Green Finance Engagement Team

The third primer in our GSF Spotlight series explores climate-related risks – how to identify, assess, and manage the financial impacts of climate change.
The effects of climate change are being felt across the globe, and understanding climate-related risks has become crucial for sound financial decision-making.
What are Climate-related Risks?
Climate-related risks refer to the potential impacts resulting from climate change. These may affect businesses, investments, and the broader economy through both physical changes to our environment as well as the transition to a low-carbon economy.
The Taskforce on Climate-related Financial Disclosures (TCFD) divides climate-related risks into two major categories:
Physical Risks:
- Acute risks: Event-driven, such as increased severity of extreme weather events (cyclones, hurricanes, floods).
- Chronic risks: Longer-term shifts in climate patterns (such as sustained higher temperatures) that may cause sea level rise or chronic heat waves.
Transition Risks:
- Policy and legal changes: Evolving climate policies, regulations and potential litigation.
- Technology risk: Innovations that support the low-carbon transition and their impacts on organisations.
- Market risk: Shifts in supply and demand for certain commodities, products and services as climate-related risks and opportunities are taken into account.
- Reputation risk: Changing customer or community perceptions of an organisation’s contribution to or detraction from the low-carbon transition.
Key Developments
2024 was the hottest year on record with a global average surface temperature of 1.55°C above pre-industrial temperatures, according to the World Meteorological Organisation (WMO).
The World Economic Forum (WEF) Global Risks Report 2025 also ranked extreme weather events as the second most critical risk on a two-year horizon, and the top risk over the next decade.
Global Disclosure of Climate-related Financial Risks
International Sustainability Standards Board (ISSB) and TCFD:
The TCFD, established by the Financial Stability Board in 2015, provided a globally recognised framework for companies to disclose climate-related financial risks. Supported by nearly 5,000 organisations worldwide, the TCFD recommendations have now been fully incorporated into the standards developed by the International Sustainability Standards Board (ISSB).
The ISSB standards, which include the IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and S2 (Climate-related Disclosures), officially launched in 2023 and now serve as the global baseline for sustainability-related financial disclosures.
IFRS S2 requires companies to report on climate-related risks and opportunities, fully integrating the TCFD’s four pillars of Governance, Strategy, Risk Management, and Metrics & Targets.
Hong Kong
From January 1, 2025, the Hong Kong Exchanges and Clearing Limited (HKEX) will require all listed companies to make climate-related disclosures in alignment with IFRS S2.
Mandatory disclosure of Scope 1 and Scope 2 greenhouse gas (GHG) emissions will be required for all issuers for financial years commencing on or after January 1, 2025.
For large-cap issuers, additional climate-related disclosures – including Scope 3 emissions –will be required on a “comply or explain” basis from 2025, with mandatory disclosure of Scope 3 emissions commencing for financial years beginning on or after January 1, 2026
European Union: ESRS and CSRD
The European Union’s Corporate Sustainability Reporting Directive (CSRD) requires large companies and listed entities to disclose sustainability information using the European Sustainability Reporting Standards (ESRS), developed by EFRAG. The ESRS became mandatory for the first wave of companies for financial years starting in 2024, with phased implementation for other entities.
ESRS E1 specifically addresses climate change, with disclosure requirements for climate-related impacts, risks, opportunities, greenhouse gas (GHG) emissions (Scope 1, 2, and 3) as well as transition plans.
The Network for Greening the Financial System (NGFS)
The NGFS is a coalition of over 140 central banks and supervisors, launched in 2017 to strengthen the global response to meet the goals of the Paris Agreement and to enhance the role of the financial system to manage climate and environmental risks. The NGFS develops climate scenarios and methodologies used by financial authorities and institutions around the world.
Why Should Companies and Investors Care about Climate-related Risks?
For Companies:
- Identify vulnerabilities in operations, supply chains, and markets that could be affected by climate change.
- Stay ahead of evolving disclosure requirements and meet stakeholder expectations.
- Gain a competitive advantage through proactive adaptation and resilience planning.
For Investors:
- Improve risk assessment and management within investment portfolios.
- Identify opportunities in climate-resilient sectors and companies.
- Support sustainable, climate-aware strategies that can improve long-term returns.
How to Get Started
For Companies:
- Assess Climate Exposure:
- Map physical and transition risks across assets, operations, and supply chains.
- Identify sector-specific risks and opportunities.
- Review and understand relevant disclosure standards (e.g., ISSB, TCFD, ESRS).
- Develop Climate Risk Strategies:
- Conduct scenario analysis under different climate futures.
- Integrate climate considerations into governance and decision-making.
- Set measurable climate risk metrics and targets.
For Investors:
- Integrate Climate Risk into Investment Processes:
- Develop and apply climate risk assessment tools and methodologies.
- Evaluate portfolio exposure to sectors and assets most at risk.
- Incorporate climate scenarios into asset allocation and investment decisions.
- Strengthen Climate Risk Management:
- Engage with investee companies on climate risk disclosure and management.
- Use climate data and analytics in financial analysis and reporting.
- Set clear climate risk limits or thresholds for investment portfolios.
Conclusion
The assessment and management of climate-related risks are now essential components of financial decision-making. As climate impacts intensify and regulatory requirements continue to evolve, the ability to effectively identify, measure, and manage climate risks will be crucial for financial resilience and long-term value creation.