When quantifying climate-related financial impacts, judgement matters most

Climate-related risks and opportunities are often easier to identify than they are to quantify.

Many organisations can readily describe the transition risks facing their industry, the physical risks affecting their operations, or the opportunities emerging from a lower-carbon economy. Far fewer can explain what those issues could mean for revenue, costs, capital expenditure or cash flows.

This sounds straightforward in principle, but quantification is emerging as one of the most challenging aspects of climate-related reporting. Not every risk can be quantified with confidence, nor should every risk be reduced to a number.

The most important question is not "can this be quantified?" but "would quantification provide meaningful insight?"

The goal is not to assign a dollar value to every climate-related issue. It’s to develop a reasonable, evidence-based understanding of where financial impacts may arise and how significant they could be.

Three issues consistently emerge when organisations assess climate-related financial impacts: data availability, uncertainty and attribution.

Most organisations already have more evidence than they realise

One of the biggest misconceptions about quantification is that it begins with a financial model. In practice, the starting point is often much simpler: identifying the information already available within the business.

This may include operational and financial data, information from climate risk assessments, industry trends, publicly available climate data, and historical experience. Existing costs, investments, disruptions or market shifts can also provide valuable evidence of how climate-related risks and opportunities are already affecting the organisation.

For example, a manufacturer may already have information on energy costs, insurance premiums, weather-related disruptions or planned capital investments that can be used to estimate the potential financial impact of climate-related risks under different scenarios.

The objective is not to accumulate perfect data, but to determine whether sufficient evidence exists to support a reasonable estimate that can inform decision-making.

Uncertainty does not prevent quantification

A common concern we often hear is that climate-related risks are too uncertain to quantify. However, business decisions are rarely made with complete certainty.

The key question is not whether uncertainty exists, but whether the uncertainty is understood, transparent and appropriately reflected in the analysis. Quantification can still be valuable where outcomes depend on future policy settings, technological developments, market responses, or physical climate impacts, provided that assumptions are clearly articulated and understood.

The goal is not to predict the future with accuracy. It’s to better understand how climate-related risks and opportunities could affect the organisation under different circumstances.

Not every climate-related impact can be isolated

Climate-related risks and opportunities rarely occur independently of other business drivers.

Changes in costs, revenues, asset values and capital requirements are often influenced by multiple interconnected factors. This can make it difficult to determine the extent to which a particular financial impact is attributable to climate-related considerations.

In some cases, the relationship is relatively clear. Rising insurance costs, adaptation expenditure or carbon compliance obligations may have a direct financial pathway. In others, quantification may be less straightforward, and qualitative analysis may provide more meaningful insights.

What matters is whether the organisation can reasonably explain the connection between the climate-related issue and the potential financial effect.

The most sophisticated approach is not always the best one

There is no universally accepted methodology for quantifying climate-related risks and opportunities.

A fit-for-purpose approach will often generate more value than a highly complex model built on uncertain assumptions. Depending on the issue being assessed, organisations may draw on existing budgets, forecasts, operational data, scenario analysis or market projections already used in business planning.

The objective should be to produce information that is useful, credible and proportionate to the decision being made.

Focus on decision-useful outcomes

The purpose of quantification is not to generate a number for the sake of disclosure. It’s to help organisations understand the potential financial implications of climate-related risks and opportunities, inform strategic choices and support meaningful conversations with Boards, investors and other stakeholders.

Where quantification delivers that value, it can become a powerful decision-making tool. Where it does not, a robust qualitative assessment may be more informative than a highly uncertain numerical estimate.

Ultimately, organisations should focus less on producing numbers and more on understanding what those numbers are telling them. The real value lies not in quantification itself, but in using financial insights to inform strategy, resilience and decision-making.

How BDO can help

Quantification remains one of the least mature and most challenging aspects of climate reporting. If you need support assessing which climate-related risks and opportunities warrant quantification, or refining your approach ahead of future reporting cycles, BDO's sustainability and corporate reporting specialists can help you develop an appropriate approach.

For those looking to explore this topic further, our webinar, Financial modelling for climate risk and opportunity, discusses the role of judgement, uncertainty, and decision-usefulness in assessing climate-related financial impacts.