2.5 - Identification of transition risks and opportunities

What are the risks and opportunities for the test organization?

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The low-carbon transition of our society and global warming are both a source of risks and opportunities for organizations. It is therefore necessary to integrate these concepts into low-carbon transition strategies. For example, GES emissions are both a risk (energy dependency, strong impact of new carbon taxes, vulnerability to regulatory changes, legal and reputational risk) and an opportunity (greater business resilience, increased investment towards less emissive and more efficient solutions, sector leadership in innovation, reputational gain following the implementation of reduction actions, etc.).

The risks and opportunities associated with climate change have been categorized and should ultimately be subject to analysis by the organization. The requirements for this analysis vary depending on the organization's maturity level.

The step of identifying transition risks and opportunities is necessary in a Bilan Carbone® approach. It takes place upstream of the accounting phase to add a strategic dimension to reflections on scope, mobilization, data collection, etc.

The results obtained during the process (the organization's impact on the environment, including the carbon impact accounting, and potentially multi-criteria) then feed into the risk analysis (the impact of environmental degradation on the organization), linking to the concept of double materiality.

Climate-related risks are divided into two main categories:

• Transition risks, which are linked to changes in our societies and economic models

• Physical risks, which are directly linked to climate change and its consequences

It is important to keep in mind that even if taking risks into account and adapting to them may be difficult and costly for the organization, failing to act could prove catastrophic.

Transition Risks

Transition risks are divided into several categories:

• Regulatory risks, which may notably be linked to an increase in the carbon tax, greater reporting obligations, or legislation on certain products, services, or activities of the organization (examples include the European taxonomy, CSRD, or CBAM).

• Image and reputational risks, which may notably be linked to behavioral changes among the organization's users, members, or customers, to concerns from investors in the case of a company, or to stigmatization in sector media. These also include legal actions related to climate inaction. These image and reputational risks may also have consequences on the organization's ability to recruit staff.

• Market and technology risks, linked to uncertainty in raw material and energy prices on the markets, or to competition from other organizations offering less carbon-intensive products and services.

Economic risks are cross-cutting. The costs of inaction are intrinsically linked to the consequences of the other risk categories.

Examples are available in the annex.

Physical Risks

Physical risks are divided into several categories:

• Risks related to natural disasters and extreme weather events that are becoming increasingly frequent and/or intense. These can disrupt operations or endanger the organization's assets and staff. For example, natural disasters can lead to local power grid outages.

• Risks related to gradual climate changes, such as rising average temperatures, rising sea levels, and changes in the frequency and/or intensity of rainfall, depending on the areas where the organization's activities are deployed. These risks may affect the organization's staff and certain assets depending on its sector of activity. For example, more frequent and intense heatwaves may lead to higher absenteeism within the organization. If the organization uses agricultural raw materials, these could become scarcer if water resources were to decline, etc.

Physical risks also encompass the consequences of these two categories of physical risks (extreme events or gradual changes), such as risks of supply chain disruptions, connectivity disruptions, blocked transport means, health risks, or geopolitical risks, etc.

Examples are available in the annex.

Transition Opportunities

The opportunities that ensure the organization a place in tomorrow's low-carbon world are of several types:

• Reduction in resource consumption: the organization benefits from this reduction, whether in the form of cost savings, increased production of goods or services, etc. The organization maintains its access to these resources in the event they become scarce.

• Reduction of GES emissions: the organization protects itself against changes in fossil fuel prices, the impact of future regulations, and potentially participates in carbon markets.

• Development of new products, services, and innovations: the organization gains access to new markets, new audiences, strengthens its market position, or becomes a market leader.

• Regulatory and financial incentives: the organization may gain access to public funding, conditional subsidies, or private financing targeting lower-impact activities.

• Communication and image: the organization communicates on its actions related to energy, climate, or its resilience, and improves its public image.

• Adaptation: by adapting to climate change, the organization also reduces its vulnerability to other hazards.

Examples are available in the annex.

Requirements for the Identification of Risks and Opportunities

The following requirements must be met in terms of identifying transition risks and opportunities for each of the 3 maturity levels.

Initial Level: criterion G1

A rapid identification of risks as part of the mobilization

The organization lists the various risks (physical and transition) and the impacts they could have. The organization also presents the potential opportunities and co-benefits of the approach.

The organization can refer to the annex for a list of potential physical and transition risks.

As part of the mobilization, a time for debate and exchange on these risks and their relevance within the organization can be organized.

Standard Level: criterion G2

The flow mapping integrates the risks relevant to the organization

The organization produces a mapping of the various relevant risks in its context and their impacts. Risks internal to the organization and across the entire value chain must be considered. The organization then plots all these risks on the flow map, in order to highlight the vulnerabilities to which it is exposed.

The organization can refer to the annex for:

• a list of potential physical and transition risks

• a risk analysis matrix aimed at considering risks specific to the organization's activities

• an economic vulnerability simulator.

To present these findings, the same representation can be used for the risk mapping and the emissions source mapping. In this way, the organization frames and highlights the vulnerabilities of the flows surrounding its activities.

Consequently, the organization's transition plan takes these vulnerabilities into account by incorporating several climate change adaptation actions.

Advanced Level: criterion G3

A comprehensive risk analysis is carried out and forms an integral part of the organization's decision-making processes

This maturity level implies that the organization reasons in terms of double materiality (measuring the organization's impact on the environment, and the impact of environmental degradation on the organization itself).

The organization carries out or has carried out (within the Bilan Carbone® process, or as part of a complementary, potentially pre-existing approach) a comprehensive analysis of climate-related risks and opportunities, the results of which are appended to the Bilan Carbone®. This analysis must be less than 10 years old. Risks and opportunities must be considered both internally to the organization and across the entire value chain.

To do this, six steps can be followed:

Step 1: Analysis of the organization's past exposure and sensitivity to the various physical and transition risks. For example, studying the past evolution of the organization's energy costs, the evolution of the public image of the organization's sector, investments related to the energy-climate theme, and any other relevant element in this context for the organization.

Step 2: Assessment of the organization's present and future (short, medium, and long term) exposure to transition risks. The organization must at a minimum study different scenarios for the evolution of energy prices, regulatory developments (carbon tax, product and service regulation), changes in the expectations of the organization's various stakeholders (health, environment, social commitment, etc.), and technological developments (low-carbon, etc.). The scenarios studied must include assumptions in which global warming is kept to 1.5°C under the Paris Agreement, as transition risks will be higher in this case.

Step 3: Assessment of the organization's present and future (short, medium, and long term) exposure to physical risks. The organization must at a minimum study different scenarios for the evolution of extreme weather events and gradual climate changes. The scenarios studied must include high-warming assumptions ("business as usual" scenario) as physical risks will be more intense and frequent in this case.

Step 4: Prioritization and summary of these various risks. Qualification and quantification of the effects these risks may have on the organization and its value chain. The organization can refer to the annex for a list of potential physical and transition risks, a risk analysis matrix, and an economic vulnerability simulator.

Step 5: Assessment of the organization's present and future opportunities in relation to climate issues.

Step 6: Production of a report documenting the various analyses carried out by the organization. In addition, the organization can map risks in the same way as the emissions source mapping. In this way, the organization frames and highlights the vulnerabilities of the flows surrounding its activities.

The organization then integrates this risk and opportunity analysis into its strategic analysis. Decisions made by the organization must systematically take this risk and opportunity analysis into account. The transition plan must incorporate adaptation objectives, and multiple climate change adaptation actions, in order to limit the likelihood and impacts of physical and transition risks, and to seize the various opportunities that arise.

ℹ️ Given the existing methods, and within the Bilan Carbone® framework, it is possible to have a more in-depth analysis of physical risks than of transition risks; however, the latter must exist, at least qualitatively. It is possible to have a more in-depth physical risk analysis at the scale of a single site (considered vital and representative). However, within the context of CSRD reporting, this analysis must be extended to all sites.

🔎 The Advanced Level Bilan Carbone® requirements regarding risks and opportunities are aligned with the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and enable a response to several DR of the Corporate Sustainability Reporting Directive (CSRD).

🔎 The organization can refer to the OCARA methodological guide.

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