By Megan Tarrant, 3R Consultant I, Sustainability and Climate
Climate-related reporting can be a daunting undertaking, but it can also be seen as an opportunity for your company to meet investor, customer, and regulatory requests while preparing for future climate challenges.
The goal of climate reporting is to enhance corporate transparency and elevate the standards of corporate actions in addressing the climate crisis. Regulations aim to standardize corporate disclosures regarding carbon emissions and climate-related risks. Let’s talk about the basics of climate risk, what regulations to be aware of, and how 3R can help your company prepare for what’s ahead.
What is climate risk?
Climate-related risks include any threats to an organization’s financial outcomes that stem from changes in the climate (physical risks) and shifts in the economy (transitional risks).
- Physical risks include chronic and acute risks, such as sea level rise, wildfires, severe storms, air quality, and others.
- Transition risks include policy & legal, technology, market, and reputational risks.
What is a climate risk assessment?
Conducting a climate risk assessment enables a company to identify all relevant climate-related risks to their business operations, determine which of these risks are financially material, and integrate this process into the company’s existing risk management systems.
This ensures that any identified risks are regularly monitored and mitigated as needed. It considers both climate-related transition and physical risks, as well as adaptation and mitigation opportunities.
When conducting a climate risk assessment, 3R uses multiple climate scenarios, including low warming and high warming (business as usual) scenarios, to explore potential futures and the actions that could lead to those outcomes. Our risk assessment considers the probability/likelihood and magnitude/significance of an event occurring due to the climate-related transition risks and climate-related physical risks.
What are the benefits of climate risk reporting?
Climate compliance isn’t the finish line; it is a starting point for your organization to realize the value creation and competitive advantage climate risk reporting provides.
There is value beyond compliance and finding a way for these disclosures to evolve from a climate compliance checklist into a more meaningful tool that provides a new perspective on operational resilience. When undertaking this work, processes and collaboration are implemented to support the climate reporting program and deliver these business values.
- Data integration: There is an integration of data by identifying the financial impacts of climate trends, risks, and opportunities, which can lead to more holistic and robust decision management based on those risks and opportunities.
- Collaboration: The process of climate risk assessment brings together different departments at your organization, such as legal, finance, risk, audit, sustainability, operations, and others to work together, leveraging efforts towards these common goals and increasing operational efficiency.
- Build trust: The comprehensive, transparent risk reports can help build trust with stakeholders, including investors, customers, employees, and other key players, which can lead to stakeholder loyalty and market access.
- Readiness: Even if you are not within scope for compliance or mandatory reporting, your organization might fall within the supply chain of a company that is in scope, and that trickle-down reporting could still impact you.
What climate risk reporting requirements exist?
California SB 261 (Climate Related Financial Risk Act)
California SB 261 (Climate Related Financial Risk Act) is one of the newest climate risk reporting regulations. Companies fall in scope for reporting to SB 261 if they do business in California and have annual revenues of $500 million USD or more*.
CA SB 261 requires companies in scope to disclose climate-related financial risks and their mitigation strategies biannually, with reports posted publicly on the organization’s website starting January 2026. The implementing authority, California Air Resources Board, plans to outline the implementing regulations and provide further clarity on some of the unknowns (such as the definition of “doing business in California” and the scope of the climate scenario analysis) in a draft by the end of the calendar year.
SB 261 draws on the guidelines from the Task Force on Climate-related Financial Disclosures, also known as the TCFD framework, to create transparency in how companies assess and report on the financial risks they face due to climate change.
TCFD was disbanded as of October 2023, but the International Financial Reporting Standards (IFRS) foundation has taken over the monitoring of the progress of companies’ climate-related disclosures.
IFRS S2 (Climate-related disclosures)
The IFRS are globally recognized guidelines for financial disclosures. IFRS S1 (General sustainability disclosures) and IFRS S2 (Climate-related disclosures) were developed by the International Sustainability Standards Board (ISSB) as a focus on sustainability-related financial disclosures.
IFRS S2 is a reporting framework that many countries are adopting or using as a basis for their own frameworks, which include climate risk. It builds upon TCFD, by offering more structured reporting and clearer guidelines.
While TCFD focuses on the identification and management of climate-related risks, IFRS S2 expands this scope to include climate-related opportunities. Companies are required to disclose processes used to identify, assess, prioritize, and monitor both risks and opportunities, providing a more comprehensive view of their risk management approach.
CDP (Climate Disclosure Project)
CDP (Climate Disclosure Project) is an environmental disclosure system for companies, cities, and regions that captures data on respondents’ environmental impacts, focused on Climate but also including sections on Forests and Water for applicable businesses.
CDP can be used by stakeholders (such as investors) to assess companies’ climate-related risk and how they are implementing management risks into their business operations and overall strategy.
The CDP questionnaire has a large focus on climate-related risks and opportunities, with two modules requiring specific risk-related information (Identification, Assessment, and Management of Dependencies, Impacts, Risks, and Opportunities, and Disclosure of Risks and Opportunities).
Over 22,000 companies were scored on CDP in 2024, giving them individual scores on Climate, as well as Forests and Water for those that are in scope for the additional environmental sections, as well as a benchmark of their score against industry averages.
CDP is almost fully aligned with the IFRS S2 standard, as well as a high degree of interoperability with the European Sustainability Reporting Standards (ESRS), and is partially aligned with the Task Force on Nature-related Financial Disclosures (TNFD).
What now? 3R’s Climate Risk Services
3R’s goal for current and prospective clients that are exploring voluntary or mandatory climate risk reporting is to help lower the barrier of entry, to keep it from being confusing, stressful, and time-consuming. We aim to meet organizations where they are at and help them come up with a strategy for their future. We offer services including climate risk assessments, CDP submissions, and IFRS-aligned reporting, and are also available for identifying which reporting avenues might be relevant to organizations as a jumping off point. We’ll help you understand both the current and future states of your business while looking to proactively manage changes in regulation, customer requests, or markets.
*Note that this revenue threshold is referring to the organization’s total revenue, not just revenue generated from operations in California.