2.5 - Identification of transition risks and opportunities

What are the risks and opportunities for the organization?

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The low-carbon transition of our society and global warming are both a source of risks and opportunities for organisations. It is therefore necessary to integrate these concepts into low-carbon transition strategies. For example, GHG emissions are both a risk (energy dependence, strong impact of new carbon taxes, vulnerability to regulatory changes, legal and reputational risk) and an opportunity (better business resilience, increased investments in less-emissive and more efficient solutions, a sector’s leadership position in terms of innovation, reputation gain following implementation of reduction actions, etc.).

The risks and the opportunities related to climate change have been categorised and must ultimately be the subject of an analysis by the organisation. The requirements for this analysis vary according to the maturity level of the organisation.

The step of identifying transition risks and opportunities is necessary in a Bilan Carbone®. It takes place upstream of the accounting phase to add a strategic dimension to considerations of boundaries, Stakeholder engagement, data collection, etc.

The results obtained during the approach (the organisation’s impact on the environment, notably the carbon impact accounting, and potentially multi-criteria) then feed the risk analysis (impact of environmental degradation on the organisation), to make the link with the notion of double materiality.

Climate-related risks are subdivided into two main categories:

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

• The transition risks, which are directly related to changes in the climate and the consequences resulting from them

It is important not to lose sight of the fact that even if taking risks into account and adapting to them can be difficult and costly for the organisation, not acting could prove disastrous for it.

Transition risks

Transition risks are divided into several categories:

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

• Image and reputational risks, which may in particular be linked to changes in behaviour among the organisation’s users, members or clients, to investor concerns in the case of a company, or to stigmatization in the media regarding the organisation’s sector. This also includes legal actions related to climate inaction. These image and reputational risks can also have consequences for the organisation’s ability to recruit employees.

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

Economic risks are transversal. 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 climatic events becoming more frequent and/or intense. These can disrupt operations or endanger the organisation’s assets and employees. For example, natural disasters can lead to a local power outage.

• Risks related to progressive changes in the climate, such as rising average temperatures, sea level rise, changes in the frequency and/or intensity of rainfall, depending on the areas where the organisation operates. These risks can affect the organisation’s employees and some of its assets depending on its sector. For example, more frequent and intense heat waves can lead to higher absenteeism within the organisation. If the organisation uses agricultural raw materials, these could become scarcer if water resources were to be lacking, etc.

Physical risks make explicit the consequences of the first two categories of physical risks (extreme events or progressive changes), such as supply chain disruptions, link failures, transport blockages, health or geopolitical risks, etc.

Examples are available in the annex.

Transition opportunities

The opportunities that secure the organisation a place in the low-carbon world of tomorrow are of several types:

• Resource consumption reduction: the organisation benefits from this reduction, whether in the form of cost savings, increased production of goods or services, etc. The organisation maintains its access to these resources in case they become scarcer.

• Reduction of GHG emissions: the organisation hedges against changes in fossil fuel prices, the impact of future regulations and may potentially participate in carbon markets.

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

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

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

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

Examples are available in the annex.

Requirements related to the identification of risks and opportunities

Here are the different requirements to 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 Stakeholder engagement

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

The organisation can rely annex on a list of potential physical and transition risks.

As part of the Stakeholder engagement, a time for debate and exchange on these risks and their relevance within the organisation can be organised.

Standard Level: criterion G2

The flow mapping incorporates risks relevant to the organisation

The organisation produces a mapping of the different risks relevant in its case and their impacts. Internal risks to the organisation and risks across the whole value chain must be considered. The organisation then overlays all these risks on the flow map, in order to reveal the vulnerabilities to which it is subject.

The organisation can rely annex on:

• a list of potential physical and transition risks

• a risk analysis matrix aimed at considering risks that are specific to the organisation’s activities

• an economic vulnerability simulator.

To report these conclusions, the same representation can be used for the risk mapping and the emission source mapping. Thus, the organisation frames and vulnerabilises the flows that revolve around its activities.

Consequently, the organisation’s transition plan takes these vulnerabilities into account by integrating several adaptation actions to climate change.

Advanced Level: criterion G3

A comprehensive risk analysis is carried out and is an integral part of the organisation’s decision-making processes

This maturity level implies that the organisation reasons in double materiality (measuring an organisation’s impact on the environment, and the impact of environmental degradation on that same organisation).

The organisation conducts or has conducted (within the framework of the Bilan Carbone®, or as part of a complementary approach, potentially preexisting) a comprehensive analysis of climate change-related risks and opportunities, the results of which are attached to the Bilan Carbone®. This analysis must be less than 10 years old. Risks and opportunities must be considered internally within the organisation and across the entire value chain.

For this, six steps can be followed:

Step 1: Analysis of exposure and sensitivity past of the organisation to the different risks physical and transition. For example, study of past evolution of the organisation’s energy cost, changes in the public image of the organisation’s sector, investments related to the energy-climate theme, and any other element relevant in this context for the organisation.

Step 2: Evaluation of exposure present and future (short, medium and long term) of the organisation to transition. The organisation must at least study different scenarios of energy price evolution, regulatory changes (carbon tax, product and service regulation), changes in the requirements of the organisation’s different stakeholders (health, environment, societal engagement, etc.), and technological development (low carbon, etc.). The scenarios studied must include assumptions in which global warming is kept to 1.5°C under the Paris Agreement because transition risks will be higher in that case.

Step 3: Evaluation of exposure present and future (short, medium and long term) of the organisation to physical risks physical. The organisation must at least study different scenarios of changes in extreme climatic events and progressive climate evolution. The scenarios studied must include high-warming assumptions (business-as-usual scenario) because physical risks will be more intense and frequent in that case.

Step 4: Prioritisation and summary of these different risks. Qualification and quantification of the effects that these risks can have on the organisation and its value chain. The organisation can rely annex on a list of potential physical and transition risks, on a risk analysis matrix and on an economic vulnerability simulator.

Step 5: Assessment of the organisation’s present and future opportunities linked to climate issues.

Step 6: Drafting of a report accounting for the various analyses carried out by the organisation. In addition, the organisation can map risks in the same way as the emission source mapping. Thus, the organisation frames and vulnerabilises the flows that revolve around its activities.

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

ℹ️ In view of existing methods, and within the framework of the Bilan Carbone®, it is possible to have a more in-depth analysis of physical risks than of transition risks; nevertheless the latter must exist, at least qualitatively. It is possible to have a more advanced analysis of physical risks at the scale ofa site (considered vital and representative). However, within the framework 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 responding to several DRs of the Corporate Sustainability Reporting Directive (CSRD).

🔎 The organisation can rely on the OCARA methodological guide.

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