Climate change is no longer a distant concern for people, the planet, and businesses. It has become a present-day financial and operational risk. Experts warn that climate change will cost the global economy $38 trillion in damages annually within the next 25 years. European businesses are already experiencing extreme weather events, supply chain disruptions, and regulatory pressures. In the EU, weather- and climate-related extremes have caused economic losses estimated at €738 billion from 1980 to 2023, with over €162 billion (22%) occurring between 2021 and 2023. With severe climate-related events intensifying, assessing climate risk has become a business necessity.
Under the EU Taxonomy, companies are required to assess physical climate risks and implement adaptation strategies to align with sustainability goals. But how prepared are European businesses to meet these obligations?
Climate risks for businesses fall into three categories: physical, transition, and liability risks. Physical risks include direct damage caused by extreme weather events such as floods, heatwaves, wildfires, and rising sea levels. Transition risks arise from policy changes, carbon pricing, and shifts in consumer demand as economies move away from fossil fuels. While climate risk assessments usually focus on physical and transition risks, businesses should also be aware of liability risks, which stem from failure to mitigate or disclose climate risks, potentially leading to regulatory fines and lawsuits.
Nearly 5 years ago, in 2020/2021, the EIB Investment Survey offered insights into how European firms perceive climate risk. It was found that nearly 60% of European firms believe climate change poses a physical risk, compared to 50% in the United States. Additionally, around 45% of EU firms have invested in climate change measures, compared to just 32% of US firms. The survey showed that despite these efforts, uncertainty over regulation and taxation is a hamper to climate investments, particularly for European firms.
Currently, European regulations require businesses to assess and disclose climate risks. The Corporate Sustainability Reporting Directive (CSRD) requires large companies to assess and report physical climate risks, transition risks, and adaptation strategies. Compliance for large public companies began in 2024, with first reports expected now in 2025. By 2026, small and medium enterprises (SMEs) will also be subject to reporting requirements. Under the Sustainable Finance Disclosure Regulation (SFDR) financial firms must disclose climate risks in their investment portfolios.
Compliance with these regulations requires firms to conduct Climate Risk and Vulnerability Assessments (CRVAs), which evaluate exposure to climate risks and identify adaptation strategies. Effective CRVAs are essential for business strategy, offering significant benefits such as reducing financial losses by identifying risks early to prevent costly damages, ensuring regulatory compliance with EU requirements to avoid fines and legal issues, enhancing investor and consumer confidence by demonstrating environmental responsibility, and strengthening supply chain resilience by anticipating and mitigating disruptions caused by climate-related challenges like energy volatility and infrastructure damage.
Despite growing awareness, challenges remain in integrating CRVAs into business operations. One concern is data quality and availability as many firms struggle to access reliable climate risk data. Without accurate data, businesses may miscalculate their vulnerabilities and fail to implement effective adaptation measures. In the short term, companies are facing high compliance costs. SMEs, in particular, are concerned about financial and technical challenges in conducting CRVAs and meeting regulatory requirements. Furthermore, the readiness of European businesses to comply with climate risk regulations varies across sectors. The financial sector, real estate, and infrastructure industries are at the forefront of climate risk assessments due to their direct exposure. In contrast, manufacturing and SMEs are falling behind, hindered by limited technical expertise and resources.
To stay ahead, businesses should invest in climate risk data analytics. By leveraging AI-driven risk models, companies can improve CRVAs and provide real-time risk assessments. This could also support regularly conducting CRVAs as climate risks evolve, and businesses must continuously update their risk assessments to remain resilient. Finally, businesses must seriously integrate climate risk into their corporate governance and decision-making processes for long-term sustainability. While currently, many companies are already disclosing climate risks, fewer are taking concrete actions to mitigate them. The CDP Corporate Health Check 2025 found that while businesses are improving in disclosure, only one in ten is embedding climate considerations into their business models. Similarly, only one-third of companies are on track to achieve emissions reduction targets. This highlights the need for businesses to move beyond assessment and disclosure.
As the first CSRD reports emerge in 2025, businesses will gain valuable insights into best practices for climate risk management. Yet, Brussels’ push to simplify sustainability regulations, including the CSRD, through its omnibus proposal raises concerns about deregulation at the expense of people and the planet. However, regardless of policy shifts, climate risks remain, making CRVAs essential for long-term resilience and competitiveness. The true challenge lies not only in assessing risks but in translating insights into meaningful action for lasting sustainability.
