2.5 - Identification of transition risks and opportunities

What are the risks and opportunities for the organization?

Source: Pexels

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, 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 toward less-emissive and more efficient solutions, sector leadership in innovation, reputational gains following implementation of reduction actions, etc.).

The risks and opportunities related to climate change have been categorized and must ultimately be the subject of analysis by the organization. The requirements regarding this analysis vary depending on the level of maturity of the organization.

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 boundaries, stakeholder engagement, data collection, etc.

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

Climate-related risks are subdivided into two major categories:

• The transition risks, which are linked to societal changes and economic models

• The physical risks, which are directly related to changes in the climate and the consequences generated by 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 organization, not acting could prove disastrous for it.

Transition risks

Transition risks are distributed across several categories:

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

• Image and reputational risks, which can notably be related to changes in behavior among users, members or clients of the organization, to concerns from investors in the case of a company, or to stigmatization notably in the media concerning the organization’s sector of activity. This also includes legal actions related to climate inaction. These image and reputational risks can also have consequences on the organization’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 organizations offering lower-carbon 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 appendix.

Physical risks

Physical risks are distributed across several categories:

• Risks related to natural disasters and extreme climatic events becoming increasingly frequent and/or intense. These can disrupt operations or endanger the organization’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 increases in average temperature, sea level rise, changes in the frequency and/or intensity of rainfall, depending on the areas where the organization’s activities take place. These risks can affect the organization’s employees and certain of its assets depending on its sector. For example, more frequent and intense heatwaves can lead to greater absenteeism within the organization. If the organization uses agricultural raw materials, these could become scarce if the water resource were to diminish, etc.

Physical risks explain the consequences of these first two categories of physical risks (extreme events or progressive changes), such as supply disruptions, breaks in connections, transport blockages, health or geopolitical risks, etc.

Examples are available in the appendix.

Transition opportunities

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

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

• GHG emissions reduction: the organization 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 organization gains access to new markets, new audiences, strengthens its position or becomes a market leader.

• Regulatory and financial incentives: the organization may obtain access to public financing, conditional grants or private financing targeting lower-environmental-impact activities

• Communication and image: the organization communicates about 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 appendix.

Requirements for identifying risks and opportunities

Here are 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 quick identification of risks as part of stakeholder engagement

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

The organization 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 organization can be organized.

Standard Level: criterion G2

The flow mapping integrates the risks relevant to the organization

The organization carries out a mapping of the different risks relevant to its case and their impacts. Internal risks to the organization and across the entire value chain must be considered. The organization then reports all these risks onto the flow mapping, in order to highlight the vulnerabilities to which it is subject.

The organization 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 organization’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 organization problematizes and vulnerabilizes the flows that revolve around its activities.

As a result, the organization’s transition plan takes these vulnerabilities into account by integrating several adaptation actions to climate change.

Advanced Level: criterion G3

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

This level of maturity implies that the organization reasons in double materiality (measure the impact of an organization on the environment, and the impact of environmental degradation on that same organization).

The organization carries out or has carried out (within the framework of the Bilan Carbone®, or as part of a complementary approach, potentially preexisting) 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 less than 10 years old. Risks and opportunities must be considered internally to the organization and across the entire value chain.

For this, six steps can be followed:

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

Step 2: Evaluation of exposure present and future (short, medium and long term) of the organization to the risks of transition. The organization must at a minimum study different scenarios of energy price evolution, changes in regulations (carbon tax, regulation of products and services), changes in the requirements of the organization’s various stakeholders (health, environment, societal engagement, etc.), 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 because transition risks will be higher in that case.

Step 3: Evaluation of exposure present and future (short, medium and long term) of the organization to the risks physical. The organization must at a minimum study different scenarios of evolution of extreme climatic events and progressive climate changes. 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: Prioritization and summary of these different risks. Qualification and quantification of the effects these risks can have on the organization and its value chain. The organization 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: Evaluation of the organization’s present and future opportunities related to climate issues.

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

The organization then integrates this risk and opportunity analysis into its strategic analysis. The decisions taken by the organization 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 likelihood and impacts of physical and transition risks, and to seize the various opportunities presented.

ℹ️ Given existing methods, and within the framework of the Bilan Carbone®, it is possible to have a more detailed 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, in 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 make it possible to meet several disclosure requirements of the Corporate Sustainability Reporting Directive (CSRD).

🔎 The organization can rely on the OCARA methodological guide.

---

Do you have a question about understanding? Consult the FAQ. The method is living and therefore likely to evolve (clarifications, additions): find the track of changes here.