Climate change risk management and the pivotal role of the risk function in ESG efforts

Temperatures are rising, storms are intensifying, and shifting ecosystems are no longer distant threats but present realities. The spectre of disruptive climate events looms larger with each passing day, prompting organisations to confront their vulnerabilities and responsibilities in climate change and ESG risk management. Addressing recent years’ transformations in this space, Adam Ennamli, Chief Risk Officer at General Bank of Canada, explains the role that the risk function is taking on as a protector of business interests and guide to a sustainable future.

Today, climate change risk management is a concrete discipline. As we better understand the effects and frequency of climate disasters, it is increasingly clear that managing these risks demands both foresight and adaptability. At the heart of this endeavour lies the risk function within organisations – a pivot in integrating environmental considerations into broader ESG efforts. While companies recalibrate their response strategies to these risks, the dynamics between climate risk management and the risk function reveals a story of transformation, resilience, and stewardship.

The multidimensional nature of climate change risk

Climate change, by its nature, is a multidimensional risk. It defies the tidy boundaries of traditional risk categories, blending physical threats—like floods or wildfires—with transitional uncertainties, such as regulatory shifts or market disruptions. Over the past decade, the urgency to address these risks has spurred remarkable developments in how businesses assess and mitigate them. Once, climate considerations were relegated to corporate social responsibility reports and feel-good, borderline greenwashed campaigns. Now, they command attention in boardrooms and balance sheets. How these perceptions and behaviours have shifted indicates a deeper, more fundamental awakening. Climate change is no longer just about the environment, it's also about finance, operations, and strategy, where you have deeper implications for long-term viability.

Understanding the road ahead with scenario analysis

One of the most significant advancements that we can attribute to climate change risk management is the refinement of scenario analysis as a discipline. Businesses are turning to sophisticated models that project how different climate futures – ranging from aggressive decarbonisation to unchecked emissions – might impact their operations, supply chains, and markets. Informed by guidelines like the Task Force on Climate-related Financial Disclosures (TCFD), these scenarios involve variables from the present, the future and allow them to evaluate the future through a large spectrum of possibilities.

Take the example of an energy company. They could map out how a rapid transition to renewables would reconfigure its asset portfolio. Similarly, a manufacturer may assess how much disruption water scarcity could cause to its production capabilities. This forward-looking approach is a departure from reactive risk management, offering a lens through which firms can anticipate and prepare, rather than merely respond to change.

Incorporating climate into enterprise risk management

Scenario analysis is just one piece of a larger puzzle. Embedding climate risks into established enterprise risk management (ERM) frameworks in a durable way is another necessary step towards sustained progress. Historically, ERM focused on immediate, quantifiable risks – credit defaults, cyberattacks, or supply disruptions. Climate risks, with their extended horizons and cascading effects that translate differently, demand a broader scope. Progressive organisations now embed climate considerations into their risk registers, assigning them the same rigour as financial or operational exposures. This requires new tools – such as carbon footprint assessments, hazard mapping – and a perennial cultural shift. Climate literacy should be a shared competency across departments, part of the new DNA of the organisation.

The risk function’s role in climate risk management

Quantifying climate risk

The risk function is now a vital synchroniser of climate change response efforts. Traditionally tasked with safeguarding against threats, risk professionals are now called to bridge the gap between environmental imperatives and business strategy. Their role in a company’s ESG efforts is both tactical and visionary.

From a tactical standpoint, relying on risk managers’ previous experience with emerging risks, they can quantify climate risks in monetary terms, translating abstract threats into concrete metrics that will resonate with executives and investors, and sensitise them. Take the example of a coastal property developer. They can rely on risk advisors to estimate the cost of rising sea levels over decades, considering changes in insurance premiums, regulatory pressure shifts, and accelerated asset depreciation, resulting in a Total Cost of Change (TCC), similar to Total Cost of Ownership (TCO) analysis used by product managers. As we ground ESG goals in financial realities, the risk function ensures that sustainability is not an abstract ideal, more of a measurable reality that needs a response on both the short and long term.

Pricing climate risk

The evolving role of the risk function also reflects a broader trend: the financialisation of climate change. Most investors, whether from private equity, pension funds or individuals, request transparency on how companies getting their capital are managing climate risks, or at least, their plan to do so. This is an important proxy for long-term value. This scrutiny has elevated the risk function’s profile, as it becomes a key interlocutor with external stakeholders. Annual reports increasingly feature detailed, concrete disclosures on climate exposure, often crafted with the risk team’s input.

For example, take a bank who intends to phase out fossil fuel investments, or a retailer wanting to reduce emissions within its supply chain, all of these strategies must go beyond simple words and translate into practical, tangible and quantified plan, most often with the help of the risk team. When supported by rigorous and transparent risk analysis, the right narrative signal to markets that ESG is not just a peripheral concern, but a cornerstone of resilience.

The centre of collaboration across the business

Beyond just numbers, the risk function serves as a chief diplomat for collective collaboration. ESG efforts, by design, span multiple domains—environmental impact, social equity, and governance integrity. Climate risk management, which is a strong and active subset of the ESG triad, requires data from operations, procurement, legal, and even marketing functions. Risk professionals can capitalise on their enterprise-wide perspective to align and federate these disparate voices.

Examples include organising working groups to stress-test supply chains in real time against extreme weather events, or partner with regulators through public consultation vehicles to anticipate carbon pricing schemes. As progress happens, risk practitioners embed climate considerations into the fabric of decision-making, ensuring that ESG commitments are not siloed but systemic by design.

Conclusion

The trajectory is clear. As climate pressures mount, the risk function’s role in ESG efforts will only grow more prominent. Governments are increasing regulatory pressure, with new mandates like the European Union’s Corporate Sustainability Reporting Directive, requiring firms to disclose climate impacts in unprecedented, granular detail. At the same time, consumers are clearly leading the trend by favouring and backing brands that show genuine environmental accountability. This is not a backdrop, but rather an opportunity for the risk function, who could stand as both a shield and a compass – protecting against value loss through threats, and guiding businesses toward a sustainable future by leveraging global industry tailwinds.

All in all, climate change risk management is not a static discipline. It's a living one that evolves with each scientific discovery and societal shift, while also accelerating as physical risks materialise. The risk function, as its steward, and sometimes owner within the ESG framework, embodies this dynamism. The risk professional role demands both technical acumen and creative, practical imagination – a capacity to envision a world reshaped by warmer skies and rising tides, and to chart a course through it while still staying competitive. For businesses, the stakes could not be higher, as responding to climate risks involves securing their economic survival amid fundamental shifts, and at the same time, meeting their societal responsibilities. As the horizon shifts, the risk function will remain at the helm, steering toward a balance of profit, purpose, and planet.

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