What middle market organisations need to know about climate risk identification

Key takeaways:

IFRS S2 provides a structured framework for climate-related financial disclosures, helping businesses assess and communicate the impact of climate risks on their operations and strategies.

Identifying climate risks is critical for businesses to mitigate potential disruptions, ensure compliance, and enhance resilience across operations and supply chains.

Proactively managing climate risks not only ensures regulatory compliance but also strengthens investor confidence and positions businesses for long-term sustainability and growth.

Global Standards for Climate Risk Disclosure and Sustainable Growth

Climate risk is no longer a distant concern for businesses—it has become standard procedure. As industries face increased scrutiny from stakeholders, regulators, and investors, frameworks like the International Financial Reporting Standards (IFRS) S2 are stepping into the spotlight. Developed by the International Sustainability Standards Board (ISSB) as part of its broader sustainability disclosure framework under IFRS S1, IFRS S2 sets out global standards for climate risk disclosures, enabling companies to assess, manage, and communicate climate exposures effectively.

Understanding and addressing climate risks is critical for businesses to stay competitive, meet compliance requirements, and ensure long-term viability. Identifying these risks helps companies protect operations and drive sustainable growth, while building trust with key stakeholders.

Understanding IFRS S2

Purpose of IFRS S2 in addressing climate risk

IFRS S2 is a global disclosure standard developed by the ISSB to enhance quality, consistency and transparency in climate-related financial disclosures. It builds on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and provides a structured approach for companies to assess and communicate how climate-related risks may affect their financial performance, resilience and strategic planning.

Key requirements for climate-related risk disclosures

IFRS S2 focuses on four main disclosure areas:

Governance: How boards oversee climate-related risks and opportunities, including the formal governance processes and assigned responsibilities, and how this oversight is embedded within the organisation’s broader governance framework.
Strategy: Assessment of how climate-related risks and opportunities may affect the company’s business model, strategy, and financial planning, supported by scenario analysis to evaluate resilience and inform mitigation and adaptation measures.
Risk management: Processes for identifying, assessing, and managing climate-related risks and how these processes are embedded within the entity’s broader enterprise risk management framework
Metrics and targets: Quantitative and qualitative measures used to monitor and assess climate-related risks and opportunities, along with any climate-related targets and the entity’s progress toward meeting them

Why identifying climate risks is essential

Failing to identify climate risks may have costly consequences, including supply chain disruptions, reputational damage, regulatory fines, and missed business opportunities. Conversely, proactive identification paves the way for well-informed decision-making that safeguards assets and enhances operational resilience.

Steps to identify climate risks

1.Assess business operations and supply chains

Begin by examining your business processes and mapping the value chain to pinpoint where climate risks might arise. Consider factors such as energy usage, reliance on natural resources, and the vulnerability of key suppliers.

2.Engage stakeholders and experts

Open communication with employees, investors, regulators, and climate specialists ensures a deeper understanding of potential risks and their implications.

3.Leverage data and tools for risk identification

Utilise advanced tools, predictive models, and climate data to map risks accurately. For example, risk analytics platforms that simulate the financial impacts of extreme weather events can offer valuable insights.

Examples of climate risks across industries

Manufacturing: Increased energy costs due to carbon pricing mechanisms.
Real Estate: Property damage and devaluation caused by extreme weather.
Retail: Disrupted supply chains due to regional climate events.
Agriculture: Reduced yield caused by changing weather patterns.

Key considerations for compliance with IFRS S2

Aligning climate risk identification with IFRS S2 requirements

To meet IFRS S2 standards, businesses must clearly disclose how climate-related risks are identified and managed, ensuring that this process is applied consistently across the organisation and integrated into their broader risk management framework.

Ensuring transparency and consistency in disclosures

Clear documentation backed by robust evidence prevents discrepancies in reporting and maintains stakeholder confidence.

Addressing data gaps and uncertainties

While accessing data on climate impacts can be challenging, acknowledging uncertainties and using scenario analysis to prepare for multiple outcomes can strengthen your approach.

Engaging with auditors and stakeholders

Continuous collaboration with auditors and key stakeholders ensures accountability and helps identify areas for improvement in climate risk reporting.

How RSM can support climate risk management with IFRS S1 and S2

With IFRS S2 paving the way, organisations have an opportunity to proactively identify and manage climate risks. RSM helps organisations to address climate exposures head-on, ensuring businesses not only meet reporting requirements but also unlock further opportunities for growth, resilience, and stakeholder trust.

Contributors:

Jacob Elkhishin

Partner, Risk Advisory and ESG Services

Australia

Samuel Weight

Consultant, ESG and Climate Services