Corporate disclosures on physical climate risks

Since 2017, when the TCFD recommendations were published, thousands of companies have carried out physical climate risk analysis with materiality assessments.

Starting in FY 2022, listed companies began to include climate-related disclosures in their annual filings. While this type of information has long been familiar to insurance companies, for many other sectors it represents a new challenge. One challenge is identifying the right data vendor; another is consolidating climate risk information across all operations.

We wonder: what do these disclosures look like? And more specifically, which metrics, and numbers have been published?

To answer these questions, we collected thousands of corporate sustainability reports and annual financial statements and processed them using our in-house analytics software.

Before reviewing the results, it would useful to remind what companies are expected to disclose under the TCFD, IFRS/ISSB, the EU Taxonomy, and the CSRD/ESRS. Which “hazards” are referenced for physical climate risk assessments? There include:

- riverine and pluvial flooding
- sea-level rise
- severe storm
- cold stress
- heat wave
- drought
- landslide
- wildfire
- extreme rainfall
- changes in temperature patterns
- changes in precipitation patterns

In our FAQ we have an article discussing these weather-related parameters, climate indices and hazards. 

Our analysis of corporate disclosures of listed companies, including those in mineral mining, agriculture, pharmaceuticals, chemicals, construction, data centers, banking, insurance, and IT, shows that almost nine out of ten companies disclose their physical climate risks. Eight out of ten companies explicitly mention water-related issues. Six to seven out of ten companies mention flooding and drought. While very few companies refer to direct physical damage caused by climate risks, eight out of ten companies report disruptions and financial implications related to climate risks. Eight out of ten companies have also performed forward-looking scenario analyses of their physical climate risks. These results are presented below in six pie charts.

 

Which hazards do companies include in their reporting and disclosures?

As we expected, companies report more extensively on flood risk than on other hazards. Flooding is the most well-known physical climate hazard, partly because it is commonly covered and priced in standard insurance contracts. Heatwaves, heat stress, storms, and drought are also systematically mentioned in physical climate risk analyses, although often with less quantitative detail than flood risk. These results are presented below in the bar plot.

 

How many assets do companies assess for climate risk exposure?

Also it was also of interest to understand how many facilities companies include in their physical climate risk assessments. We found that only five out of ten companies disclose the number of locations (sites or facilities) assessed; the others do not report any figures. Notably, this represents significant progress compared with FY 2023.  Among companies that do disclose this information, around 80% assess fewer than 100 assets, and only 2% have carried out assessments covering more than 1,000 locations. In practice, companies typically apply physical climate risk analyses to their most important or critical facilities, representing only a fraction of the total assets they operate. And this is both logical and pragmatic.

 

 

What have we learned from reviewing these corporate reports?

Compared with the previous two years, 2024 marks a significant improvement in the disclosure of physical climate risks. A growing number of companies now include this information in their annual reports, and the level of detail and clarity have improved.

Do we have any recommendations for those starting this journey?

Eventually, yes, we would recommend starting with a limited number of climate hazards, for example flood and drought only. The list of hazards should be realistic. When too many hazards, metrics, and indicators are included at once, key messages risk being diluted or lost. 

By the way, this is exactly what central banks and retail banks do. For climate stress testing, they typically consider only four climate hazards. Even though central banks regulate how companies disclose climate risks, their own experience shows that in practice, they found climate data for only four hazards, and only at headquarter locations level rather than across factories and facilities. 

Chasing data for all possible types of hazards is counterproductive and can undermine the credibility of the entire exercise.

Another pragmatic recommendation is to prioritize the most important or critical facilities during the initial phase. There is no need to assess the entire  portfolio at the outset. Instead, companies should focus on a limited number of irreplaceable facilities, where physical damages and disruptions could lead to severe or irreversible impacts on the business.

Finally, when interviewing and selecting a climate data vendor, always ask for examples of climate data, for instance, flood risk maps for YOUR locations, not for random or irrelevant sites. If a vendor cannot even share their screen to demonstrate an analysis for YOUR locations, not even one, and if they do not have flood risk maps available, no maps, this is a red flag, you may need to look for another provider. There are very good providers offering high-quality data, professional support, and democratic pricing.

Regarding climate-related delays and disruptions across the supply chain, companies do frequently highlight this issue; however, they rarely provide any quantitative assessment or supporting financial metrics.