By Dr Kaushik Sridhar – Founder & CEO, Orka Advisory (Melbourne, Australia)
For years, climate risk sat comfortably within sustainability departments. It was discussed in ESG reports, summarised in stakeholder updates, and occasionally presented to boards as part of broader reputational risk briefings. But rarely did it influence core financial decision-making. That separation is no longer defensible.
Across global markets, climate risk is rapidly shifting from a peripheral sustainability issue to a central financial and governance concern. The change is not philosophical. It is regulatory, structural and economic. Boards that fail to recognise this shift are exposing their organisations to material risk.
The reframing of climate risk
The most important development in recent years is the reframing of climate change as a source of enterprise-value impact. Regulators, investors and standard-setters are no longer asking companies to disclose their environmental intentions; they are asking how climate-related risks and opportunities affect cash flows, asset values, cost of capital and long-term strategy. This reframing fundamentally alters the conversation. Climate risk is no longer about carbon footprint disclosure alone; it is about physical asset resilience, insurance availability, supply chain volatility, policy transition costs, financing conditions and stranded asset exposure. In other words, it is about financial performance.
That performance is already being hit. In the first half of 2025, global insured losses from natural catastrophe events reached US$100 billion – 40 per cent higher than the same period of 2024 – while total global economic losses were US$162 billion. The Swiss Re Institute estimates that insured losses from natural catastrophes will reach US$107 billion in 2025, marking the sixth consecutive year these losses have exceeded US$100 billion. Los Angeles wildfires alone are expected to cost insurers around US$40 billion. These figures underscore that climate-related physical risks are no longer hypothetical; they are balance-sheet realities.
Physical risk is becoming balance-sheet risk
Extreme weather events, rising temperatures and chronic climate shifts are now operational realities. Physical risks increasingly affect asset impairment and useful-life assumptions, drive up insurance premiums and coverage exclusions, cause operational downtime and productivity losses, create commodity and input price volatility, and necessitate large investments in infrastructure resilience and maintenance. When insurers withdraw coverage or sharply increase premiums, the issue sits with the chief financial officer and the audit committee, not the sustainability team. And when physical events disrupt supply chains, revenue forecasts and working-capital assumptions are affected. These are balance-sheet consequences, not just environmental considerations.
Transition risk is reshaping capital allocation
Equally significant are transition risks arising from policy shifts, technological change, market expectations and investor scrutiny. Carbon pricing, emissions standards, disclosure mandates – such as the IFRS S2 climate-related disclosures standard – and decarbonisation pathways influence project-viability assessments, discount rates and the weighted average cost of capital, long-term demand assumptions, access to debt and equity financing, and competitive positioning. Boards approving capital expenditure today must consider whether assets will remain viable under tightening climate policies and shifting market expectations. Ignoring this dynamic is not neutrality; it is a strategic gamble.
The governance blind spot
Despite the growing financial implications, many boards still treat climate as a sustainability reporting matter rather than a strategic risk driver. This creates a governance blind spot. When climate oversight is isolated within sustainability updates instead of embedded into risk, strategy and finance discussions, boards fail to test core assumptions. They should be challenging how climate scenarios affect long-term revenue projections; what happens to asset valuations under different transition pathways; whether business models are stress-tested against insurance withdrawal or regulatory acceleration; and whether remuneration structures reflect climate-related performance and risk. Without integration into enterprise risk management and financial planning, climate risk remains conceptually acknowledged but practically ignored.
Scenario analysis is not an academic exercise
One of the clearest indicators of maturity is how organisations approach climate scenario analysis. In weaker approaches, scenarios are high-level narratives produced for disclosure purposes that do not link to financial sensitivities or strategic decisions. In more mature organisations, scenario analysis informs capital-allocation decisions, asset-impairment testing, supply-chain diversification, operational-resilience investments and long-term strategic pivots. The difference lies in whether climate scenarios are used to inform board-level decisions or merely to populate reports.
Investor expectations are shifting rapidly
Investors increasingly view climate exposure as a proxy for governance quality. FTSE Russell’s 2025 global asset-owner survey found that 85 % of asset owners identify climate change as a major concern. Eighty per cent of respondents said they integrate sustainability or climate considerations into strategic asset allocation, and 73 % implement sustainability products in their portfolios. Financial performance and risk management have become the primary motivations for sustainable investment. When climate risks are poorly understood or inadequately disclosed, investors may interpret this as a broader weakness in risk management. Conversely, organisations that demonstrate clear integration of climate considerations into strategy and financial planning are often perceived as better prepared for long-term volatility. Access to capital is therefore becoming partially contingent on climate competence. This marks a profound shift from voluntary sustainability positioning to financial credibility.
Climate competence is now a board capability issue
As climate risk becomes financial risk, it also becomes a capability issue. Boards must possess sufficient expertise to interrogate management assumptions, challenge scenario outcomes and understand how climate variables affect enterprise value. This does not mean every director must be a climate scientist, but it does mean boards must ensure that climate-related risks are embedded in enterprise risk frameworks, financial planning reflects climate assumptions, oversight responsibilities are clearly allocated, reporting is consistent with internal risk assessments, and management incentives align with transition strategy. Without this capability, oversight becomes symbolic rather than substantive.
The cost of inaction
The consequences of failing to treat climate as a financial risk are increasingly visible. They include asset write-downs linked to regulatory acceleration, insurance withdrawal and escalating premiums, litigation exposure tied to inadequate disclosure, reputational damage following climate-related disruptions, and erosion of investor confidence. In each case, the root issue is not climate awareness but governance integration.
From sustainability narrative to financial discipline
The maturation of climate-disclosure regimes is forcing organisations to move from narrative-based sustainability reporting to financially grounded risk management. Climate risk can no longer sit in a standalone report; it must be reflected in strategy documents, capital-expenditure papers, financial forecasts and board discussions. For boards willing to make this shift, climate integration strengthens resilience and strategic clarity. For those that do not, the risks will not remain theoretical. Climate risk has crossed the threshold. It is now firmly a financial risk – and boards must respond accordingly.
