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Definition

Climate risk management

Climate risk management is the documented process for identifying, assessing, prioritising, and monitoring risks from climate hazards and the shift to a lower-emissions economy, then integrating them into your organisation's wider risk decisions.

What is climate risk management?

Climate risk management turns physical and transition risks into repeatable decisions. IFRS S2 paragraphs 24-26 require disclosures about the inputs, criteria, priorities, monitoring, process changes, and integration behind those decisions. Keslio's TCFD and IFRS S2 guide explains the wider disclosure structure.

Why does climate risk management matter to you?

When an investor or risk committee asks how you decide which climate risks need action, show how the decision changes a budget, maintenance plan, procurement choice, or operating control. A list of floods, heat, or carbon-price changes is not enough if it lacks a defined scope, likelihood and magnitude criteria, an owner, review date, and link to financial or operational decisions.

How does climate risk management work?

Set the sites, business units, value-chain activities, and time horizons covered. Record each risk's source, physical or transition type, likelihood, magnitude, threshold, priority, owner, controls, monitoring measure, and next review date. Apply the same documented scoring rules before ranking risks. Then compare them with other enterprise risks and record changes from the previous reporting period.

What mistakes should you avoid?

  • Rating risks without recording the data source, scoring threshold, and scope of operations.
  • Keeping climate risks in a separate register that never informs budgets, maintenance, procurement, or enterprise risk review.
  • Reporting a control without an owner, monitoring measure, review date, or escalation trigger.

Is climate risk management the same as a climate risk assessment?

No. Assessment estimates a risk's nature, likelihood, and magnitude. Management also prioritises risks, assigns controls and owners, monitors change, and integrates the result into existing decisions.

What do you send when an investor asks about climate risk management?

Send the risk policy, scope, register, scoring method, scenario inputs, owners, controls, monitoring results, review dates, changes since the prior period, and the committee or board record showing how material risks entered wider risk decisions.

Example

Suppose a garment and textile factory in Australia uses an internal escalation rule: review any climate risk with an estimated 12-month cash effect of at least AUD 500,000 or more than three days of production lost.

For a hypothetical dye-house flood, finance estimates AUD 350,000 of repair costs and four days of lost production contribution at AUD 55,000 per day. The total cash effect is AUD 350,000 + (4 x AUD 55,000) = AUD 570,000, which exceeds the cash threshold by AUD 70,000 and the downtime threshold by one day. The facilities manager owns a 90-day action plan and reports monthly on flood-barrier installation. A hypothetical electricity carbon-price effect is 6,000,000 kWh x an internal AUD 0.01/kWh cost assumption = AUD 60,000, so it stays below the escalation threshold and is reviewed in six months. These are hypothetical internal assumptions, not forecasts of Australian conditions or policy.

Where it comes up

IFRS S2 climate-risk inputs, scenario use, likelihood and magnitude criteria, prioritisation, monitoring, and process changesIFRS S2 paragraphs 24 and 25(a)(i)-(vi)IFRS S2 integration of climate-risk processes into overall risk management and avoidance of duplicate disclosureIFRS S2 paragraphs 25(c)-26AASB S2 identification, assessment, prioritisation, monitoring, and integration of climate-related risksAASB S2 paragraphs 24-26

Related terms

Physical climate risk

Physical climate risk is the potential for acute events or chronic climate shifts to damage assets, interrupt operations, disrupt supply chains, and change revenue, costs, cash flows, financing, or insurance.

Climate-related transition risk

Climate-related transition risk is the financial risk that policy, legal, technology, market, or reputation changes create as economies move towards lower greenhouse gas emissions.

Climate scenario analysis

Climate scenario analysis tests how your strategy, business model and financial performance could change under several plausible climate futures, including physical hazards and policy, market and technology shifts.

Climate resilience

Climate resilience is your strategy and business model's capacity to keep working, fund a response and change course when physical hazards or the shift to a lower-carbon economy affect the company.

Materiality

Materiality is the test a company uses to decide which sustainability topics matter enough to manage or report because they could affect its finances, reflect significant impacts on people or the environment, or both.

Sources

Last verified 2026-08-21

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Climate risk management Definition | Keslio