climate risks into corporate strategy, companies can strengthen their resilience to climate disruptions and better meet regulatory requirements. A proactive approach to climate-related risks also leads to cost savings, for example through more efficient resource use and less waste.
Market trends also underscore the importance of this approach: according to a survey, 33% of consumers consider environmental or social aspects in their purchasing decisions. More than half of banks also see environmental and climate issues as key risk factors for the future. Companies that prioritize environmental issues not only gain the trust of conscious customers but also that of investors. Deloitte’s Global Consumer Pulse Survey found that sustainability influences the purchasing decisions of one in three consumers globally.
In addition, considering climate risks opens access to sustainable financing options with attractive terms. This is becoming increasingly important as large companies may soon be required to conduct scenario-based climate risk assessments.
“Climate change and decarbonization will create material financial risks for companies—but also new business opportunities. Our Climate Excellence scenario analysis was developed to help you identify these risks and opportunities early and draw the right strategic conclusions.”
Goran Mazar, Partner and Head of ESG Germany at KPMG
The analyses so far make it clear that companies in Germany can no longer rely solely on emissions measurement. Moving towards comprehensive climate risk management is not just a regulatory requirement but a strategic necessity. Recent events highlight the urgency: floods in northern and central Germany around Christmas 2023 caused estimated damages of €200 million. In May 2024, Saarland saw 100 liters of rain per square meter within 24 hours—a strain for which neither rivers nor infrastructure were prepared. These events echo global trends, as the EM-DAT International Disaster Database reports a steady increase in climate-related disasters worldwide.
The economic consequences of such events are already being felt. Average building insurance premiums in Germany rose by about 24% between 2019 and 2024—from €213 to €264. A report from the German building materials trade also shows that many cities and municipalities are still inadequately prepared for such challenges.
The financial sector has begun to respond. One example is the joint mortgage program of Deutsche Bank and the European Investment Bank (EIB), which provides over €600 million for low-interest mortgages. The aim is to promote environmentally friendly new buildings and energy-efficient renovations of existing properties. Commerzbank has also adjusted its investment guidelines and now places greater emphasis on climate resilience in real estate projects.
But climate risk management is not just a reaction to risks—it also opens up new business opportunities. Forecasts suggest that global ESG assets will grow to $53 trillion by 2025 (Bloomberg). Companies with solid ESG risk management benefit from lower capital costs and increased attractiveness to investors. An analysis by Morningstar shows that 58.8% of sustainable funds outperformed their traditional counterparts over a ten-year period (Morningstar).
A pioneer in this field is Allianz. The company integrates climate risks into its investment and risk management strategies, including through stress tests and scenario analyses to identify at-risk assets. Allianz uses both qualitative and quantitative assessment models and relies on NGFS scenarios and hazard models that consider different emissions pathways. Read more about Allianz’s climate strategy.
For German companies, this means that focusing solely on CO₂ balances is not enough. Early investment in comprehensive climate risk assessments not only provides regulatory certainty but also creates a solid foundation for long-term competitive advantages in a changing economy. Those who use climate risk management strategically will be future-proof and can benefit from the opportunities of a climate-altered world.
Focusing solely on the CO₂ balance falls short when it comes to tackling the complex challenges climate change poses for businesses. Climate risks—such as physical damage from extreme weather events or new regulatory requirements—can lead to severe financial losses and significantly impair a company’s competitiveness. The IPCC highlights that unmitigated risks can cascade through supply chains and financial markets, amplifying losses.
These risks have a direct impact on assets, revenues, and costs. Companies that act early and address climate risks proactively not only create financial security but also gain a competitive edge. Thoughtful and comprehensive climate risk management is therefore a crucial step toward long-term stability and future-oriented business.
Climate change brings significant challenges for companies in Germany. Extreme weather events such as heavy rainfall, flooding, or droughts can not only seriously disrupt supply chains but also heavily impact infrastructure—whether through damage to buildings or impaired transport links. Such events threaten business operations and can also result in high financial burdens. For example, the 2021 floods in Germany led to widespread supply chain disruptions, with some manufacturers reporting weeks of halted production (Reuters).
To address these risks, it is crucial for companies to act early. This includes measures such as comprehensive risk assessments, developing adaptation strategies, and integrating climate risks into long-term planning processes. With this approach, the potential impacts of climate change on business operations can be reduced and companies’ resilience can be specifically strengthened. Learn about water risk assessment and business resilience.
Companies can use scenario analyses to simulate possible future developments. This helps them better understand climate risks and opportunities. By regularly running through different scenarios, the potential impacts of climate change on the business can be assessed and strategies adjusted accordingly. The TCFD recommends scenario analysis as a best practice for aligning with investor expectations and regulatory requirements.
It is essential to continuously update such analyses to respond to new regulatory requirements and scientific findings. The results should be incorporated into risk assessment and strategic planning to strengthen resilience to climate impacts and remain competitive in the long term. In this way, companies can make informed decisions and further develop their ESG strategies in a targeted manner.