The evolving risks posed by climate change have profound implications for European companies, spanning economic, regulatory and reputational dimensions. While the urgency of mitigating climate risks is widely acknowledged, the reality of implementing risk management strategies presents significant hurdles. The global response to climate change has been fragmented, with disparities in policy approaches, financial commitments and strategic priorities among key economic blocs and emerging economies. As a result, European businesses find themselves navigating a complex landscape of shifting regulations, economic pressures and heightened public scrutiny.
Organisations must adapt to increasing demands for sustainability while mitigating risks associated with regulatory shifts, supply-chain disruptions and financial instability driven by climate-related catastrophes.
Deprioritisation of climate action: Urgency versus reality
Despite growing recognition of climate change as an existential threat, a noticeable deprioritisation trend has emerged. The United States has demonstrated increasing pushback on green initiatives, with a resurgence of hyper-capitalist policies that prioritise short-term economic gains over long-term sustainability. Meanwhile, within the European Union, climate action is increasingly balanced against the need to maintain economic competitiveness, leading to a slower approach to green transitions.
At the global level, CO2 reduction targets remain largely unmet, and the effectiveness of international climate summits, such as COP and discussions at the G20, is regarded with increased scepticism. The lack of binding agreements and concrete enforcement mechanisms further exacerbates the credibility gap, leaving organisations uncertain about the long-term regulatory landscape. Additionally, many emerging economies continue to prioritise industrial growth over environmental responsibility, further complicating global climate action efforts.
Climate change as a systemic risk
Climate-related risks represent systemic threats that intersect with economic stability, geopolitical shifts and social structures. A restriction in access to collective protection mechanisms, particularly in the insurance sector, exacerbates corporate vulnerabilities. As climate-related disasters increase in frequency and severity, insurers face mounting losses, potentially leading to reduced coverage availability and higher premiums for buyers. This dynamic creates a systemic risk within a systemic risk, where the financial protection that companies have traditionally relied upon is itself under threat.
Furthermore, climate risks are deeply interconnected with geopolitical and human capital concerns.
For instance, disruptions caused by extreme weather events, war or migration crises impact workforce availability, supply-chain continuity and infrastructure resilience. The compounding effects of these risks underscore the need for European companies to adopt a more holistic approach to climate risk management, integrating it into broader strategic foresight or scenario-planning efforts.
Economic impact and cost distribution
The financial burden of transitioning to a low-carbon economy and adapting to climate change is substantial, and how that burden will be shared remains highly contested. A restriction in capacity and coverage from sectors of the insurance market is leading to increased reliance on state intervention. However, high public debt levels in many European countries means the ability of governments to provide sustained financial support remains uncertain.
Climate change is also a significant legal risk for corporations. Recent legal decisions not only emphasise violations of the European and UN Conventions on Human Rights for omissions or shortcomings in public policies regarding climate change, there have also been several judicial actions brought against private corporations and/or their directors.
To bridge this gap, there is a growing need to deploy more private-sector capital into climate-resilience initiatives. This includes mechanisms such as public-private partnerships and mandatory insurance or risk-pooling structures that mutualise climate risks. But these financial shifts raise concerns about potential impacts on political stability, as the perceived burden of climate transition may lead to lower public and corporate ambition levels.
Regulatory compliance, policy uncertainty and competitiveness
As climate policies evolve, European organisations must navigate an increasingly complex regulatory environment. The European Union remains a global leader in climate legislation, particularly with its commitment to a 55% CO2 reduction by 2030. But regulatory fragmentation across regions poses compliance challenges for businesses operating across multiple jurisdictions. There is also growing concern that the current stance being taken by the United States may cascade to other countries.
Profitability is increasingly affected by stringent environmental regulations, legal liabilities and rising compliance costs. And litigation risks are mounting. For businesses, the challenge lies in balancing regulatory adherence and meeting the Environmental, Social and Governance (ESG) expectations of stakeholders with maintaining financial viability in a competitive global market.
International cooperation: the missing link
Addressing climate risks requires global cooperation, yet current efforts remain fragmented. While the European Union continues to push forward with ambitious policies, its ability to drive meaningful change is constrained by the limited impact of unilateral actions.
Emerging economies, particularly those with high biodiversity risks, are demanding greater compensation and support from industrialised nations, which bear the greatest responsibility for historic emissions. At the same time, the vacuum left by US disengagement from green initiatives has opened opportunities for developing nations to take a more prominent role in green-technology leadership. However, without stronger international agreements, these dynamics risk further delaying the transition to a more sustainable global economy.
Corporate and governmental responsibilities
Climate change is morphing from an ethical consideration to a legal responsibility. Increasingly, climate change is recognised as a Human Rights issue, with growing demands for accountability from both governments and corporations. Climate litigation and activism are on the rise, placing pressure on businesses to demonstrate genuine commitment to sustainability.
Organisations are increasingly caught between public expectations, legal risks and operational constraints. The credibility and ethics gap in corporate climate action directly impacts reputation and brand value, making sustainability a critical factor in long-term business success.
In this landscape, firms must integrate climate risk management into their core strategies, rather than treating it as a peripheral concern.
Key risk management takeaways
Integrate climate risk into core strategy
Climate change should be treated as a systemtic risk and embedded into Enterprise Risk Management frameworks and scenario planning.
Prioritise critical functions
Organisations should protect esseental functions and consier exiting highly vunerable or unsustainable business lines.
Plan for business model shifts
Risk Managers should assess the viability of business lines under climate stress and prepare for potential divestments or transformations.
Strengthen crisis and continuity planning
Business continuity and disaster recovery plans should be regukarly stress-tested for climate-driven disruptions.
Monitor legal and regulatory exposures
Risk Managers should stay ahead of evolving regulatory and litigation risks, partcularly around fiduciary duty.
Scenario
Example: Applying scenario planning to climate change risk
Axes:
1. Level of global climate policy alignment
Global alignment
Coherent and binding international agreements drive coordinated climate action.
Fragmented effort
Fragmented, competitive or nationalistic approaches dominate; little global coordination.
2. Pace of physical climate impact
Gradual onset
Climate change effects emerge steadily and predictably.
Abrupt disruption
Extreme weather events, tipping points or feedback loops accelerate climate impacts unpredictably.
A
B
D
C
Gradual onset
Fragmented
efforts
Global
alignment
Abrupt disruption
A . Fragmented efforts & Gradual onset: “MXGA”
In this scenario, global climate cooperation breaks down. Nations adopt fragmented policies benefitting their own interests and protectionism rises. Climate risks emerge slowly, allowing time to prepare but dulling the political urgency of taking action. European firms face stricter local rules but limited global alignment.
Implications:
Navigating divergent regulations and green tariffs becomes costly. Companies must localise operations and develop strategies to balance compliance with competitiveness. Green innovation continues, but without global coordination, and scaling it becomes harder.
B . Global alignment & Gradual onset: “Green Pact Era”
In this scenario, international climate cooperation takes hold. Global agreements, carbon pricing and green finance align policy across regions. Physical climate impacts remain manageable, giving businesses time to adapt. European companies operate in a rules-based environment that rewards sustainability and innovation.
Implications:
Firms benefit from policy predictability and rising consumer demand for sustainable products. Early movers in clean tech and ESG leadership thrive, but keeping pace with compliance and innovation is essential to stay competitive.
C. Global alignment & Abrupt disruption: “Better late than even later”
In this scenario, global climate policy aligns, but the environment deteriorates faster than expected. Extreme weather events and infrastructure failures become frequent. Insurance markets falter, necessitating public-private risk-sharing mechanisms. Even well-prepared companies struggle to maintain operations.
Implications:
Building resilience becomes critical. Companies must invest in crisis response, scenario planning and supply-chain flexibility. Success depends less on emissions targets and more on the ability to adapt to constant disruption.
D. Fragmented efforts & Abrupt disruption: “Climate chaos”
In this scenario, climate impacts accelerate dramatically while international coordination collapses. Crises compound; natural disasters, displacement, supply-chain failures and social unrest. Regulatory responses are reactive and unpredictable. Markets contract and public trust erodes. Systemic risks take hold.
Implications:
Survival depends on extreme adaptability. Companies must exit high-risk geographies, protect reputation and refocus on core resilient assets. The cost of inaction rises sharply, and public scrutiny becomes unforgiving. Regulation is erratic and reactive, in desperate attempts to create structure in chaos, ironically only adding to the grievances of businesses and citizens.
