What is Climate Risk Disclosure?

What is Climate Risk Disclosure?

Climate risk disclosure is the systematic reporting of climate-related financial risks and opportunities to investors, regulators, and other stakeholders. It covers physical risks (damage from extreme weather, sea-level rise, chronic heat), transition risks (policy changes, technology shifts, market repricing), and the strategies organizations use to identify, assess, and manage these risks. Disclosure frameworks have evolved from voluntary guidance to mandatory regulation across major economies.

Why It Matters

Capital markets cannot price risk they cannot see. Before structured climate disclosure, investors had limited visibility into how climate change affected portfolio companies — creating systemic mispricing that the Bank of England's Mark Carney famously called the "tragedy of the horizon." Climate risk disclosure corrects this information asymmetry.

The regulatory landscape has shifted decisively toward mandatory disclosure. The EU's CSRD requires approximately 50,000 companies to report under the European Sustainability Reporting Standards (ESRS), including detailed climate risk analysis under ESRS E1. The IFRS Foundation's International Sustainability Standards Board (ISSB) published IFRS S1 and S2 in June 2023, creating a global baseline for sustainability and climate disclosure that jurisdictions from Japan to Brazil are adopting. California's SB 253 and SB 261 require large companies doing business in the state to report emissions and climate financial risks.

The financial consequences of inadequate disclosure are real. Companies facing climate-related litigation increasingly cite disclosure failures as a basis for claims. ClientEarth's 2023 action against Shell's board argued that insufficient climate transition planning breached directors' duties. The SEC's enforcement actions have targeted greenwashing in fund disclosures. Directors and officers face personal liability for material climate risk omissions.

Beyond compliance, disclosure drives internal decision-making improvements. The process of preparing climate risk reports forces organizations to identify exposures they hadn't quantified, model scenarios they hadn't considered, and engage business units that hadn't previously thought about climate as a financial issue.

How It Works / Key Components

The TCFD framework, released in 2017, established four pillars that remain the structural foundation for most disclosure regimes: governance (board and management oversight of climate risks), strategy (how climate risks and opportunities affect business, strategy, and financial planning), risk management (processes for identifying, assessing, and managing climate risks), and metrics and targets (emissions data and climate performance indicators).

Scenario analysis is a critical component. Organizations model their resilience under different warming pathways — typically 1.5°C, 2°C, and 3°C+ — assessing how physical and transition risks materialize under each. This isn't forecasting; it's stress-testing strategic assumptions against plausible futures. The NGFS provides reference scenarios that financial regulators worldwide have adopted as benchmarks.

Emissions reporting provides the quantitative backbone. Scope 1 (direct emissions), Scope 2 (purchased energy), and increasingly Scope 3 (value chain emissions) data enables investors to assess transition risk exposure. The GHG Protocol provides the dominant accounting methodology. Scope 3 reporting remains challenging — it can represent 70–90% of a company's total footprint but relies on data from suppliers, customers, and other third parties with varying measurement capabilities.

Materiality determination shapes what gets disclosed. Financial materiality (ISSB approach) focuses on climate risks that affect enterprise value. Double materiality (ESRS approach) adds the organization's impact on climate and environment. The difference matters: a coal company has high financial materiality regardless, but double materiality also captures downstream emissions impacts that affect societal climate outcomes.

Climate Risk Disclosure in Practice

BHP Group's 2024 climate report exemplifies comprehensive disclosure — covering physical risk assessments across 90+ operational sites, Scope 1–3 emissions with third-party assurance, scenario analysis under 1.5°C and 3°C pathways, and explicit links between climate performance and executive compensation. The report runs 120 pages and underwent independent limited assurance.

New Zealand became the first country to mandate TCFD-aligned climate disclosures for financial institutions, large insurers, and listed companies in 2023. First-year reports revealed significant variability in quality — some organizations produced sophisticated scenario analyses while others offered generic descriptions of climate as a "potential risk." The experience demonstrates that mandating disclosure is necessary but insufficient; building organizational capacity to report meaningfully takes time.

Council Fire's Approach

Council Fire helps organizations navigate the rapidly consolidating climate disclosure landscape, from ISSB and ESRS compliance to voluntary leadership reporting. Our approach integrates technical risk analysis — particularly for coastal and ocean-exposed operations — with the narrative clarity that transforms disclosure documents from compliance exercises into stakeholder communication tools. We believe disclosure should drive strategy, not just describe it, and we work with clients to embed climate risk insights into capital allocation, operational planning, and board governance.

Frequently Asked Questions

Which disclosure framework should my organization follow?

It depends on your jurisdiction and stakeholder base. EU-operating companies must comply with ESRS under the CSRD. Companies in ISSB-adopting jurisdictions (including the UK, Japan, Singapore, and others) should follow IFRS S2. US public companies should track SEC developments. In practice, many multinational companies report under multiple frameworks. The good news is that ISSB and ESRS have worked to ensure interoperability, so a robust ESRS report largely satisfies ISSB requirements.

Do private companies need to worry about climate risk disclosure?

Increasingly, yes. The CSRD extends to large private companies meeting size thresholds. California's SB 253 applies to public and private companies with revenues exceeding $1 billion. Supply chain pressure is also a factor — large disclosing companies need Scope 3 data from their suppliers, effectively cascading reporting requirements down the value chain. Private equity firms are pushing portfolio companies toward disclosure readiness to protect exit valuations.

How do companies handle Scope 3 data challenges?

Most organizations use a combination of primary supplier data (where available), spend-based estimation (using industry emissions factors per dollar spent), and sector-average proxies. The quality hierarchy matters: primary data from suppliers is most reliable, followed by activity-based estimates, then financial proxies. Companies typically improve Scope 3 accuracy over 2–3 reporting cycles as they build supplier engagement programs and refine data collection. Starting with estimates is acceptable; staying with estimates indefinitely is not.