Integrating Climate Risks into Financial Planning: Key Insights for EU Companies

Climate risks cost Germany billions every year. Companies must integrate these risks into their financial planning to minimize damage and comply with regulatory requirements. Here are the key points:

• Climate damages in numbers: Between 2000 and 2021, climate risks caused average damages of €6.6 billion per year. Extreme weather events such as floods and droughts led to massive losses in agriculture, industry, and private households. Notably, the German Federal Ministry for Economic Affairs and Climate Action reported that the 2018 drought alone resulted in agricultural losses exceeding €770 million, underscoring the growing frequency and severity of such events (source).
• Regulatory pressure: Companies must comply with the TCFD recommendations, the EU taxonomy, and MaRisk requirements. Large corporations in particular face reporting and adaptation pressures. The Corporate Sustainability Reporting Directive (CSRD) will soon expand these obligations to thousands of medium-sized firms across the EU, intensifying the need for robust climate risk integration (source).
• Integration into CAPEX/OPEX: Capital and operating expenditures (CAPEX/OPEX) are increasingly affected by climate risks. Scenario analyses and risk models such as Monte Carlo simulations help quantify these risks. According to the European Central Bank, over 80% of European firms expect climate change to impact their business models and investment decisions within the next five years (source).
• Physical and transition risks: Damage to infrastructure, production outages, and CO₂ pricing put a strain on companies. Adapting business models and site assessments are essential. For example, the introduction of the EU Emissions Trading System (ETS) has led to rising carbon costs, directly affecting operational budgets and necessitating strategic shifts (source).
• Actions: Companies should establish clear governance structures, scenario analyses, and regular financial plan updates. Collaboration between finance and sustainability departments is crucial. The World Economic Forum emphasizes that cross-functional teams are vital for translating climate data into actionable financial strategies (source).

A concrete case study illustrating the damage to businesses and infrastructure is the Ahr Valley flood in July 2021:

On the night of July 14 to 15, 2021, exceptionally heavy rainfall hit the Ahr Valley in a short period, leading to extreme flooding. The consequences for businesses and infrastructure were devastating:

• Business damages: In the Ahr Valley, around 3,000 businesses were directly affected, including many hotels, restaurants, shops, and wineries. Of the 65 commercial wine producers in the Ahr region, only three remained unscathed. In total, about 17,000 people in the valley lost all their belongings, impacting many self-employed and business owners. Damages to commercial enterprises as well as agriculture and forestry in Rhineland-Palatinate alone amounted to around €1.2 billion.
• Infrastructure damages: Over 9,000 buildings and more than 100 bridges were destroyed or severely damaged in the Ahr Valley. The entire transport infrastructure was massively affected: federal highways such as the A1 and A61 were closed for months, all railway bridges in the Ahr Valley were destroyed, with a total of around 600 kilometers of tracks, over 50 bridges, 180 level crossings, and nearly 40 signal boxes damaged or destroyed. At times, 165,000 people were left without electricity and water, and telephone and internet lines were widely disrupted.
• Long-term consequences: The reconstruction of infrastructure is still ongoing. Many businesses could only reopen after months or years, and some had to close permanently. The damage to public infrastructure in the Ahr Valley was estimated at around €6 to €7 billion, with total damages in Rhineland-Palatinate at more than €18 billion.

This example vividly demonstrates how natural disasters like the 2021 Ahr Valley flood can severely impact not only private households but also businesses and the entire infrastructure of a region, with consequences shaping reconstruction for years to come. According to the European Environment Agency, such events are expected to become more frequent and costly due to climate change, highlighting the urgent need for proactive adaptation (source).

EU Regulations

In recent years, the requirements for integrating climate risks into CAPEX and OPEX assessments have become significantly stricter. Companies must comply with both national and EU-wide regulations. These requirements form the basis for the following regulatory demands. The European Green Deal and the Sustainable Finance Disclosure Regulation (SFDR) further reinforce the need for transparent climate risk reporting and integration into financial decision-making (source).

CAPEX/OPEX Regulatory Requirements

The TCFD (Task Force on Climate-related Financial Disclosures) has defined four main areas relevant for assessing climate-related risks: TCFD recommendations and integration.

The TCFD requirements are closely linked to the reporting obligations of the CSRD. Many of its concepts, such as scenario analysis or the separation of physical and transition risks, have been adopted into the European Sustainability Reporting Standards (ESRS). As a result, these will soon become mandatory for many medium-sized companies as well. For more on ESRS, see a complete overview of ESRS standards. A study of the 100 largest German companies shows that especially DAX-30 companies largely align their reporting with TCFD recommendations. The focus is more on transition risks than on physical risks. German business standards specify these requirements and provide practical guidelines for sustainability reporting.

German Business Standards

The German Environment Agency provides a transparent basis for assessing physical climate risks through regular updates. The key requirements include:

• Sustainability reporting with clear principles
  Reporting is based on criteria such as relevance, specificity, clarity, consistency, comparability, reliability, and timeliness. These principles ensure the quality of CAPEX and OPEX assessments.
• Assessment of climate risks through scenario analyses
  Companies must test the resilience of their strategies under different climate scenarios, including scenarios with a temperature increase of no more than 2°C.

"The TCFD recommendations lay the groundwork for a better understanding of companies’ climate-related risks and ultimately lead to better-informed markets, more accurate pricing, and greater financial stability." – Loh Boon Chye, Chief Executive Officer, Singapore Exchange

The TCFD Knowledge Hub provides companies with practical support for implementing these recommendations (source).

Climate Risk Categories and Financial Impacts

Based on the regulatory framework, the following categories show how climate risks can impact finances.

Direct Physical Risks

Between 2000 and 2021, climate change caused average damages of €6.6 billion per year in Germany. The main physical risk factors and their financial consequences can be summarized as follows:

After the devastating flood in May 2023 in the Emilia-Romagna region, a logistics company was forced to rethink its site strategy. Over 500 damaged roads and a drastic 30% drop in delivery performance forced the company to take new approaches:

• Relocation of storage capacity: Critical goods are now stored in higher regions or on flood-safe floors – outside floodplains.
• Supplier diversification: Dependence on a single, particularly vulnerable region was reduced. New partners in less affected areas were integrated.
• Investments in protection systems: Existing sites were retrofitted with mobile barriers, backflow preventers, and emergency plans.

This example shows: Climate adaptation should ideally begin with strategic site selection, not just after a disaster occurs. The World Bank highlights that every dollar invested in resilience can yield up to four dollars in avoided losses (source).

Market and Policy Changes

In addition to physical risks, changes in markets and political frameworks also affect financial planning. Transition risks, such as market changes and stricter environmental regulations, require adjustments in capital and operating expenditures. Studies show that German companies are increasingly suffering from the effects of climate change. For instance, a 2023 survey by the German Chamber of Commerce and Industry found that over 60% of German firms see climate policy as a significant factor influencing their investment decisions (source).

Comparison of Risk Impacts

The following tables summarize the short- and long-term effects of different risk types:

Incorporating various climate scenarios enables better estimation of financial consequences and supports the development of effective adaptation strategies.

Climate Risk Integration Process

Risk Analysis Methods

A structured approach is necessary to systematically capture climate risks. A proven method is the Monte Carlo simulation, which enables modeling of quantifiable risks and precise calculation of their impact on CAPEX and OPEX. Learn more about climate risk assessment and management.

The results of these analyses flow directly into financial planning.

In practice, however, companies often face significant challenges: the availability of reliable climate data – especially at the regional level – is limited. Many analyses are therefore based on estimates or cross-sector assumptions, increasing uncertainty in assessments. Close cooperation with external data providers is therefore recommended. The European Environment Agency offers open data portals to help bridge these gaps (source).

Integration into Financial Planning

The integration of climate risks into financial planning is achieved by using statistical distribution functions based on historical data, empirical values, and specific project data. The calculated quantile value of Value at Risk (VaR) provides an accurate financial assessment. This method enables continuous adjustment and optimization of financial plans.

Updating Financial Plans

Regular review and adjustment of risk models is essential. Companies should align their models with the structured approach of the PIEVC catalog, published in November 2022 by the International Climate Initiative (IKI). A practical example: DAX-30 companies update their models in line with TCFD recommendations.

Implementation Recommendations

Based on the previous analyses, the following recommendations outline concrete measures to integrate climate-related risks into financial planning. These complement the previously explained risk models and financial plan adjustments.

Methods for Data Analysis

Capturing and analyzing climate-related risks requires a clearly structured approach. It is important to distinguish between physical climate risks and transition risks arising from climate policies.

This data forms the basis for cross-departmental collaboration and the definition of clear responsibilities within team coordination.

Team Coordination

Effective collaboration between finance and sustainability departments requires clear responsibilities, regular data exchange, and targeted training:

• Data exchange: Establishment of a central database for climate-relevant metrics and efficient communication channels.
• Training: Employee training on interpreting climate scenarios and their impact on financial planning.

In addition to internal alignment, compliance with external regulations plays a decisive role.

Regulatory Requirements

German Environment Agency: "Companies see themselves as more affected by risks from climate protection policies than by risks from climate change itself."

To meet changing regulatory requirements, the following steps should be implemented:

Adapting to new regulations remains an ongoing process. In particular, the assessment of physical climate risks should be further improved, as there is still potential here.

A key obstacle remains data management: companies need reliable sources for climate-related metrics – from physical site data and regional extreme weather forecasts to CO₂ price scenarios. Especially the assessment of Scope 3 risks requires intensive coordination with suppliers and external partners. Building robust data flows is therefore a strategic success factor. For guidance on Scope 3 emissions, see mastering measuring and reporting for financed emissions.

Summary

Considering climate-related risks in CAPEX and OPEX assessments requires a clearly structured approach that incorporates both physical and transition-related impacts. The analysis highlights the following focus areas:

This table summarises the key risk categories and recommended actions described in detail in the previous sections.

The German Environment Agency notes: "The financial impacts of climate-related risks for non-financial institutions are not always immediately apparent, and there are challenges in assessing, quantifying and managing these risks."

Three main areas are in focus:

• Data Management and Analysis: Companies need precise data collection and modelling frameworks to better assess climate-related financial risks.
• Regulatory Requirements: Compliance with standardised frameworks is essential.
• Strategic Alignment: Business models must be reviewed for climate resilience, as investors expect detailed information to make informed decisions.

Collaboration with the finance department is essential. Especially important is the connection between financial and non-financial information within integrated reporting. These approaches help companies strategically incorporate climate risks into their long-term financial planning.

This summary serves as a foundation for the frequently asked questions answered in the next section.

Frequently Asked Questions

Here we answer key questions about integrating climate-related risks into financial planning, based on the preceding analyses.

Impacts of Integrating Climate Risks

Considering climate-related risks has direct effects on financial planning. Studies show that by 2021, annual damages averaged €6.6 billion, with cumulative losses amounting to €145 billion.

"Companies perceive themselves to be more affected by risks from climate protection policies than by the risks of climate change itself." – German Environment Agency

Differences Between Physical and Transition Risks

The distinction between physical and transition risks is critical. Each type has distinct characteristics and financial consequences:

Executives in Germany already report noticeable impacts, according to studies.

Tools for Climate Risk Analysis

There are three key tools for assessing climate risks:

• Climate Risk Sourcebook (CR-SB): Offers regional risk assessments with eight standardised modules.
• PACTA software: Evaluates investment portfolios in relation to climate scenario alignment.
• PIEVC High Level Screening Guide: Supports initial assessments of climate risks and resilience.

Under the Corporate Sustainability Reporting Directive (CSRD), extended reporting obligations now also apply to medium-sized enterprises with more than 250 employees.