Climate risk is the potential for climate change and the transition to a low-emission economy to cause losses for a business. The TCFD recommendations — now integrated into IFRS S2 — divide it into two groups: physical risks (storms, floods, droughts, heatwaves, sea level rise) and transition risks (policy, technology, market, reputation).
Key takeaways
- Physical risks include acute risks (natural disasters) and chronic risks (changes in temperature, rainfall and sea level).
- Transition risks include carbon prices, CBAM, shifts in customer demand and technology costs.
- Scenario analysis helps test the resilience of a strategy across a range of possible futures.
The four disclosure pillars under TCFD/IFRS S2
| Pillar | Key question |
|---|---|
| Governance | Who oversees and manages climate risk? |
| Strategy | Which risks and opportunities affect the business model and finances? |
| Risk management | How are climate risks identified, assessed and managed? |
| Metrics and targets | Which metrics are used to measure them, and what are the targets? |
A five-step roadmap
- Identify risks by asset location, supply chain and market.
- Assess the magnitude and likelihood of impacts over different time horizons.
- Analyse scenarios: at least one scenario aligned with the Paris Agreement goals and one high-warming scenario.
- Respond: adaptation (flood embankments, backup supply) and mitigation (emissions reduction).
- Integrate into the enterprise risk management framework and report to the Board.
Examples of risks in Vietnam
- Factories in low-lying areas exposed to flooding and production disruption.
- Heatwaves reducing labour productivity and increasing cooling costs.
- Drought and saltwater intrusion affecting agricultural sourcing areas.
- International customers requiring emissions cuts and favouring low-carbon suppliers.
Climate risk is no longer just an environmental risk — it is a credit risk, a supply chain risk and a market risk.
Frequently asked questions
Do small businesses need climate scenario analysis?
They can start with a simple qualitative analysis of the main risks to their assets and supply chain; IFRS S2 allows an approach proportionate to capabilities and resources.
How does climate risk affect access to loans?
Banks are increasingly assessing borrowers' climate risks; businesses with a clear risk management plan will find it easier to access green credit.
How do TCFD and IFRS S2 differ?
IFRS S2 incorporates the TCFD recommendations and adds more detailed requirements, such as Scope 3 emissions and industry-based metrics.
VietESG — Independent ESG rating organisation. Ratings based on disclosed data, supporting evidence and a public methodology aligned with GRI and the SDGs.
