Climate risk assessment: A quality perspective

Authors

Marcos Serrano, Sustainability Research Specialist

Alessandro Badinotti, Manager, Sustainability Research

Climate-related risks are increasingly embedded in the global risk landscape. Extreme weather events and critical changes to Earth systems rank among the most severe long-term environmental risks in the World Economic Forum’s “Global Risks Report 2026”. Meanwhile, transition risks arising from the shift to a low-carbon economy, including policy changes, technological disruption, evolving market dynamics and the potential stranding of carbon-intensive assets, are creating significant challenges for businesses and investors. This landscape underscores the need for companies to understand and manage climate exposures across their value chains and portfolios.

For corporates, comprehensive climate risk assessments, including physical and transition risks and meaningful scenario analysis, can play an important role in identifying material exposures, informing adaptation and risk management strategies, and allocating capital effectively. The value of these processes depends on their scope and depth: Incomplete assessments or the absence of robust physical and transition scenarios may lead to underestimating risks, misallocating capital, mispricing exposures and incomplete adaptation plans. By contrast, comprehensive risk and scenario coverage can help reveal strategic vulnerabilities, inform resilient investment decisions and highlight opportunities in the low-carbon transition.

For investors, understanding portfolio-level climate risk depends in part on the quality and comprehensiveness of the climate risk assessments conducted by portfolio companies. Aggregating the coverage and quality of these assessments may therefore provide valuable insights for portfolio analysis.

Within our ESG Scores and Raw Data, underpinned by the S&P Global Corporate Sustainability Assessment (CSA), we assess whether companies report on conducting comprehensive climate risk assessments across risk types and whether they use scenario analysis to evaluate physical and transition risks under different climate futures.

The CSA is an annual evaluation of sustainability practices covering about 14,000 companies worldwide. In this review, we analyze how 11,955 public companies across sectors reported on climate risk management as part of the 2025 research cycle.

Because risks that are not considered cannot be identified or managed, an effective climate risk assessment should be comprehensive from the outset, covering physical and transition risks. This is particularly important because climate-related impacts can arise through multiple, interconnected channels across the value chain, including suppliers, customers, infrastructure, technology and logistics. Figure 1 presents the scope (or absence) of climate risk assessments, distinguishing among those that assess both physical and transition risks, those that assess only one risk type and those that report no assessment.

Among companies undertaking an assessment, the vast majority consider both physical and transition risks. Yet about 40% of companies globally report no assessment at all, with the share rising to about 60% in North America. These regional differences may reflect the development and implementation of reporting regulations, as well as variations in the perceived materiality of climate-related risks and the expectations and pressure exerted by stakeholders. In Latin America and Africa, smaller sample sizes may also affect the observed results.

Figure 2 shows the same scope of climate risk assessments across sectors in the same sample. The sector-level picture broadly mirrors the overall pattern: Among companies that conduct an assessment, most consider both physical and transition risks, but the proportion that undertake any assessment varies considerably across sectors.

Utilities, real estate, and consumer staples show some of the highest levels of comprehensive assessment, alongside materials, industrials and energy. This may reflect these sectors’ direct exposure to climate-related disruptions due to extensive use of infrastructure, as well as regulatory and stakeholder expectations to integrate climate risk into enterprise risk management. For utilities in particular, their role as highly regulated providers of essential services may create stronger incentives to assess climate risks comprehensively. By contrast, health care and communication services have the lowest share of companies assessing both risk types and the highest proportion reporting no assessment, even though climate-related policy, technological and physical risks may still affect these sectors.

Financials also presents a notable gap. Despite the growing focus on climate risk in banking, insurance and investment activities, approximately 50% of companies in the sector report no climate risk assessment. The CSA asks companies to specify whether their physical and transition risk assessments cover their own operations, upstream activities and/or downstream activities and clients. The absence of such assessments may limit companies’ ability to identify and manage exposures across portfolios and financial relationships, through which climate-related risks can be transmitted to the broader economy.

The quality of a climate risk assessment also depends on its analytical rigor and use of internationally accepted, forward-looking scenarios. These provide a framework for evaluating companies’ resilience under different global warming pathways.

Figure 3 focuses on the 7,067 companies that report assessing both physical and transition risks and examines the extent to which these assessments are supported by climate scenario analysis. A comprehensive approach involves considering at least one scenario in which global warming exceeds 2 degrees C above preindustrial levels and at least one scenario in which warming is less than 2 C for physical and transition risks. Globally, only about 40% of the sample incorporates both physical and transition scenarios into their risk assessment practices, and less than half of this group applies these scenarios comprehensively across both temperature pathways. Utilities leads in adopting a comprehensive approach, followed by consumer staples. Information technology, real estate and health care report the lowest levels of comprehensive scenario coverage.

Roughly 20% of the sample uses physical scenarios only, a trend prevalent in real estate, utilities and consumer staples. By contrast, companies in the energy and financials sectors are more likely than those in other sectors to focus exclusively on transition scenarios. These patterns indicate that climate risk assessment often remains concentrated on a single dimension, providing a narrower view of climate exposure.

In conclusion, companies generally recognize climate-related risks, but the depth and comprehensiveness of their assessments vary significantly. Among the many companies that report assessing both physical and transition risks, roughly one-third do not report using internationally accepted scenarios, and a minority apply a comprehensive approach that covers both risk types across above- and below-2-C scenario pathways. This variation may limit the extent to which assessments capture companies’ broader climate-related exposures, vulnerabilities and potential financial impacts across time horizons. For investors, the findings underscore the importance of evaluating whether companies disclose climate risks, as well as the quality and scope of the analysis underpinning those disclosures.

Effective climate risk management and adaptation generally depend on comprehensive assessments that combine physical and transition risk evaluation with robust scenario analysis. Such an integrated approach can support companies in developing informed strategies and resilience measures while providing investors with the information needed to assess climate-related financial risks and preparedness.

To explore further analysis of climate‑related risk and adaptation, see Essential Sustainability Research and Insights.