Climate Risk - CFO Horizons - Financial Imperative - I by IMD (2025)

We are in the depths of a “climate winter.” The struggle between two opposing forces has shaped this unwelcoming season. On one side is the mounting financial toll of climate-related disasters, such as the California wildfires. On the other, the growing pushback, driven by populist politics, against net-zero policies and climate science.

This “ESG backlash” is unfolding in the face of clear financial warnings. In 2024, when devastating floods hit Central Europe, carmaker Porsche issued a profit warning after flooding hit its aluminum supplier. In August, Novelis, a leading sustainable aluminum solutions provider, announced a 3% year-on-year fall in net income due in part to the cost of flooding at its Sierre plant in Switzerland. Events like these reinforce the fact that extreme weather is not just an environmental issue – it is also a financial one.

Against this backdrop, the European Commission has announced plans to simplify sustainability disclosure regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). The proposals are intended to reduce “complexity” for SMEs and small mid-caps in particular and remove around 80% of companies from the scope of CSRD.

But, while regulatory streamlining is welcome, it is crucial not to lose sight of the original intent behind these frameworks: to improve transparency and enable better financial decision-making. For CFOs, the challenge is not just regulatory compliance, but how to integrate climate risk into strategic financial planning.

Companies that fail to integrate risks into their financial models are vulnerable to being blindsided by regulatory shifts, supply chain disruptions, and stranded assets.

Reporting should be seen as a financial discipline, not an obligation

The discourse around climate-related disclosures often centers on the complexity and cost of reporting. However, CFOs should view these frameworks as tools to support financial resilience. The original Task Force on Climate-Related Financial Disclosures (TCFD) framework, for example, was designed not as an administrative checklist, but to assess financial risks related to climate change and the transition to more sustainable models. As well as risk identification, this discipline also creates opportunities.

For example, companies will need to assess changes in supply and demand due to policies, technology, and market dynamics related to climate change, including assessing the impact on assets, liabilities, and resources and making decisions on new investments, restructuring, write-downs, or impairments.

Companies that fail to integrate risks into their financial models are vulnerable to being blindsided by regulatory shifts, supply chain disruptions, and stranded assets. For example, when wildfires devastated Southern California in January 2025, The Financial Times reported that “shares of the three largest publicly traded utility companies in California – Edison International, Sempra and Pacific Gas and Electric (PG&E) – sold off as investors reacted to the potential liability utility companies face in the aftermath of a wildfire.” CFOs who treat climate-related reporting as a forward-looking financial discipline, rather than a purely regulatory obligation, will be better equipped to protect their companies from such shocks.

Insurance takes the lead on physical climate risk

Insurance companies are already pricing in climate risks, adjusting underwriting strategies, and, in some cases, withdrawing from high-risk areas. Their approach provides valuable insights for companies looking to protect their balance sheets.

Estimates suggest that insured losses from the LA fires could exceed $20bn. However, analysis has shown that reinsurers, which provide insurance to frontline insurance companies, could absorb less than 3% of the insured losses. This reflects how reinsurers have actively scaled back their exposure to natural catastrophe risks.

This shift in the insurance industry should prompt CFOs to rethink their risk management strategies. Do their financial models account for the increasing cost of insurance? Are they conducting scenario analyses to assess how extreme weather events could impact operations and capital allocation? The financial repercussions of physical climate risk are already affecting balance sheets.

The cost of inaction

Companies that fail to adapt to these financial realities may pay the price in multiple ways. Insurers reducing coverage could lead to direct financial exposure, while lenders and investors, increasingly influenced by climate risk considerations, may demand higher risk premiums.

Just as insurers use data models to calculate natural catastrophe risks, CFOs must develop their analytical capabilities to quantify the potential financial impact of climate-related disruption. Whether through risk-transfer mechanisms, strategic asset relocation, or scenario planning, proactive financial decision-making will separate resilient businesses from the unprepared.

In a period in which insurers are walking away from risky assets, the key question for CFOs is not whether to report climate risks, but how to manage them before they become unmanageable.

Conclusion: The CFO’s role in climate risk management

Rather than resisting sustainability reporting requirements, CFOs should use these frameworks to gain deeper insight into financial risks and opportunities. The insurance industry is leading the way in incorporating physical risk into decision-making and companies should follow suit.

In a period in which insurers are walking away from risky assets, the key question for CFOs is not whether to report climate risks, but how to manage them before they become unmanageable.