Climate risks are no longer a thing of the future – they directly affect you as venture capital teams. Whether through extreme weather, new regulations, or market changes: These risks can significantly impact your portfolios. At the same time, they offer opportunities if you act early.
Key takeaways at a glance:
Our conclusion: Those who ignore climate risks not only risk portfolio values but also investor trust. With the right tools and processes, you can minimize risks while identifying opportunities. Now is the right time to future-proof your portfolio.
Choosing the right tools is crucial for conducting a well-founded analysis of climate risks in your portfolio. Venture capital firms (VCs) today have access to specialized platforms that cover various facets of climate risk analysis – from scenario analyses to detailed risk modeling.
Scenario analysis platforms form the foundation of thorough climate risk assessment. These tools allow you to simulate different climate scenarios and estimate their potential impacts on portfolio companies. The platforms use standardized climate scenarios that consider various degrees of warming and societal development pathways.
Particularly helpful is the ability to model both physical and transition risks across different time periods. The analyses often span decades, from the 2020s to the 2090s, giving VCs the opportunity to better understand the long-term impacts of their investment decisions. According to the Intergovernmental Panel on Climate Change (IPCC), physical risks include acute events like floods and chronic changes like sea-level rise, while transition risks encompass policy changes, technological shifts, and market sentiment changes as economies move toward lower-carbon alternatives.
An example is S&P Global's Physical Risk Dataset, which provides climate hazard metrics for 201 countries and nearly 2,100 subnational regions. This level of detail allows for precise risk assessments even for geographically diverse portfolios. Such scenario analyses are often the basis for detailed evaluation by specialized climate data providers.
Climate data providers deliver detailed information on physical and transition risks, enabling VCs to make informed decisions even for private companies. The market for climate risk data has expanded rapidly, with providers now offering comprehensive coverage that was previously unavailable for private markets.
A leading example is ICE, which has expanded its climate risk platform and now offers physical and transition risk data for more than five million private companies worldwide. This data is particularly relevant for VCs, as they frequently invest in non-public companies where traditional ESG data may be limited or unavailable.
The provided metrics cover a variety of risks, including extreme heat, drought, flooding, wildfires, and tropical cyclones. Additionally, GDP-weighted exposure, population exposure, and greenhouse gas emissions (Scope 1, 2, and 3) are captured. The U.S. Environmental Protection Agency defines these emission scopes as direct emissions from owned sources (Scope 1), indirect emissions from purchased energy (Scope 2), and all other indirect emissions in the value chain (Scope 3).
Another example is Climate X's Carta solution, which provides asset-level transparency for 18.7 million public and private companies worldwide. Such platforms help VCs identify risk hotspots in their portfolios, assess risk relevance, and analyze long-term trends. This data often forms the basis for further quantitative risk analyses.
With risk modeling software, VCs can transform collected data into concrete, quantitative assessments. These tools enable the translation of physical climate risks into financial loss metrics – both at portfolio and asset levels. Some platforms go further and calculate investment expenditures as well as ROI for adaptation measures, making it easier for VCs to develop targeted recommendations for their portfolio companies.
Furthermore, such tools support compliance with regulatory requirements and reporting obligations. Many solutions are already adapted to standards like IFRS S2 or the EU Taxonomy, significantly reducing the effort required for reporting. The International Financial Reporting Standards (IFRS) Foundation introduced IFRS S2 as a comprehensive framework for climate-related financial disclosures, requiring entities to provide information about climate-related risks and opportunities that could affect their cash flows and access to finance.
A major advantage lies in the ability to integrate different risk types within a unified framework. Modern platforms can assess physical and transition risks together, making interactions between these risk types visible. This helps VCs create comprehensive risk profiles of their portfolio companies and meet regulatory requirements.
For VCs looking to develop a comprehensive climate risk strategy, Fiegenbaum Solutions offers specialized consulting. With technical expertise and practical experience in the VC industry, the company supports the selection and implementation of suitable tools. This creates tailored solutions that not only meet regulatory requirements but also deliver real value for investment decisions.
Integrating climate risk tools into venture capital portfolio assessment processes requires a clearly structured approach that considers both technical and regulatory requirements. Building on the tools presented, we'll show you how to incorporate them into your VC assessment – naturally considering German and European compliance requirements.
The first step involves systematically capturing your portfolio and analyzing the climate-relevant characteristics of individual companies. This includes a thorough inventory covering geographical locations, industry affiliation, value chains, and operational structures. This data forms the foundation for all further analyses and must be comprehensive enough to support both regulatory reporting and strategic decision-making.
Particularly important is compliance with the General Data Protection Regulation (GDPR). Inform your portfolio companies about the purpose of data collection and obtain GDPR-compliant consent declarations. The European Commission's data protection framework requires explicit consent for processing personal data, including employee information that may be part of climate risk assessments. Many VCs integrate standardized data inquiry processes into the due diligence phase of new investments and request regular updates from existing portfolio companies.
You should adapt your approach depending on the company stage. While established scale-ups often already have ESG data and sustainability reporting processes in place, early-stage startups frequently need support with data collection infrastructure. Here, you can initially work with available proxy data and later obtain more detailed information as companies mature and develop their reporting capabilities.
Prioritizing companies by their risk relevance is also helpful. Companies in climate-sensitive industries like agriculture, real estate, or logistics require more intensive data collection than software startups with a small physical footprint. This focus saves resources and allows you to address the most critical areas first.
Based on this data, you can then move into scenario selection and stress testing.
Selecting appropriate scenarios is crucial for realistically depicting future risks and meeting regulatory requirements. We recommend working with three scenarios: an optimistic 1.5°C scenario, a moderate 2°C scenario, and a scenario with over 4°C warming that considers increased physical risks. These temperature targets align with the Paris Agreement framework established by the United Nations Framework Convention on Climate Change.
For regulatory purposes, you should use scenarios prescribed by supervisory authorities. For internal analyses, external scenarios are suitable, such as those from the Network for Greening the Financial System (NGFS), referenced by institutions like the European Central Bank or the Bank of England. The NGFS, established in 2017, brings together 127 central banks and supervisors to enhance the role of the financial system in managing climate-related risks and mobilizing capital for sustainable growth.
A proven approach is to start with an "Early Action" scenario that simulates limiting warming to 1.5°C through immediate and sustained emissions reductions. Then you can run a "Delayed Transition" scenario for 2°C warming that assumes policy action is delayed but eventually implemented, and finally a "Current Policies" scenario that models higher temperatures and associated physical risks based on existing policy commitments.
The scenarios should be adapted to your portfolio's specific characteristics – including industries, geographical locations, value chains, and operational structures. While many analyses use a 30-year time horizon to capture long-term climate impacts, more supervisory authorities are also employing shorter periods to consider short-term transition risks that could affect near-term financial performance.
The results of these scenarios form the basis for subsequent risk analysis and decision-making.
You must evaluate the obtained data both quantitatively and qualitatively. The goal is to translate results into concrete action recommendations for your portfolio companies. You should not only mitigate risks but also identify investment opportunities that emerge from the transition to a low-carbon economy.
A structured approach begins with assessing risks by probability of occurrence and potential financial impact. Companies with high exposure to physical risks – such as through locations in flood-prone areas or supply chains dependent on climate-sensitive regions – require immediate attention and concrete measures. The World Bank estimates that climate change could push 216 million people to migrate within their own countries by 2050, highlighting the scale of potential supply chain and operational disruptions.
Develop risk mitigation strategies together with the companies. While larger firms can often implement comprehensive adaptation plans including infrastructure upgrades and supply chain diversification, startups need cost-effective solutions that are scalable with their growth trajectory and limited resources.
It's particularly effective to integrate climate risk analysis directly into your investment decision processes. This allows you to expand due diligence procedures to include climate resilience assessments, adjust valuation models to account for climate-related risks and opportunities, and develop targeted support for your portfolio companies – such as through early identification of potential stranded assets or emerging market opportunities in clean technology sectors.
Finally, clear communication of results is crucial. Investors increasingly expect transparency regarding climate risks and measures taken. A precise, data-based presentation of analyses and strategies strengthens trust and facilitates fundraising activities, particularly as institutional investors face their own climate-related disclosure requirements.
Fiegenbaum Solutions supports you in implementing these steps. With tailored consulting and technical expertise, we accompany you from data collection through scenario development to strategic interpretation of results. This allows you to systematically address climate risks while developing sustainable growth strategies.
The EU Taxonomy Regulation relies on precise assessment of climate-related risks to promote sustainable orientations. These requirements are detailed in Annex 1, Appendix A of Delegated Regulation 2021/2139, which establishes technical screening criteria for determining whether economic activities contribute substantially to climate change mitigation or adaptation.
In December 2022, the German Federal Environment Agency published practical recommendations titled "How to perform a robust climate risk and vulnerability assessment for EU Taxonomy reporting?" This guide was written by Lukas Dorsch, Christian Kind, David Fleischmann, Thomas Loew, and Inke Schauser, providing detailed methodological guidance for companies navigating the complex requirements.
For venture capital firms (VCs), this means their portfolio companies must conduct detailed assessments of climate-related risks as part of broader sustainability reporting requirements. The Corporate Sustainability Reporting Directive (CSRD), which came into force in January 2023, extends these requirements to a broader range of companies, including many that may be in VC portfolios. These analyses must not only meet regulatory requirements but also be prepared in clear, structured reports that meet the expectations of your limited partners.
Beyond compliance, transparent communication of results is crucial. Limited partners increasingly value understandable and traceable information about climate-related risks in your portfolios, driven by their own regulatory obligations and fiduciary duties. The Task Force on Climate-related Financial Disclosures (TCFD) framework, established by the Financial Stability Board, has become the global standard for climate-related financial disclosures, influencing investor expectations worldwide.
The goal is to prepare climate risk analysis results in a way that both meets regulatory requirements and provides strategic insights that can inform investment decisions and portfolio management strategies. This dual purpose ensures that compliance efforts generate tangible value beyond mere regulatory adherence.
The technical implementation of such reports requires specific know-how in both climate science and financial reporting standards. Fiegenbaum Solutions supports VCs in efficiently managing these requirements while extracting strategic value from the analyses. The offering ranges from developing tailored reporting frameworks to training your teams on emerging regulatory requirements. This way, compliance becomes not just an obligation but also a driver for informed investment decisions.
Successfully deploying climate risk tools requires clear processes and awareness of potential hurdles. Many venture capital firms underestimate how complex integrating such tools can be and lose sight of important success factors. Therefore, we want to present some concrete measures that facilitate implementation.
Data quality is essential. Without a reliable data foundation, climate risk analyses remain inaccurate and unhelpful. Ensure you thoroughly check and standardize all data sources before starting assessments. This includes uniform collection methods, clearly defined quality standards, and regular validations. The Organisation for Economic Co-operation and Development (OECD) emphasizes that high-quality, comparable data is fundamental to effective climate risk assessment and decision-making.
The gradual introduction of a climate risk tool is often more effective than a comprehensive big-bang approach. Start with a pilot group of portfolio companies that already have solid data foundations and established sustainability practices. This allows you to optimize processes, identify implementation challenges, and gather valuable insights before extending the tool to the entire portfolio.
Training and capacity building are crucial for making your team long-term ready for climate risk analyses. Your investment teams must not only understand the technical aspects of the tools but also build solid knowledge about climate science, risk assessment methodologies, and regulatory frameworks. Plan at least six months for comprehensive training and ensure regular continuing education as the field evolves rapidly.
Seamless integration into your due diligence processes is essential. Instead of treating climate risk analyses as a separate step, anchor them directly in your standard checklists and investment committee materials. This facilitates team acceptance and ensures no assessment occurs without considering climate risks, making climate considerations a natural part of investment evaluation.
Including local conditions is particularly important for VCs in Germany and Europe. Consider the EU Taxonomy, national funding programs, and specific regional risks such as flooding in river valleys or heat stress in urban areas. Providers like Fiegenbaum Solutions can support you in systematically integrating these requirements into your processes and complying with regulatory requirements.
Besides these success factors, there are also typical mistakes that should definitely be avoided.
To avoid compromising the benefits of climate risk tools, you should avoid the following pitfalls:
Don't underestimate physical risks. Many VCs focus exclusively on transition risks like CO₂ prices or regulatory changes and overlook the direct consequences of climate change. But extreme weather, water scarcity, or rising temperatures can have significant impacts on supply chains and operations of portfolio companies. The UN Office for Disaster Risk Reduction reports that economic losses from climate-related disasters have increased dramatically, with annual losses now exceeding $100 billion globally. Even companies that appear climate-resilient can face considerable problems due to disrupted supply chains or infrastructure failures.
Misjudging regulatory timelines is a common mistake. Implementing comprehensive climate risk analyses often takes 12 to 18 months, while many VCs only plan for six to nine months. This leads to unnecessary stress when deadlines approach and can result in rushed implementations that compromise data quality and analytical rigor.
Considering too few scenarios weakens the meaningfulness of your analyses. Standard climate scenarios are often insufficient for capturing company-specific risks and opportunities. Therefore, also develop company-specific stress tests that reflect the unique characteristics of each investment. A logistics startup has completely different risks than a software company – even if both are affected by climate change through different pathways.
Without integration into investment decisions, even the best analyses lose impact. Climate risk assessments must not be seen as mere compliance exercises or box-ticking activities. They must actively flow into valuations, deal structuring, and ongoing portfolio management. Set clear thresholds for different risk levels and define escalation processes for different risk classes to ensure systematic follow-up on identified issues.
Communication errors toward portfolio companies can also be problematic. If you present climate risk analysis to companies as purely regulatory requirements, you'll quickly encounter resistance and limited cooperation. Instead, you should emphasize the strategic benefits, including improved operational resilience, access to green financing, and competitive advantages in increasingly sustainability-conscious markets. Companies that recognize the added value provide better data and implement your recommendations more consistently.
Considering climate risks in portfolio assessment is indispensable for venture capital firms in Germany and Europe today. Stricter regulatory requirements and growing challenges from physical and transitional climate risks require robust valuation models that incorporate these factors systematically and comprehensively.
Successful VCs see climate risk assessments not just as an obligation but as a strategic advantage to identify future-proof investments. Portfolio companies with solid climate strategies benefit from better operational results, more favorable financing conditions, and enhanced competitive positioning in markets increasingly focused on sustainability. At the same time, early recognition of climate risks enables timely action to avoid potential losses and capitalize on emerging opportunities in the low-carbon transition.
The technology is ready and based on precise data. Modern tools provide the necessary foundations for making informed decisions, with sophisticated modeling capabilities and comprehensive data coverage that was unimaginable just a few years ago. However, systematic introduction is crucial, encompassing clear processes, sufficient time for implementation, comprehensive team training, and ongoing refinement based on experience and evolving best practices.
A central success factor is the integration of these analyses into existing due diligence processes. The insights gained should consistently flow into investment decisions, from initial screening through ongoing portfolio management. VCs that view climate risk tools as strategic opportunities rather than just regulatory necessities can make their portfolios more resilient, identify emerging market opportunities, and achieve higher long-term returns while contributing to the broader transition to a sustainable economy.
Now is the right time to act. With a clear strategy, appropriate tool selection, and deep understanding of regulatory and market requirements, you can not only protect your portfolios against climate risks but also unlock new opportunities in the rapidly evolving sustainability landscape. By integrating comprehensive climate strategies, you lay the foundation for sustainable and future-oriented portfolio development that delivers value to all stakeholders.
For venture capital investors, climate risk assessment tools are invaluable as they enable detailed analyses at both portfolio and company levels. Particularly helpful are platforms based on established climate scenarios that include both physical risks like extreme weather events and transition risks, such as regulatory changes and market shifts toward low-carbon alternatives.
Available solutions include specialized tools that allow flexible and in-depth risk analyses tailored to the unique characteristics of private companies. Many of these tools integrate comprehensive climate data, offer sophisticated scenario analyses, and enable quantitative risk modeling with financial impact assessments. They support investors in identifying climate-related risks early and managing them strategically – a central building block for long-term success in Germany and Europe's evolving regulatory landscape.
VCs can meet EU Taxonomy Regulation requirements by conducting targeted climate risk analyses that comply with the regulation's detailed specifications and technical screening criteria. The focus is primarily on how portfolio companies contribute to the EU's six environmental objectives – such as climate protection, climate change adaptation, or the transition to a circular economy – while ensuring they do no significant harm to other environmental objectives.
Additionally, it's important to comply with the regulation's comprehensive reporting and disclosure obligations, which require detailed documentation of assessment methodologies and results. This enables systematic identification of relevant climate risks and their financial impacts while supporting portfolio companies in their own compliance efforts. Close collaboration with portfolio companies, regular data quality reviews, and engagement with specialized advisors help efficiently integrate taxonomy requirements into investment processes and ongoing portfolio management.
To ensure your climate risk analyses are based on a solid foundation, you should rely exclusively on verified and reliable climate data sources from established providers and scientific institutions. It's crucial to regularly update data and maintain it in standardized formats that facilitate integration across different analytical tools. This not only facilitates consistency but also comparability – an essential factor for meaningful analyses and regulatory compliance.
Another central point: quality controls and validation processes. These should be integral parts of your analysis workflow to identify and avoid potential errors early in the process. Additionally, independent audits and third-party verification can provide valuable support in ensuring the integrity of used data and the robustness of analytical methodologies.
Furthermore, there are specialized tools and software specifically tailored to VC requirements that incorporate built-in data quality checks and validation procedures. These help assess climate risks precisely and make informed decisions – a clear advantage in an area where accuracy and reliability are paramount for both investment success and regulatory compliance.