Climate Risks and Their Management

While the state continues to struggle between emergency responses and insufficient planning, companies must integrate climate risk into their business risk management.

Recent storms in Portugal have once again exposed the fragility of climate risk management, revealing that much of the damage results less from the intensity of extreme events and more from a lack of planning and adaptation. Studies and experts have insisted that the country continues to focus primarily on reaction, investing less than necessary in prevention and territorial resilience, despite the intensification of extreme weather events associated with climate change, which are also exacerbated by inadequate land use planning.

But while the state continues to struggle between emergency responses and insufficient planning, companies must integrate climate risk into their business risk management, not least so that they can make intelligent use of the potential funding to support innovation that usually exists within the scope of Compete.

All companies, small, medium, and large, should incorporate climate risk both in the list of operational risks—which affect day-to-day activities—and in the list of contingency risks, which require specific plans for high-impact extreme events.

Depending on the level of risk identified, the company should have someone responsible for managing this risk and for identifying mitigation and adaptation measures that need to be implemented and monitored.

How can this be done?

The international standard IFRS S2, International Financial Reporting Standard S2 – Climate-related Disclosures, is an international reporting standard issued by the International Sustainability Standards Board (ISSB) that defines how companies should identify, measure, and disclose climate-related risks and opportunities.

IFRS S2 specifies requirements for governance, strategy, risk management, and climate-related metrics/objectives, including the disclosure of physical risks (e.g., storms, floods, extreme heat) and transition risks (e.g., regulatory changes, decarbonization). The great relevance of IFRS S2 lies in the recognition that companies must conduct rigorous and transparent climate scenario analyses. These analyses should explain how they assess their exposure to risk, what methodologies they use, what assumptions underlie that assessment, and how the results influence their transition and resilience plans. This exercise encourages companies to initiate a continuous practice of strategic climate risk management.

IFRS S2 should be seen as a strategic tool that allows companies to identify vulnerabilities before they become crises and define mitigation measures—from infrastructure location to adaptation investments.

The scenario planning required in IFRS S2 allows companies to anticipate potential future costs, which justify potential investments in the present, and whose financing should be possible through climate adaptation financing from sources to be defined by the State. In 2024, I argued that “It is not at all unreasonable to consider creating a Sovereign Fund to address losses and damages caused by environmental disasters that will occur in the future and, consequently, affect future generations. These revenues should come mainly from taxes on polluting economic agents who are therefore contributing to future environmental damage."

While this idea may have seemed bold at the time, today's reality shows the opposite: the costs of extreme events are increasing, systematic, and need to be estimated. The IFRS S2 rules reinforce this argument by providing a tool for companies to quantify climate risks and their potential financial impact, thus revealing the real extent of potential losses and the need for structural mechanisms to finance resilience.

The link between IFRS S2 and a Sovereign Loss and Damage Fund is clear:

• The standard provides the methodology for companies to identify and measure risk, which leads to the identification of mitigation and adaptation measures that should be implemented;

• The fund provides a financial response to the measures identified above by companies;

• Both encourage the reduction of vulnerabilities and the accountability of the biggest polluters who contribute most to climate change.

Portugal needs an integrated strategy where prevention, reporting, and financing work together. IFRS S2 provides the technical basis; a Sovereign Loss and Damage Fund can provide the economic basis. Only then will the country stop reacting to storms and finally begin to anticipate them.

Published in PT Green Journal