Physical and Transition Risk

This chapter provides a corporate finance perspective on the impacts of the climate crisis on firm value, emphasizing the role of climate risk management in safeguarding long-term financial stability. The chapter categorizes risks into physical risks, such as extreme weather and resource scarcity, and transition risks, including policy changes, technological advancements, and market dynamics. These risks, while posing significant financial threats, also create opportunities for firms to innovate and build resilience. From a corporate finance standpoint, climate risks affect firm value through increased operating costs, capital expenditures, changes in asset valuation, and access to financing. The chapter highlights the importance of materiality, adaptive capacity, and scenario analysis as tools to quantify and address these impacts. It also recognizes the role of other stakeholders—such as investors, customers, regulators, and communities—who influence and are affected by corporate responses to climate risks. The case of Danone illustrates how firms can integrate climate risk assessment into strategic planning, leveraging science-based targets, stakeholder engagement, and sustainable practices. This chapter underscores that addressing climate risks is not just about mitigating threats but also about creating value by aligning corporate strategies with the expectations of a low-carbon economy and a sustainable future.