Integrating and disclosing climate-related data in a scientifically sound and forward-looking manner is essential for effectively preparing for climate-related risks. Additionally, companies are facing an increasing demand for non-financial reporting, which includes using climate change scenarios in risk analyses.
Significant contributions to environmental goals in accordance with the EU Taxonomy Regulation are also necessary. However, many companies currently exhibit notable gaps in incorporating forward-looking climate data and scenarios into their reporting and long-term planning strategies. In light of this, we briefly describe and discuss an innovative eight-step process model designed to integrate future climate change into corporate processes.
This model takes into account existing regulations, standards, and recommendations for risk assessment and reporting, aiming to empower decision-makers within companies to identify and assess the impacts of climate change while considering regional climate information. By leveraging this information and Using additional local knowledge, companies can pinpoint suitable adaptation options and develop transformative risk management solutions. This approach fosters new forms of collaboration embedded within a framework of transdisciplinary co-production processes. Thus, close and trust-based cooperation between internal and external stakeholders from the outset is a crucial factor for success.
The process model approach
This process has been developed as a prototype to assist companies in assessing their vulnerability to current and future climate change impacts. It also helps identify potential adaptation strategies and measures. The process model focuses on direct and indirect physical impacts, encompassing acute and chronic effects. Currently, these impacts are not adequately considered by company decision-makers.
The objective of the procedure outlined below is to methodically assess susceptibility across various aspects of a company, taking into account present and future climate changes and their associated impacts. The approach aims to bridge the gap between existing knowledge about expected climate change and the awareness among decision-makers regarding its effects on their organizations. At the same time, it acknowledges the increasing necessity for companies to prepare for the impacts of climate change and to disclose this information to investors, customers, and through mandatory reporting. The process model consists of the following eight phases (figure 1): i) stocktaking, ii) classification, iii) identification, iv) provision of the required climate information, v) facilitating the use of climate information (capability), vi) derivation and implementation of measures, vii) evaluation, and viii) process solidification, which are described in figure 1.
Phase 1: Stocktaking
The main objective is to identify potential events along with their associated damages, disruptions, and failures, both at the company site and throughout its supply chain, logistics, and markets for its products and services. This identification process relies on past experiences, observations, meteorological data, and the expertise of all relevant stakeholders within the company. Furthermore, external knowledge sources and sector-specific impact information ought to be taken into account.
The focus is on events directly affecting the company and linked to the impacts of climate change. These impacts encompass both physical and transition risks for businesses. Consequently, the inventory must include all potential impact levels of climate change, covering physical, market, regulatory, and health-related implications for employees throughout the value chain. These impacts may entail both direct and indirect consequences for the company. The inventory should not rely solely on management’s knowledge but must also incorporate insights from all relevant business units. This can be achieved through workshops that compile historical data on weather- or climate change-related disruptions and damages, as well as projections of future impacts based on current trends. Furthermore, the inventory should encompass existing data on future climate parameters relevant to the company and its supply chains. External sources of information, such as municipal rainfall runoff or hazard maps, can be integrated to assess location-specific flooding risks. Urban climate analyses can further assist in evaluating heat-related risks. Moreover, it is often beneficial to incorporate existing or develop new climate impact chains as part of the risk analysis. A minimum list of climate hazards to be considered in a risk and vulnerability analysis, compliant with the EU Taxonomy, is provided in Appendix A to Annex I and II of the Delegated Regulation to the EU Taxonomy Regulation.
Phase 2: Classification
The primary objective here is to assess the impacts identified in Phase 1 regarding their relevance and significance. This phase filters out the impacts that are critical to the company’s objectives and, consequently, hold the highest priority. It aims to identify those impacts that could significantly influence the company’s operations, productivity, and performance in relation to strategic, political, and stakeholder-related goals.
To facilitate this, a weighted decision table or matrix is recommended, which aligns with the risk analysis step in the overall risk management process. In this process, key criteria are predefined and assessed on a scale of 1 to 10 based on their relevance. Additionally, some criteria may be given higher weights depending on the company’s priorities, particularly those impacts that require avoidance or mitigation to align with its objectives. Following this, a priority ranking of the impacts will be established. The evaluation of the most critical potential impacts can also be conducted using a risk matrix, taking into account factors such as the probability of occurrence and the extent of damage. This approach visually categorizes impacts that have a high likelihood of occurrence and significant damage, making it easier to present the results to individuals who are not directly involved in the process.
With regard to the EU Taxonomy Regulation, the relevant climate hazards to consider are detailed in Appendix A of Annexes I and II of the Delegated Regulation to the EU Taxonomy Regulation. It is important to emphasise that prioritization should not be seen as overlooking less immediately relevant climate hazards. Climate hazards deemed irrelevant due to their geographical occurrence or other factors must also be recorded and justified. The process of documenting potential climate hazards and their impacts on company activities enables a structured assessment and comprehensive documentation of climate-related risks.
Phase 3: Identification
In the next step, it is essential to identify the key climate parameters required for a more detailed analysis of the relevant impacts. Additionally, if the company intends to align with the EU Taxonomy Regulation, it is crucial to determine the highly relevant climate hazards outlined within the taxonomy framework. The identification of critical climate parameters can be informed by data that depicts potential future developments in climate variables, taking into account different climate scenarios derived from all regional climate model simulations. These key climate parameters include various aspects such as current and projected air temperatures, the frequency of heat days and tropical nights, and the duration and recurrence of droughts, frost days, humid days, and days with heavy rainfall.
Combinations of these parameters can also be of high relevance. For example, while a single tropical night may not have severe consequences, a series of tropical nights combined with a specific number of heat days could have a substantial impact. These parameters can be adapted or supplemented if required to address specific company needs. The European Commission highlights the importance of considering a minimum set of climate hazards within the scope of risk and vulnerability analyzes, based on the best available scientific knowledge (European Commission 2021, Appendix A to Annex I and II). These specified climate parameters can be seamlessly integrated into the process model and operationalized. This phase aligns with the requirements outlined in the Delegated Regulation, which calls for assessments to utilize high-resolution, state-of-the-art climate projections for the available set of future climate scenarios (European Commission 2021a).
Phase 4: Supplying information
The next crucial step involves compiling, preparing, and delivering tailored climate change information to meet the specific needs of the company. During this phase, companies establish a comprehensive understanding of the available climate change data and its quality, ensuring access to relevant information necessary for assessing current and future climate impacts. This is particularly important for evaluating the significance of these impacts on the company’s vulnerable system components and throughout its supply chains. One example of a robust data source is the GERICS Climate Outlook, which provides insights into climate changes at a highly localized scale (Pfeifer et al. 2021).
These outlooks consolidate data at the county, district, regional district, or city level and summarize key climate parameters, such as temperature, heat days, dry days, wind speed, and heavy rainfall days, in a brief and summarized format. The projections illustrate trends in climate parameters over the 21st century, shedding light on how the climate may evolve in specific regions of Germany. This information not only serves as a valuable resource for citizens but also equips decision-makers in business and politics with a factual basis for long-term planning. At this stage, it is essential to consider both current and projected developments in climate parameters and align them with the company’s specific requirements. If the company lacks sufficient in-house expertise on the use of climate data, it may be beneficial to seek external knowledge and guidance in analyzing and applying climate scenarios and information effectively.
Phase 5: Capability
Following phases 1-4, which focus on identifying, analyzing, and assessing climate change impacts, phases 5-8 shift the focus towards internal integration, facilitation, and evaluation of risk management.
Phase 5 focuses on empowering decision-makers within the company to effectively utilize climate change information. To achieve this, tailored formats must be developed to ensure that the provided information is accessible to company representatives and can be translated into a coordinated action plan. This enables its seamless integration into the company’s decision-making processes. To ensure resilience, companies should train multiple employees in the use of climate change data, equipping them with the skills to continue leveraging this information even in the event of personnel changes. Depending on the company’s needs, training can take various forms, including guides, workshops, or lectures. To further enhance learning, developing guided instructions for replicating best practices or conducting case studies tailored to the company’s context can be a valuable, albeit time-intensive, effort. Such approaches provide practical support for integrating climate change information into either hypothetical or real-world planning scenarios.
The choice between a best practice example and a case study hinges on the company’s objectives. Best practice examples are suitable when a successful implementation exists within the company’s sector or organization. In contrast, case studies are more fitting for illustrating how climate change information can be integrated into specific locations or processes, particularly when planned changes or conversions are in progress.
Phase 6: Derivation and implementation of measures
Phase 6 focuses on deriving, prioritizing, and implementing measures to address the impacts identified through climate change information. These measures aim to enhance the company’s resilience to climate change, making management, employees, locations, logistics, processes, and products more climate-resilient or adaptive. Additionally, these actions bolster the company’s overall capacity to cope with the effects of climate change, influencing strategic decisions such as site selection, investments, and long-term planning. Developing and implementing adaptation measures is critical for reducing the risk of stranded assets, which are assets that lose value rapidly due to environmental or climate-related factors. A structured approach is recommended for this phase, utilizing tools like assessment matrices. To avoid misalignment or the unintended transfer of risks from one area to another, measures should be systematically compiled and tailored for various aspects of the company’s operations. These measures can be categorized into short-, medium-, and long-term actions. Furthermore, identifying measures with potential synergies or benefits even in the absence of climate-related events (no-regret measures) is particularly valuable.
Once the measures are identified, their implementation should align with standard company procedures to ensure seamless integration. Action planning is essential and must align with the Technical Assessment Criteria outlined in the EU Taxonomy Regulation for the environmental objective of adapting to the impacts of climate change. Appendix A to Annex I and II of the Delegated Regulation to the EU Taxonomy Regulation requires the evaluation of adaptation solutions that mitigate identified physical climate risks, as well as the development and implementation of an adaptation plan to address these risks (European Commission 2021).
Phase 7: Evaluation
This phase is dedicated to evaluating the success of the implemented measures and reviewing the overall adaptation process in an iterative and recursive manner. This phase is critical for refining strategies and ensuring continuous improvement. Evaluating adaptation measures presents unique challenges due to the uncertain, non-linear, and long-term nature of climate change. Key difficulties include attributing success to specific measures, establishing baselines, and setting meaningful targets for adaptation actions. Unlike climate change mitigation, where results can often be quantified in the short term, measuring the success of adaptation efforts is more complicated. For example, predicting the occurrence of extreme weather events or gradual climate changes, along with their impacts, with spatial and temporal accuracy is inherently difficult. As a result, assessing the effectiveness of locally implemented measures in terms of damage prevention can be equally challenging.
Simple before-and-after comparisons may fail to account for other variables that influence on-the-ground outcomes. In addition to evaluating the outcomes of adaptation measures (outcome evaluation), it is also essential to assess the overall adaptation process. This involves examining the extent to which relevant internal and external stakeholders were engaged and identifying opportunities for optimizing the incorporation of new or additional climate change information into decision-making.
Evaluation should also emphasize transdisciplinary cooperation. This involves fostering a dialogue-driven process where local-specific knowledge and company expertise are integrated with scientific research and climate data. Such an approach ensures that climate information is effectively embedded into company processes, such as risk analysis and long-term planning.
Phase 8: Process solidification
Finally, it is useful to seamlessly integrate the process model into the company’s organizational structures and procedures to ensure that all key aspects of the process are consistently reviewed and updated. The World Economic Forum (2022) identifies one of the most critical factors for enhancing organizational resilience as viewing resilience not as a fixed endpoint but as an ongoing journey. This perspective underscores the importance of continuous learning and adaptation, informed by stress tests and real-world crises, to strengthen the organization and better prepare it for evolving challenges. Embracing this mindset enables regular self-assessments, uncovers potential blind spots, and supports the implementation of additional necessary measures.
To bolster this approach, it is advisable to incorporate a structured learning process into the framework, facilitating a flexible and iterative methodology. Such a process promotes reflection, refinement, and continuous improvement, ensuring the company remains adaptable to changing circumstances. In the context of the EU Taxonomy Regulation, there is a clear competitive advantage for companies that fully embrace the process and its reporting requirements. By proactively integrating future-oriented climate change information into their operations, businesses can not only mitigate risks but also identify and capitalise on opportunities arising from the impacts of climate change. This proactive approach can drive innovation in business models and facilitate the development of new products, positioning the company for long-term success in an evolving market.
Conclusion
To better align corporate investments with climate change mitigation and future climate risks, the EU Commission has introduced an economic activity classification system (TEG 2020a; 2020b). As a result, financing for European companies will be increasingly influenced by the EU Taxonomy Regulation, incentivizing businesses to disclose the extent to which their activities contribute to adaptation efforts and the other five environmental objectives. Such transparency has the potential to enhance capital flows towards companies actively engaged in climate adaptation initiatives.
Against this backdrop, our process model addresses the interplay between the previously lacking future-oriented approach in corporate activities, new EU-level regulations imposing additional financial and sustainability reporting requirements, and the integration of climate change information into risk management processes. The primary aim is to offer a practical, user-friendly framework for seamlessly incorporating future-focused climate change information across all phases of the risk management process. This approach effectively bridges the gap between identifying problems and developing actionable adaptation measures. The conceptual process has been developed and prototypically tested in close collaboration with stakeholders from various companies in Germany.
The process model is currently a prototype, designed to remain adaptable for practical applications based on the existing knowledge base, data availability, and observational data. It also permits feedback loops between phases to ensure continuous improvement. Several success factors have been identified thus far. The successful implementation of the process model hinges on close, trust-based collaboration between internal and external stakeholders from the outset. Furthermore, its effectiveness relies on engaging all relevant experts within the company, leveraging their expertise and implicit knowledge to evaluate and prioritize areas for action and to develop suitable adaptation measures.
The process model provides significant added value by fostering the development of transformative adaptation solutions to address climate change impacts. This includes promoting new forms of collaboration, encouraging cross-organizational thinking and actions, reimagining adaptation needs with a systemic perspective, and engaging other relevant stakeholders in tackling climate risks. These efforts are embedded within a framework of transdisciplinary co-production, ensuring that solutions are comprehensive, inclusive, and innovative.
References
- European Commission (2021) COMMISSION DELEGATED REGULATION (EU) 2021/2139 of 4 June 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32021R2139
- Gehrke, JM, Groth, M & Seipold, P (2024) A process model approach to integrating future climate change into corporate strategies. SNF 32, 10. https://doi.org/10.1007/s00550-024-00550-0.
- Pfeifer, S, Bathiany, S & Rechid, D (2021) Klimaausblicke für Landkreise. https://gerics.de/products_and_publications/fact_sheets/landkreise/index.php.de.
- Technical Expert Group on Sustainable Finance (TEG) (2020a) Taxonomy: Final report of the Technical Expert Group on Sustainable Finance. https://finance.ec.europa.eu/system/files/2020-03/200309-sustainable-finance-teg-final-report-taxonomy_en.pdf
- Technical Expert Group on Sustainable Finance (TEG) (2020b) Financing a sustainable European economy. Taxonomy Report – Technical Annex. Updated methodology & Updated Technical Screening Criteria. https://finance.ec.europa.eu/system/files/2020-03/200309-sustainable-finance-teg-final-report-taxonomy-annexes_en.pdf
6. World Economic Forum (2022) The Global Risks Report 2022. 17th Edition. Insight Report.
