From Climate Risk to Financial Numbers: A Practical Explainer

Climate risk is financial risk. That's the core message behind IFRS S2 and the reason so many finance teams are now being asked to put numbers on something that once sat with the sustainability team. But how do you actually do it? Let me walk you through the building blocks.

Two kinds of risk, one balance sheet

Start by separating the problem. Physical risk is the financial exposure to acute events—floods, storms, droughts, heatwaves—and chronic shifts in climate patterns. Transition risk comes from the move to a lower-carbon economy: policy, legal, technology, market and reputational changes. Both land in the same place: your cash flows, your access to finance, your cost of capital. That's exactly what IFRS S2 asks you to focus on—risks and opportunities that could reasonably affect those financial realities over short, medium or long-term horizons.

Scenario analysis is a resilience test, not a forecast

Here's where people get stuck. IFRS S2 requires scenario analysis to assess climate resilience, but it does not prescribe a single scenario or a universal numerical loss estimate. It's a resilience assessment, not a standalone forecast. The approach must be commensurate with your circumstances—your exposure, your skills, your capabilities and resources—using reasonable and supportable information available without undue cost or effort.

So don't wait for the perfect model. Ask: what scenarios are plausible for us? Do they cover physical and transition risks? What do they imply for our business?

Translating S2 into numbers

To turn climate risk into financial terms, connect scenario assumptions to business and valuation drivers. These are analytical channels, not a prescribed IFRS S2 formula. Think:

• Asset damage or downtime
• Operating and capital costs
• Revenues and useful lives
• Cash flows and cost of capital

For example, a flood scenario might increase downtime and repair costs, reducing cash flows. A carbon price scenario might raise operating costs or shift demand. The point is to make the bridge transparent: scenario, time horizon, exposure, assumptions, data sources, and the valuation or financial-statement channel affected.

Emissions are metrics, not losses

IFRS S2 requires disclosure of absolute gross Scope 1, Scope 2 and Scope 3 emissions in metric tonnes of CO₂ equivalent, with Scope 2 including location-based emissions. Important: these figures are metrics, not themselves estimates of financial loss. They inform the analysis, but they don't replace it.

What about valuation?

Under IVS 104's ESG appendix, significant ESG factors—including current and future climate risks—should be considered in determining the value of a company, asset or liability, to the extent they are measurable and a valuer would regard them as reasonable using professional judgement. That's a clear signal: climate risk belongs in the valuation conversation, not in a separate silo.

Timing and jurisdiction

IFRS S2 is effective for annual reporting periods beginning on or after 1 January 2024. In the first year, you need not provide comparative information for periods before initial application. For Hong Kong, HKEX's 2024 climate-related Code amendments apply from financial years beginning 1 January 2026: Scope 1 and 2 emissions are mandatory for listed issuers, while wider climate requirements vary by issuer category and include "comply or explain" arrangements. HKFRS Sustainability Disclosure Standards aligned with IFRS S1 and S2 became available for voluntary application from 1 August 2026, with 2028 as Hong Kong's target for full ISSB alignment. Always check the applicable HKEX/HKICPA requirements for your entity.

If you want a deeper mathematical guide, see Climate Risk Quantification in Practice. For the standards themselves, start with IFRS S2 and its illustrative guidance. The IVS 104 ESG appendix is essential for valuers. And for Hong Kong-specific details, see this overview.