Climate Impacts, Risks and Opportunities
Shel
Introduction
The Task Force noted that improved disclosure of climate-related risks and opportunities would provide investors, lenders, insurance underwriters, and other stakeholders with the metrics and information needed to undertake robust and consistent analysis of the potential financial impacts of climate change.
The Task Force found that there was a need for a standardized framework to promote alignment across existing regimes and G20 jurisdictions and to provide a common framework for climate-related financial disclosures. An important element of such a framework is the consistent categorisation of climate related risks and opportunities.
Climate-Related Risks
Climate risks are divided into two major categories:
risks related to the transition to a lower-carbon economy, and
risks related to the physical impacts of climate change
1. Transition Risks
Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change.
A policy risk is the potential harm or negative consequences arising from governmental policies and actions related to climate change mitigation and adaptation. The objectives of policy actions fall into two categories:
policy actions that attempt to constraint actions that contribute to the adverse effects of climate change, and
policy actions that seek to promote adaptation to climate change.
Examples include:
implementing carbon-pricing mechanisms to reduce GHG emissions;
shifting energy use towards lower-emission sources;
adopting energy-efficiency solutions;
encouraging great water efficiency measures;
promoting more sustainable land-use practices.
A litigation or legal risk is the potential financial or reputational consequence arising from climate-related litigation claims. Reasons for such claims can include:
failure to mitigate impacts of climate change;
failure to adapt to climate change;
insufficient disclosures around material financial risks.
Technological improvements or innovations that support the transition to a lower-carbon, energy-efficient economic system can have a significant impact on organisations. For example, the development and use of emerging technologies such as renewable energy, battery storage, energy efficiency, and carbon capture and storage affects the competitiveness of certain organisations, their production and distribution costs, and ultimately the demand for their products and services from end users.
The ways in which markets could be affected by climate change are varied and complex. One of the major ways is through shifts in supply and demand for certain commodities, products, and services as climate-related risks and opportunities are increasingly taken into account.
Reputation risks arise from changing consumer or community perceptions of an organisation’s contribution to or detraction from the transition to a lower-economy.
2. Physical Risks
Physical risks resulting from climate change may have financial implications for organisations, such as direct damage to assets and indirect impacts from supply chain disruption. An organisation’s financial performance may also be affected by changes in water availability, sourcing and quality, food security, and extreme temperature changes affecting the organisation’s premises, operations, supply chain, transport needs, and employee safety.
Physical risks can be categorised into two: acute risks and chronic risks.
Acute physical risks refer to the risks that are event-driven causing sudden disruption. They could arise from increased severity of extreme weather events, such as cyclones, hurricanes, wildfires or floods.
Chronic physical risks refer to long-term shifts in climate patterns, e.g sustained higher temperatures, that may cause sea level rise or chronic heat waves. Chronic risks can lead to long-term systemic challenges.
Climate-Related Opportunities
Efforts to mitigate and adapt to climate change can also produce opportunities for organisations. Climate-related opportunities vary depending on the region, market, and industry in which the organisation operates. The task force identified several areas of opportunity as described below:
Improved energy efficiency (across an organisation’s production and distribution processes, buildings, machinery/appliances, and transport mobility) and better materials, water, and waste management, can reduce operating costs. These actions can result in direct cost savings to the organisation’s operation over time, while still contributing to the global efforts to curb emissions. Technological innovations, such as the ones listed below, are playing a key part in enabling this transition.
Efficient heating solutions and circular-economy solutions
LED lighting technology and industrial motor technology
Retrofitting buildings
Employing geothermal power
Water usage and treatment solutions
Electric vehicles
To meet global emission-reduction goals, countries need to transition a major percentage of their energy generation to low emission alternatives such as wind, solar, wave, tidal, hydro, geothermal, nuclear, biofuels, and carbon capture and storage. Investments in renewable energy capacity have continued to exceed investments in fossil fuel generation. Organisations that shift their energy use towards low emission energy sources could potentially save on annual energy costs.
Organisations that innovate and develop new low-emission products and services may improve their competitive position and capitalize on shifting consumer and producer preferences. Examples include:
consumer goods and services that place greater emphasis on a product’s carbon footprint in its marketing and labeling (e.g., travel, food, beverage and consumer staples, mobility, printing, fashion, and recycling services) and
producer goods that place emphasis on reducing emissions (e.g., adoption of energy-efficiency measures along the supply chain)
Organisations that pro-actively seek opportunities in new markets or types of assets may be able to diversify their activities and better position themselves for the transition to a lower-carbon economy. In particular, opportunities exist for organisations to access new markets through collaborating with governments, development banks, small-scale local entrepreneurs, and community groups in developed and developing countries as they work to shift to a lower-carbon economy. New opportunities can also be captured through underwriting or financing green bonds and infrastructure e.g., low emission energy production, energy efficiency, grid connectivity, or transport networks.
Climate resilience involves organisations developing adaptive capacity to respond to climate change to better manage the associated risks and seize opportunities, including the ability to respond to transition risks and physical risks. Opportunities include improving efficiency, designing new product processes, and developing new products.
Opportunities related to resilience may be especially relevant for:
organisations with long-lived fixed assets or extensive supply or distribution networks,
organisations that depend critically on utility and infrastructure networks or natural resources in their value chain,
organisations that may require longer-term financing and investment.
Financial Impacts
In order to make more informed financial decisions, investors, lenders, and insurance underwriters need to understand how climate-related risks and opportunities are likely to impact an organisation’s future financial position as reflected in its income statement, cash flow statement and balance sheet.
An income statement, also known as a profit and loss (P&L) statement, is a financial report that summarizes a company’s revenues, expenses, and net profit or loss over a specific period. It essentially shows how a business has performed financially during that period. Key elements of an income statement are: revenues (which represent the total income a business generates from its operations, usually from selling goods or services), expenses (which are the costs incurred by the business to generate revenues, including things like cost of goods sold, operating expenses, and administrative expenses) and net income (which is the result of subtracting total expenses from total revenues, indicating whether a business made a profit or a loss).
A cash flow statement reports the cash generated and spent during a specific period of time (e.g., a month, quarter, or year). It acts as a bridge between the income statement and balance sheet by showing how cash moved in and out of the business.
A balance sheet displays the company’s total assets and how the assets are financed, either through debt or equity. The balance sheet is based on the fundamental equation: assets = liabilities + equity
The financial impacts of climate-related issues on an organisation are driven by the specific climate-related risks and opportunities to which the organisation is exposed and its strategic and risk management decisions on managing those risks.
Climate risk management is a framework for assessing and mitigating the potential impacts of climate change on various systems, including communities, ecosystems, and economies. It involves identifying climate-related hazards, evaluating their potential impacts, and implementing strategies to minimize negative outcomes and maximize opportunities.
Examples of ways in which climate-related risks and opportunities can affect revenue.
If new regulations such as carbon taxes, emissions limits, or mandatory reporting are introduced, companies may face increased compliance costs. These costs can lead to higher product prices, which may reduce consumer demand and ultimately decrease revenue.
In some cases, regulations may also restrict or phase out certain products entirely, resulting in a direct loss of revenue streams.
When new low-carbon technologies enter the market, companies that fail to adopt them quickly may lose their competitive edge. This can result in a loss of market share to more agile or innovative competitors, leading to a decline in revenue.
Additionally, heavy investment in outdated or soon-to-be obsolete technology may limit a company’s ability to fund product innovation, further affecting revenue growth.
As consumer and business preferences shift toward more sustainable and environmentally friendly products, demand for carbon-intensive or environmentally harmful products may decline. Companies that do not adapt their product offerings in time may experience reduced sales volumes and declining revenues in these areas.
Changing investor sentiment may also influence which products are favored in the marketplace.
A company perceived as environmentally irresponsible or slow to act on climate issues may suffer reputational damage. This can lead to consumer boycotts, customer churn, and reduced brand loyalty, all of which can negatively affect revenues.
Furthermore, reputational risk may result in the loss of key clients, partnerships, or even access to capital, which can indirectly suppress revenue-generating opportunities.
Extreme weather events such as hurricanes, floods, and wildfires can disrupt operations by damaging physical infrastructure, forcing facility closures, or interrupting supply chains. These disruptions can lead to a halt in production or distribution, resulting in missed sales opportunities and a direct reduction in revenue.
Gradual climate changes, such as rising sea levels, increased average temperatures, or prolonged droughts, can alter long-term operating conditions. For example, agricultural yields may decrease, reducing the volume of goods available to sell.
Retail and real estate assets may become less viable in vulnerable regions, reducing revenue potential from those locations. In some sectors, climate-induced migration may shift demand away from existing markets, requiring strategic adaptation to avoid loss of revenue.
Improving resource efficiency can allow companies to reduce waste and lower input costs, which may enable them to offer more competitively priced products or services. By doing so, they can attract a larger customer base and increase overall sales volume, leading to higher revenues.
When businesses invest in energy-efficient technologies, such as LED lighting, smart HVAC systems, or process automation, they often experience reduced operational expenses. These savings can be reinvested in product development, marketing, or geographic expansion, all of which can open new revenue channels.
Firms that optimize their use of raw materials through circular economy practices, such as recycling, reusing components, or minimizing excess, can reduce dependence on volatile supply chains. This stability can enhance their ability to meet customer demand reliably, which in turn strengthens customer loyalty and contributes to sustained revenue growth.
Resource efficiency can also enhance a company’s reputation in the eyes of customers, investors, and partners. A strong environmental performance can differentiate a company in crowded markets, enabling it to capture a premium segment or expand its share in existing ones.
Companies that achieve significant efficiency gains may choose to license their innovations or processes to others. In doing so, they can create new revenue streams through intellectual property or consulting services, further capitalizing on their sustainability advantage.
When a company transitions to renewable energy sources like solar, wind, or hydro, it can reduce its exposure to volatile fossil fuel prices. This increased cost stability allows for more predictable budgeting and pricing, which can give the company a competitive edge and support long-term revenue growth.
In markets where customers are actively seeking out sustainable brands, a switch to clean energy can significantly enhance brand appeal. By marketing products or services as being powered by renewables, companies can attract environmentally conscious consumers and increase demand, especially in premium or values-driven segments.
Many businesses, especially in B2B or public sector supply chains, are now required to meet environmental criteria in order to win contracts. Companies that use renewable energy can meet or exceed these requirements, gaining access to new customers or markets that were previously out of reach. This can translate into additional or recurring revenue streams.
Investing in on-site renewable energy generation, such as rooftop solar panels or biomass systems, can not only reduce long-term energy costs but also open the door to selling excess energy back to the grid. In regulated markets with feed-in tariffs or credits, this creates a direct revenue stream from the energy itself.
In regions where governments or local utilities offer incentives, rebates, or tax breaks for adopting clean energy, the financial savings can be reinvested into core business activities. These reinvestments may support product development, expansion into new markets, or operational upgrades that ultimately lead to increased sales.
Companies that position themselves early as clean-energy leaders may gain reputational advantages that attract investment, partnerships, or media attention. This increased visibility can indirectly lead to revenue growth through greater brand awareness, customer engagement, and expanded business opportunities.
Developing new low-carbon products and services allows companies to tap into rapidly growing markets driven by climate-conscious consumers and businesses. As awareness of environmental issues increases, many customers are actively seeking alternatives that align with their values. By offering sustainable options, companies can differentiate themselves, win over new market segments, and grow their revenue base.
When existing products are redesigned to reduce their environmental impact, companies often revitalize interest in their brand. By incorporating features such as recyclable materials, reduced energy usage, or minimal packaging, they can appeal to customers who are willing to pay more for sustainable alternatives. This allows businesses to increase their average revenue per unit sold.
In industries facing direct effects from climate change, such as construction, agriculture, or manufacturing, companies that offer adaptive solutions like drought-resistant crops or energy-efficient building materials can meet emerging needs. These products help clients respond to climate challenges and create entirely new revenue streams for the companies that supply them.
In the financial sector, introducing climate-aligned offerings such as green bonds, sustainability-linked loans, or climate insurance products opens opportunities to serve investors and clients seeking environmentally responsible financial instruments. These products not only attract capital but also diversify income sources in a way that aligns with global trends.
Professional service firms can capitalize on the demand for climate-related expertise by offering consulting, advisory, or training services. As more businesses seek guidance on decarbonization or climate strategy, service providers with credible sustainability offerings can expand their client base and generate new recurring revenue.
Sustainable products often carry strong brand narratives that foster loyalty and emotional connection with consumers. This deeper relationship can translate into higher retention rates, greater repeat purchases, and stronger word-of-mouth promotion, all of which contribute to more stable and growing revenue.
Products and services that meet climate standards or certification criteria are often favored in procurement decisions by governments, institutions, and corporations. This creates access to tenders and supply chains that are otherwise restricted, allowing companies to enter new markets and grow revenue through increased visibility and credibility.
As global awareness of climate change grows, new markets are forming around sustainability. These markets are shaped by changing consumer preferences, regulatory shifts, and investment flows. Companies that recognize and respond to these dynamics can expand their customer base and create new revenue streams by entering regions, sectors, or demographic segments that prioritize low-carbon goods and services.
In many parts of the world, governments are setting ambitious climate targets that require both public and private sector transformation. This has given rise to demand for clean energy, green infrastructure, electric mobility, climate-resilient construction, and environmentally responsible technologies. Businesses that can meet these demands position themselves to access fast-growing markets supported by policy, subsidies, and investment incentives.
Consumers are becoming more discerning and values-driven in their purchasing decisions. Many are willing to switch brands or pay more for sustainable options. This shift is not limited to high-income countries. In emerging economies, climate awareness is rising, and companies that offer affordable, climate-friendly solutions can tap into entirely new customer bases.
Businesses that provide low-carbon inputs or enabling technologies can benefit from increased demand across multiple sectors. For example, a company that produces parts for electric vehicles or materials for energy-efficient buildings can serve as a critical link in rapidly growing value chains. As entire industries shift toward greener operations, suppliers who meet the required standards are well positioned to grow their revenues.
Financial markets are also changing. There is significant interest in sustainability-themed investments, including green bonds, ESG funds, and climate-aligned financial products. Institutions that develop offerings aligned with these preferences are seeing increased client inflows and rising revenue from management fees and advisory services.
In the context of international trade, companies that comply with climate-related standards such as low-carbon certification or circular economy practices are gaining access to preferred trade agreements and global procurement programs. This creates a competitive advantage and allows businesses to enter or expand in markets that might otherwise be restricted or highly competitive.
Climate adaptation needs are also creating new sectors of demand. In areas facing water scarcity, extreme heat, or rising sea levels, customers are seeking products and services that improve resilience. This includes everything from advanced irrigation systems and heat-tolerant crops to urban cooling solutions and climate risk analytics. Meeting these needs presents a powerful opportunity for revenue generation, especially for companies that tailor their offerings to local conditions.
Building climate resilience into operations, products, and supply chains can directly support revenue growth by reducing vulnerability to disruption. When a company is better prepared to withstand physical climate impacts like extreme weather or long-term environmental changes, it maintains business continuity and avoids lost sales, production halts, or service interruptions.
In many sectors, customers are beginning to prioritize partners and suppliers who can demonstrate resilience. This is particularly important in industries like food, logistics, construction, finance, and healthcare, where climate risks can directly affect safety, stability, or compliance. Businesses that can prove they are resilient to climate-related shocks are more likely to win contracts, retain clients, and access premium market segments, all of which support stronger and more consistent revenue streams.
By embedding climate resilience into their product design, companies can also create offerings that perform better under future climate conditions. For example, products that withstand higher temperatures, water stress, or extreme weather can outperform competitors and become the preferred choice in vulnerable regions. This helps companies open up new markets or extend the life cycle of their existing products, increasing both sales volume and value.
Insurers and financial institutions that integrate resilience into underwriting or risk analysis are better positioned to offer innovative financial products. For example, parametric insurance or climate-contingent loans allow them to serve high-risk regions more effectively while expanding their customer base and revenue potential.
In real estate and infrastructure, resilient design adds commercial value. Buildings that are built to withstand climate risks such as flooding or heatwaves may command higher rents, sell at a premium, or maintain occupancy rates during disruptions. This drives both direct and indirect revenue benefits for developers, asset owners, and investors.
Resilience planning can also reduce operating costs over time, particularly when it minimizes damages or losses from climate events. These cost savings free up capital that can be redirected into growth areas, supporting further innovation and expanding the company’s ability to generate revenue across multiple lines of business.
Companies that invest in community resilience, by supporting local infrastructure, disaster preparedness, or resource security, often build stronger relationships with customers, regulators, and employees. This social capital translates into brand loyalty, better talent retention, and long-term customer engagement, all of which contribute to a more resilient and sustainable revenue base.
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