Facing a myriad of highly interested and diverse stakeholders, the energy industry is often forced to reckon with the competing demands of both increasing energy production using cost-effective methods, while also being responsive to stakeholder demands to produce expensive zero-carbon products.
These contradictory stakeholder pressures are becoming more relevant as voluntary reporting on sustainability initiatives is quickly giving way to expansive reporting requirements under regulations, such as California’s 2023 Senate Bill 261 (SB 261), the European Union’s simplified Corporate Sustainability Reporting Directive, and other global reporting requirements.
Often found at the nexus of regulatory reporting requirements, increased stakeholder attention, and investment considerations are climate-related risk and opportunity assessments (climate risk assessments). Based on our experience, energy companies are using climate risk assessments to comply with regulations, satisfy external stakeholders, and set a course for strengthening the company’s bottom line.
Why Do Climate Risk Assessments Matter Now?
U.S.-based energy companies reporting climate-related risks and opportunities, either voluntarily or under the requirements of a regulation, most commonly align with one of two key frameworks:
- Task Force on Climate-Related Disclosures (TCFD): TCFD’s monitoring role was transferred to the IFRS Foundation in 2024, following its final status report in October 2023, though its recommendations remain embedded in laws such as SB 261.
- International Financial Reporting Standards’ (IFRS) International Sustainability Standards Board (ISSB) S2: The formal successor to TCFD.
The TCFD and IFRS are closely aligned. In this article, we focus on IFRS, given that it is more expansive than TCFD and likely to be more widely adopted in the years to come. Under the IFRS, companies are required to disclose climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. These risks and opportunities must be described based on type, company impact, and the time horizon of those impacts. In addition, companies are required to contextualize these impacts in relation to their business model, value chain, strategy, decision making, financial position, financial performance, and cash flows.
What Is a Climate Risk Assessment?
Companies typically structure climate risk assessments into two key components:
- Physical climate risk assessment
- Transition risk and opportunity assessment
Physical Climate Risk Assessment
A physical climate risk assessment evaluates how acute and chronic hazards affect a company’s assets, operations, supply chain, and broader business performance over time.
- Acute risks are extreme and periodic events driven, in part, by a changing climate that may include destructive wildfires, extreme precipitation, or intense winter storms. The impacts are often local or regional in scale and more difficult to predict.
- Chronic risks manifest more slowly and have global impacts. These risks include changing annual temperatures, unstable precipitation patterns, and rising sea levels.
These assessments can be conducted using a range of methods, from single-day workshops with key stakeholders knowledgeable of the company’s critical assets to more complex, multi-month, geospatial analyses incorporating climatic hazard data and local vulnerability characteristics. The results aim to identify which assets are most at risk to climate-related disruption.
Key Elements of an IFRS S2 Report
Governance
- Governance processes
- Controls and procedures
- Roles and responsibilities
Strategy
- Business model and value chain
- Strategy and decision making
- Current and anticipated financial effects
- Resilience
Risk Management & Opportunities
- Risk management processes
- Integration with overall risk management
Metrics & Targets
- Mandatory objectives
- Entity-specific objectives
- Performance tracking (through KPIs)
Transition Risk & Opportunity Assessment
A transition risk and opportunity assessment evaluates how a company may be impacted by the shift to a lower-carbon economy. This may include changes in:
- Reputation
- Technology
- Markets
- Policy and legal exposure
First, these assessments typically involve understanding the field of potential risks and opportunities through key stakeholder interviews, market trend analysis, peer benchmarking, and review of current and projected climate-related government policies.
Once identified, these risks and opportunities are reviewed to determine which are financially material to the company’s operations or value chain. This often involves scenario analysis, ranging from structured workshops to more complex financial modeling exercises.
By the end of the assessment, companies should have a clear understanding of which transition-related risks and opportunities are most likely to impact financial performance and can incorporate these results into reporting and strategic planning.
Unlock Value & Turn Insight Into Action
The Roadblock
A large independent oil and gas producer was seeking a greater understanding of its climate-related risks and opportunities. Given its global footprint, leadership recognized it could be brought into climate-related disclosure compliance requirements at any time. At the same time, the company faced exposure to both physical climate and transition risks but lacked a clear, holistic view of vulnerabilities across its operations and value chain.
The Breakthrough
The team at Forvis Mazars foregrounded custom solutions to prepare the company for future disclosures while giving deep insights into the impact of physical and transition risks and opportunities on its operations.
For physical risk:
- Worked closely with the client to identify relevant sites, regions of operations, and critical value chains
- Analyzed more than 450,000 physical climate risk data points alongside stakeholder interview data
- Created a holistic picture of potential physical risks through year 2100 under multiple climate warming scenarios
For transition risk and opportunities:
- Leveraged company documents, peer materials, and stakeholder interviews
- Identified more than 40 potentially material risks and opportunities
- Convened cross-functional leadership (legal, supply chain, investor relations, etc.) to refine and prioritize risks and opportunities through workshops and scoring
The Success
By combining qualitative insights and quantitative analysis, the company gained a holistic understanding of its climate risk profile. This helped to:
- Identify key vulnerabilities across operations and the value chain
- Enable leadership to prioritize material risks and opportunities based on financial impact
- Equip the organization with actionable insight to protect critical assets, strengthen resilience, and prepare for evolving regulatory requirements
Case Study
This engagement allowed the company to have a clear, data-driven understanding of its climate risk exposure and opportunity landscape. By identifying and prioritizing material, physical, and transition risks, leadership can now protect critical assets, strengthen resilience, and align decisions with evolving regulatory expectations. Involving cross-functional leaders alerted company decision-makers to the centrality of climate-related risks and opportunities while incorporating deep thinking into future decades.
As part of the service delivery, our team brought together leaders to provide education on climate change, potential risks and opportunities, the landscape of reporting, and identifying relevant risks and opportunities for the company. Even long after the workshop, contributors were providing feedback on potential physical and transition risks to company leaders. Ultimately, the company has more resilience built in as it is positioned to proactively help manage risk while capturing value in a transitioning energy market.
How to Create Strategic Value Beyond Compliance
Climate-related risks and opportunities are already having a measurable impact on the energy industry. From increasing asset vulnerability in certain regions to the potential financial impacts of taxes on greenhouse gas emissions, many energy companies are already experiencing the effects of climate change.
The industry’s specialized knowledge, e.g., drilling miles underground for oil, understanding the difficulty of building along the coast, and structuring intricate transnational supply chains, means that energy companies are well-suited to take advantage of potential opportunities and combat physical climate risks. Organizations that take a structured approach to understanding and addressing these factors are better positioned to adapt to changing conditions and make informed strategic decisions.
How Forvis Mazars Can Help
Forvis Mazars works extensively with organizations to design and execute climate risk assessments that align with regulatory expectations and operational realities, including:
- Identifying key physical and transition risks across assets and value chains
- Combining qualitative input with quantitative analysis
- Supporting scenario analysis and materiality assessments
- Aligning outputs to relevant reporting frameworks
- Translating findings into actions that support business strategy
Interested in learning more about these topics? Connect with a professional today.