What does "climate risk" refer to?

Climate risk refers to the potential financial impacts associated with climate change-related events, which encompasses a range of risks that companies and investors face as a result of changing climate conditions. These risks can manifest in various forms, such as physical risks from extreme weather events (hurricanes, floods, droughts) that can damage property or disrupt operations, and transition risks that arise from the shift towards a low-carbon economy, including changes in regulations, market preferences, and technology.

Recognizing climate risk is critical for organizations as it allows them to make informed decisions regarding their strategies, investments, and reporting. Implementing measures to mitigate climate risk can not only reduce potential losses but also position a business advantageously in a rapidly evolving landscape. Understanding this concept is essential for effective sustainability accounting, as it helps organizations assess and report on their resilience to climate change and the associated financial implications.