Unlocking Value Through Climate Risk Disclosures in Financial Reporting

By Benjamin ClarkeLast Updated August 28, 2025

Photo by Waranont (Joe) on Unsplash

Introduction

In recent years, climate risk disclosures have become a central topic in financial reporting. As climate change poses both physical and transitional risks to businesses, regulators, investors, and other stakeholders increasingly demand transparency regarding how these risks impact financial performance and strategy. Effective climate risk disclosures not only help organizations manage risks better but also provide actionable intelligence for investors and policymakers, driving sustainable growth and resilience.

Understanding Climate Risk in Financial Reporting

Climate-related financial risks refer to the material risk of harm to immediate and long-term financial outcomes due to physical impacts (such as severe weather events, rising sea levels, and temperature extremes) and transition risks (including regulatory changes, market shifts, and reputational effects as economies move toward low-carbon solutions). These risks influence corporate operations, supply chains, financial investments, employee safety, and overall market stability, as defined under regulations like California’s Health and Safety Code Â§ 38533 [3] .

Climate risk disclosures help users of financial statements understand how climate-related issues could affect an organization’s cash flows, cost of capital, and strategic prospects over the short, medium, and long term [4] .

Regulatory Landscape and Global Standards

Regulators worldwide are implementing new rules that require companies to disclose climate-related risks in their financial reports. In the United States, the Securities and Exchange Commission (SEC) adopted rules in March 2024 to enhance and standardize climate-related disclosures. These rules require:

Disclosure of material Scope 1 and Scope 2 greenhouse gas emissions for large and accelerated filers
Assurance reports for emissions data, progressing from limited to reasonable assurance
Reporting capitalized costs, expenditures, and losses from severe weather events and other natural conditions in financial statements
Disclosure of costs and losses related to carbon offsets and renewable energy credits if used materially in climate targets
Qualitative notes explaining how climate risks impact key accounting estimates and assumptions

These requirements will be phased in based on filer status, offering time to adapt [1] . In California, new climate disclosure laws now require covered entities to prepare climate risk reports, with flexibility in choosing reporting frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) [3] .

Globally, the International Sustainability Standards Board (ISSB) has issued IFRS S2 – Climate-related Disclosures , effective for annual reporting periods starting January 2024. IFRS S2 builds on TCFD recommendations and incorporates industry-based requirements derived from SASB standards [4] .

Key Components of an Effective Climate Risk Disclosure

Comprehensive climate risk reporting should address the following elements:

Governance: Describe oversight and management structures for climate-related risks and opportunities.
Strategy: Outline actual and potential impacts of climate-related risks and opportunities on the organization’s business and financial planning.
Risk Management: Explain processes for identifying, assessing, and managing climate risks.
Metrics and Targets: Provide quantitative data (e.g., GHG emissions) and qualitative goals linked to climate risk management [5] .

Frameworks such as TCFD and IFRS S2 recommend that disclosures be specific, complete, and material, enabling users to understand the direct impact of climate risks [4] .

Implementing Climate Risk Disclosures: Step-by-Step Guidance

To comply with emerging regulations and best practices, organizations should follow a structured approach:

Assess Materiality: Identify which climate-related risks are relevant and material to your organization. Reference frameworks like TCFD to guide this assessment.
Choose a Reporting Framework: Select a recognized disclosure model (e.g., TCFD, IFRS S2) that meets regulatory requirements and aligns with your business context [3] .
Data Collection: Gather quantitative and qualitative data on climate risks, including GHG emissions, financial impacts of severe weather, and cost/loss analysis of offsets and credits.
Establish Controls and Assurance: Develop systems for data accuracy and, where required, obtain third-party assurance for emissions and other key metrics [1] .
Draft Clear Disclosures: Prepare disclosures that are specific, complete, and accessible, including notes to financial statements on climate impacts.
Review and Update: Regularly revisit disclosures as regulations evolve and as your understanding of climate risks develops.

For organizations new to climate risk reporting, it can be helpful to start with a fiscal year-end analysis and gradually expand disclosure scope and assurance levels over time.

Real-World Examples and Case Studies

Large companies, especially those publicly listed in the U.S., are now required to include climate risk disclosures in SEC filings, such as annual reports and registration statements. For example, a multinational manufacturer might disclose the financial impact of hurricanes on its operations, note capital expenditures incurred to adapt supply chains, and outline its strategy for purchasing renewable energy credits as part of its climate transition plan [1] .

In California, covered entities must submit climate-related financial risk reports that address risks to operations, supply chains, and investments, applying principles from frameworks like TCFD. Initial reports are typically based on fiscal year data and may evolve in detail as organizations gain experience [3] .

Globally, companies using IFRS S2 disclose climate risks and opportunities in their general purpose financial reports, helping investors evaluate long-term prospects and capital allocation decisions [4] .

Challenges and Solutions in Climate Risk Disclosure

Implementing climate risk disclosures presents several challenges:

Data Availability: Organizations may struggle to collect accurate, timely data, especially for Scope 3 emissions. Solution: Start with available data and build systems for incremental improvement.
Materiality Judgments: Determining which risks are material requires robust analysis. Solution: Use established frameworks and consult with experts to define materiality consistent with financial reporting standards.
Assurance Requirements: Transitioning from limited to reasonable assurance for emissions data involves investment in systems and third-party audits. Solution: Plan phased implementation and seek guidance from assurance providers early.
Regulatory Complexity: Navigating overlapping state, federal, and international rules can be complex. Solution: Monitor regulatory developments and leverage cross-functional teams for compliance.

Many organizations find it helpful to participate in industry working groups or consult with sustainability advisors to stay current and share best practices.

Alternative Approaches and Emerging Trends

While most organizations rely on frameworks like TCFD, IFRS S2, and SASB, some are exploring tiered reporting based on entity size and activity level [2] . This may mean smaller entities provide summary disclosures or focus on the most material risks, while larger organizations offer more comprehensive, assured reports.

Another emerging trend is integrating climate risk analysis into enterprise risk management and strategic planning, linking climate metrics directly to business outcomes and performance targets. As disclosure standards evolve, organizations may leverage artificial intelligence and advanced analytics to improve data collection, materiality assessment, and reporting efficiency.

How to Access Resources and Support

If your organization is preparing to disclose climate risks:

Review official guidance from the SEC for U.S. public companies and consult with your legal or compliance team for implementation steps.
For California entities, refer to the California Air Resources Board and Health and Safety Code Â§ 38533 for statutory requirements. Consider joining CARB public outreach sessions for updates.
Internationally, access ISSB and IFRS S2 documentation through the official IFRS website. Search for ‘IFRS S2 Climate-related Disclosures’ for the latest standards and explanatory materials.
Utilize resources from the EPA and other industry bodies for practical guidance and case studies [5] .
If uncertain about how to begin, search for ‘climate risk disclosure consulting’ or ‘TCFD implementation support’ to find reputable advisory services.

Always use official channels and verified sources for compliance-related information. Do not rely on unverified websites or assumed URLs; instead, refer to agency names and official programs for authoritative guidance.

Key Takeaways

Climate risk disclosures in financial reporting are rapidly becoming standard practice, driven by regulatory changes, investor expectations, and the growing realization that climate risks materially affect financial performance and long-term value. By adopting recognized frameworks, ensuring data quality, and engaging with official resources, organizations can build trust, drive strategic resilience, and unlock new opportunities for sustainable growth.