2.5 - Identification of transition risks and opportunities
What are the risks and opportunities for the organisation?
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 (improved business resilience, increased investment in less-emissive and more efficient solutions, leadership position of a sector 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 regarding this analysis vary according to the (Advanced level) covers the majority of CSRD ESRS E1. Bilan Carbone® results are usable within these initiatives. of the organisation.
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 considerations of boundaries, Stakeholder engagement, data collection, etc.
The results obtained during the approach (the organisation's impact on the environment, notably the accounting of the carbon impact, and potentially multicriteria) then feed into the risk analysis (impact of environmental degradation on the organisation), to 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 linked to the modification of the climate and the consequences resulting from it
It is important not to lose sight of the fact that although taking account of risks and adapting to them may be difficult and costly for the organisation, not acting could prove disastrous for it.
Transition risks
Transition risks are distributed across several categories:
Regulatory risks, which can notably be linked to an increase in carbon tax, to greater reporting obligations or to legislation on certain products, services or activities of the organisation (for example the European taxonomy, the CSRD or the MACF).
Image and reputational risks, which can notably be linked to changes in behaviour among the organisation's users, members or customers, to concerns from investors in the case of a company, or to stigmatisation 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 prices of raw materials and energy on markets or to competition from other organisations 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 categories of risks.
Examples are available in the annex.
Physical risks
Physical risks are distributed across several categories:
Risks related to natural disasters and extreme weather events becoming increasingly 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 gradual climate changes, such as rising average temperatures, sea level rise, changes in the frequency and/or intensity of rainfall, depending on the areas where the organisation's activities take place. These risks can affect the organisation's employees and some of its assets depending on its sector. For example, more frequent and intense heatwaves can lead to higher absenteeism within the organisation. If the organisation uses agricultural raw materials, these could become scarce if water resources were to be lacking, etc.
Physical risks set out the consequences of these first two categories of physical risks (extreme events or gradual 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 ensure 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 reduction, increased production of goods or services, etc. The organisation maintains its access to these resources in case they become scarce.
Reduction of GHG emissions: the organisation protects itself 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 innovations: 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 grants or private financing targeting lower environmental impact activities
Communication and image: the organisation communicates on its actions related to energy, climate, or its 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.
Exigences relatives à l'identification des risques et opportunités
Here are different requirements to be met in terms of identifying transition risks and opportunities for each of the 3 maturity levels.
Beginner level: criterion G1
A rapid identification of risks as part of the Stakeholder engagement
The organisation lists the different risks (physical and transition) and the impacts they could have. The organisation also presents the 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.
Intermediate level: criterion G2
The flow mapping incorporates risks relevant to the organisation
The organisation carries out a mapping of the different risks relevant in its case and their impacts. Internal risks to the organisation and across the value chain must be considered. The organisation then overlays all these risks onto 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
on a risk analysis matrix aimed at considering risks that are specific to the organisation's activities
on 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 problematises and makes vulnerable 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 (Advanced level) covers the majority of CSRD ESRS E1. Bilan Carbone® results are usable within these initiatives. 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 carries out or has carried out (within the framework of the Bilan Carbone® approach, or as part of a complementary approach, potentially pre-existing) a comprehensive analysis of the risks and opportunities related to climate change, the results of which are attached to the Bilan Carbone®. This analysis must be no older than 10 years. Risks and opportunities must be considered internally to 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 of transition. For example, study of past changes in 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: Assessment of exposure present and future (short, medium and long term) of the organisation to transition. The organisation shall at minimum study different scenarios of energy price evolution, regulatory changes (carbon tax, regulation of products and services), evolution of the requirements of the organisation's various stakeholders (health, environment, societal engagement, etc.), and evolution of technologies (low carbon, etc.). The scenarios studied shall include assumptions in which global warming is limited to 1.5°C under the Paris Agreement because transition risks will be higher in that case.
Step 3: Assessment of exposure present and future (short, medium and long term) of the organisation to physical. The organisation shall at minimum study different scenarios of evolution of extreme climate events and gradual climate changes. The scenarios studied shall 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 may 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 related 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 the risks in the same way as the emission source mapping. Thus, the organisation problematises and makes vulnerable the flows that revolve around its activities.
The organisation then integrates this risk and opportunity analysis into its strategic analysis. Decisions taken by the organisation must systematically take this risk and opportunity analysis into consideration. The transition plan shall 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 Given existing methods, and within the Bilan Carbone® framework, it is possible to have a more advanced analysis of physical risks than of transition risks; nevertheless the latter must exist, at least qualitatively. It is possible to have a more detailed analysis of physical risks at the scale of'a site (considered vital and representative). However, within the scope of CSRD reporting, this analysis must be extended to all sites.
🔎 The Advanced level requirements of Bilan Carbone® 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.
Do you have a comprehension question? Consult the FAQ. The method is living and therefore likely to evolve (clarifications, additions): find the track of changes here.
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