Navigating the new reality of climate risk

In 2008, the financial crisis sent shockwaves through global markets, with companies scrambling to shore up their balance sheets and rethink how they managed risk. The lessons learned from that period reshaped how corporate treasurers view economic vulnerabilities. Fast forward to 2024, and a different kind of risk is knocking at the door. This time, it’s climate change.

The latest reports from the Climate Financial Risk Forum (CFRF) are clear: climate risks are no longer distant concerns. Corporate treasurers now need to treat short-term climate impacts—like extreme weather and supply chain disruptions—as immediate financial threats.

For treasury teams, this means embedding short-term climate risk assessments into the core of daily financial operations. Just as treasury functions had to evolve after the financial crash, they must now adapt to this new reality. Failure to integrate these risks into liquidity management, capital allocation, and operational planning could leave companies exposed, not only to financial losses but to reputational damage as well.

Integrating short term climate risk

The Short-Term Scenarios Analysis report from the Climate Financial Risk Forum (CFRF) leaves no room for complacency. It stresses that corporate treasury teams must treat short-term climate risks—extreme weather, commodity price fluctuations, and supply chain disruptions—as pressing concerns. These events are no longer seen as long-term, distant threats and are becoming realities that can affect day-to-day financial operations within the next few years​.

Accountants will need to update their financial models and reporting practices to account for these short-term impacts. This includes reviewing asset valuations, contingent liabilities, and potential impairments related to climate-related events. For instance, businesses reliant on global supply chains may need to reassess inventory valuations or recognize provisions for potential losses due to sudden flooding or heatwaves. This level of unpredictability demands real-time risk assessments to ensure companies can accurately report their financial position and performance.

Accounting teams will also need to scrutinise their financial statements, disclosure practices, and overall exposure to assets vulnerable to climate-related events. For example, stress-testing asset values in the context of severe weather or supply chain interruptions could reveal impairments that were previously unaccounted for. Regulatory bodies are increasingly expecting these risks to be factored into financial reporting, which could lead to changes in accounting teams’ materiality assessments and disclosure practices.

Furthermore, firms must adjust their expected credit loss models to account for heightened risk due to climate shocks. Rising volatility from future climate impacts may interact with existing financial cycles, exacerbating credit risks and potentially requiring larger loss allowances. As a result, accountants should engage in scenario testing that captures these compound effects on short-term asset valuations and liability recognition.

The CFRF highlights a key takeaway: accountants should collaborate closely with risk management and sustainability teams to leverage climate scenario tools and stress-testing models that assess how short-term risks impact financial statements and disclosures. This is not just about long-term transition plans but immediate actions that ensure accurate and transparent financial reporting over the next five years. Accounting teams that fail to act quickly may face increased scrutiny from auditors, regulators, and investors.

Adapting financial reporting for climate resilience

In addition to integrating short-term climate risks into daily operations, accounting teams are being urged to explore new financial products that support climate resilience. The Mobilising Adaptation Finance report emphasizes that treasurers will need to shift focus from traditional financial instruments to those designed to mitigate the impacts of climate change. Practices such as integrated reporting, climate-related financial disclosures, and sustainability accounting are no longer niche offerings but central to future financial planning.

The report outlines that businesses operating in vulnerable sectors, such as agriculture, real estate, and energy, must seek out reporting solutions that help them communicate their adaptation to increasingly volatile conditions. For accounting teams, this means rethinking financial statement presentations and considering disclosures that support long-term resilience, like quantifying investments in infrastructure upgrades or detailing the diversification of supply chains to mitigate the risk of extreme weather disruptions.

Furthermore, the development of these reporting practices will require close collaboration with sustainability experts and external auditors. The CFRF encourages accountants and their auditing partners to work together on creating tailored solutions that meet specific climate adaptation reporting needs. Auditors, with their ability to provide assurance on complex non-financial information, can help accounting teams develop robust and credible climate-related disclosures. This shift will also allow companies to meet investor expectations around sustainability, reducing the risk of reputational damage linked to climate inaction.

The regulatory push

With regulatory pressure mounting, corporate accountants will need to adapt quickly to new climate and nature-related reporting requirements. The Mobilising Adaptation Finance and Nature-Related Risk reports both emphasize the increasing importance of transparency in how companies manage these risks. Financial institutions are expected to align with frameworks like the Taskforce on Climate-related Financial Disclosures (TCFD) and the upcoming Taskforce on Nature-related Financial Disclosures (TNFD), which demand greater clarity on how businesses are preparing for climate and environmental risks.

For accountants, this means not only reporting on traditional financial metrics but also disclosing how their financial statements and notes address climate adaptation and nature-related risks. Working closely with sustainability experts and auditors to improve data collection and risk modeling will be critical to meeting these new regulatory standards. Failure to comply could result in increased scrutiny from investors, regulators, and stakeholders, as well as potential financial penalties.

Auditors, in particular, are in a strong position to support accountants by offering expertise on scenario analysis, regulatory compliance, and sustainable reporting solutions. As disclosure requirements tighten, proactive collaboration between accountants and their auditing partners will be essential in navigating this new regulatory landscape.

Strengthening partnerships

The CFRF reports underscore the critical need for stronger collaboration between corporate accounting teams and their auditing partners. As both climate and nature-related risks become immediate financial concerns, auditors are increasingly essential in helping accountants navigate these challenges. From providing assurance on climate risk assessments to verifying the accuracy of environmental, social, and governance (ESG) disclosures, auditors have the expertise and resources to support accountants in building resilience.

Accountants should actively engage with their auditing partners to integrate climate and nature risks into financial reporting strategies. Whether it’s through joint development of climate-related key performance indicators (KPIs) or leveraging scenario analysis to stress-test financial statements, this partnership is key to maintaining reporting integrity in a rapidly changing environment. Together, they can unlock new opportunities in sustainable finance reporting while ensuring compliance with emerging regulations and managing the risks that come with a warming planet.

Entering a new era

The Climate Financial Risk Forum’s 2024 reports make one thing clear: corporate accounting teams can no longer afford to view climate and nature-related risks as distant concerns. These risks are now integral to financial reporting and require immediate attention. From integrating short-term climate risk assessments into daily decision-making to adapting financial disclosures for resilience, accountants must evolve their strategies to navigate this new era of risk management.

As accountants and their auditing partners work together to address these challenges, those who act swiftly will be better positioned to provide accurate and transparent financial reporting and seize new opportunities in sustainable finance. For those slow to adapt, the financial consequences could be significant—both in terms of regulatory non-compliance and missed opportunities for growth in a low-carbon, climate-resilient future.