Climate risk management: Rising costs, rising stakes – Part 1
Companies that fail to fully integrate climate risk internally into their business model and financial planning face mounting exposure to material losses, operational breakdowns and reputational damage. ”Ed PackshawHead of Risk, reporting and communications
Part 1 of 2 – Understanding the importance of climate risk management
The juxtaposition between growing anti-ESG sentiment and the escalating financial impact of climate-related disasters presents a striking contradiction in today’s business and policy environment. While some political and corporate voices frame ESG as a distraction or burden, the real-world costs of inaction are increasing. But equally, for companies treating climate action as a compliance box-tick, the risks are far from neutralised. True long-term resilience is not built through reporting obligations alone—it comes from embedding climate risk into governance, planning and decision-making at every level. As global temperatures continue to rise past the 1.5°C threshold above pre-industrial levels—and inflationary pressures persist— the financial risks for businesses will only intensify.
The financial toll of climate change has surged in recent years. From billion-dollar wildfires and floods to droughts and hurricanes, extreme weather events are disrupting supply chains, driving up insurance premiums and triggering asset impairments. These impacts are being felt across the global economy, creating significant strain on a range of industries and sectors.
The UK experienced its wettest 18 months on record¹, submerging thousands of acres of farmland and leading to the loss of crops and animals. The Climate Change Committee expects the impact of this to continue well into 2025. Last year, property insurers paid out £1.2bn on claims attributed to climate-related disasters, the highest level since 2007². In response to a series of natural disasters in Florida last year, including wildfires and hurricanes, the US Congress allocated over $100 billion in emergency relief.³ This placed significant strain on public finances and added pressure on insurance providers, who faced more than $40 billion in payouts.⁴ As a result, insurers have sharply raised premiums—leaving many US homeowners unable to afford coverage. A former California insurance commission has gone so far as to describe the situation as an emerging “uninsurable future”.⁵ Europe experienced its hottest year on record in 2024, with an estimated €18bn in damages from climate-induced storms and flooding⁶.
£1.2 billion
was paid out by property insurers in the UK last year on claims attributed to climate-related disasters—the highest level since 2007.
Over $100 billion
was allocated by the US Congress in emergency relief in response to wildfires and hurricanes in Florida last year.
18 months
of record-breaking rainfall made the UK’s recent stretch its wettest ever, submerging thousands of acres of farmland and leading to the loss of crops and animals.
€18 billion
in damages were estimated in Europe in 2024 from climate-induced storms and flooding, during its hottest year on record.
These impacts put ‘business-as-usual’ at significant risk for corporates that should spark adaptive action, emphasising the value of climate-risk management strategies and climate transition planning.
Investors are also becoming increasingly concerned about this inaction—particularly from financial institutions—which has left many portfolios and business models exposed to risks that could significantly affect performance and long-term value.⁷
Alarmingly, a recent survey found that less than half of large companies worldwide have published a transition plan to tackle climate-related risks.⁸ This is particularly surprising given that major regulations—such as the Corporate Sustainability Reporting Directive (CSRD) in the European Union and the UK Sustainability Reporting Standards (UK SRS)—explicitly mandate the disclosure of climate risks. These regulations have been adopted or mirrored by regulators in most major nations. Yet, these legislations often provide only a baseline view of climate risks, leaving significant blind spots—especially within a company’s value chain. Businesses that focus solely on meeting minimum compliance requirements risk overlooking critical medium-term and supply chain vulnerabilities. In doing so, they fail to build long-term resilience against the evolving impacts of climate change.
Climate impacts are no longer distant or theoretical—they are immediate-strategic risks. Businesses must go beyond surface-level assessments and take a holistic view of their entire value chain, identifying both vulnerabilities and opportunities. This is crucial not just for managing current exposures, but for ensuring the long-term resilience of the business model. They pose direct threats to physical assets, operational continuity, supply chains, and even workforce safety.
Looking deeper into the value chain, many businesses—especially in sectors like agriculture, logistics, and the built environment—face hidden vulnerabilities. These often stem from dependencies on key suppliers who themselves may be exposed to significant climate-related risks, such as extreme weather or water scarcity.
Take early 2024,for example: severedroughtsinCentral and Southern Europe—particularly along theRhine and Danube rivers—disrupted inland waterway transport. Companies like Maersk, which rely heavily on these routes to move goods across the key inland ports, were forced to reroute shipments, reduce cargo loads and absorb higher trucking costs. These disruptions led to multi-million-euro losses in its European logistics operations.⁹Maersk publicly attributed the fallout to climate variability and underscored the need for resilient infrastructure and climate-adaptive supply chain strategies.¹⁰
The takeaway is clear: companies that fail to fully integrate climate risk internally into their business model and financial planning—especially by assessing their full value chain— face mounting exposure to material losses, operational breakdowns and reputational damage. A value chain-wide review of climate risk enables businesses to safeguard continuity, seize strategic opportunities and strengthen commercial resilience. This process will also identify opportunities to improve financial performance and align with the net zero economy, which the CBI described as ‘one of the most significant economic opportunities of our time¹¹.
Understanding climate risk and the impact on businesses
Climate risks are disruptions to business operations and financial performance resulting from the effects of climate change. These risks fall into two main categories:
Physical risks: such as rising sea levels, extreme heat, floods and other severe weather events
Transition risks: resulting from regulatory shifts, technological change or evolving market expectations in the move toward a low-carbon economy
The financial impact of these risks is often interconnected and can have a ripple effect across supply chains, industries and markets. Disruptions in one part of the supply chain can rapidly spread, affecting production, distribution, and ultimately profitability.
Below are some examples of how climate change is directly affecting businesses:
Rising temperatures: Global temperature increases are driving upcooling and energy demands, particularly for data centres and manufacturing facilities. Outdoor industries such as construction and agriculture are experiencing reduced worker productivity and wellbeing, while equipment failures due to overheatingare becoming more common.
Drought: Prolonged droughts are disrupting agricultural supply chains by reducing crop yields and stressing water availability. This raises operating costs for water-intensive sectors like food and beverage, textiles, and pharmaceuticals, threatening both short-term output and long-term resource security.
Flooding and cyclones: Extreme weather events are causing physical damage to infrastructure, logistics hubs, and retail properties. These events lead to operational shutdowns,transport network disruptions, and higher insurance premiums, increasing both direct and indirect business costs.
Rising sea levels: Gradual sea-level rise threatens coastal infrastructure, including ports, real estate assets, and tourism facilities. Businesses operating in low-lying areas face increased compliance and adaptation costs and may need to restructure supply chains as flood exposure grows.
These effects extend well beyond the agricultural sector, with implications for manufacturing, retail, logistics, and finance. The financial consequences are not isolated—they can destabilise markets, erode investor confidence, and undermine company profitability.
To navigate these increasingly complex and systemic risks, businesses are turning to established climate risk frameworks and regulations to drive climate resilience. While global regulations have established a baseline of climate resilience in corporate businesses, true resilience depends on how well companies embed the framework’s guidance into everyday decision-making and long-term planning. But these tools are only as effective as the commitment behind them. Companies that treat them as strategic enablers—not checklists—are better positioned to adapt, lead, and grow in a volatile climate.
