The New Zealand Society of Actuaries white paper, Identifying and quantifying anticipated financial impacts of climate-related risks and opportunities, provides practical guidance on how businesses can identify and quantify potential financial impacts from climate-related risks and opportunities.

The XRB worked with the New Zealand Society of Actuaries Climate Disclosures Working Group to develop the white paper, which aims to provide practical thought leadership in an evolving area and "support decision-useful, proportionate, and transparent approaches", rather than prescribe a single methodology.

Anticipated financial impacts are a required disclosure in many climate reporting frameworks, including the Aotearoa New Zealand Climate Standards.

The paper says translating climate risks into financial terms is critical to understanding their scale and supporting better business and investment decisions.

“Climate change represents a fundamental shift without historical precedent. Past data offers limited guidance for future impacts, and simple trend extrapolation is unlikely to produce plausible results,” it says.

“Both the climate system and societal responses involve considerable uncertainty, creating a wide range of possible futures. 

This challenge is heightened by the long timeframes involved, with projections often stretching 10 to 30 years or more – well beyond typical business planning horizons. Over such periods, even small shifts in assumptions can compound, significantly increasing uncertainty.

Adding to this complexity, the report says, climate-related risks and opportunities do not occur in isolation. 

“Physical and transition climate-related risks and opportunities interact with each other and with broader business risks in intricate ways, creating cascading effects that are difficult to model.

“These interdependencies mean that understanding climate risk is not just about individual events but about systemic interactions that can reshape financial outcomes. 

“Given this, it is important to keep in mind that the aim is not perfect prediction but useful insights that help decision makers plan and allocate resources effectively.

“It is very unlikely that high-quality, location-specific climate impact data will be available for entities. Reliance on expert judgment and structured, consistent assumptions is necessary. The longer the projection period, the greater the need for assumptions.”  

Low-probability, high-impact

The report warns climate change could trigger low-probability, high-impact events that dominate financial risk, with traditional modelling approaches likely to underestimate their potential impact.

“Climate change involves the potential for extreme outcomes that sit in the "tails" of probability distributions (examples of which include the 2008 global financial crisis and the Covid-19 pandemic). 

“These low-probability, high-impact events can dominate financial risk even if their likelihood seems remote. Using traditional mean-based approaches may significantly understate impacts.”

Tipping points – severe and sudden 

The paper also highlights the risk of climate “tipping points” – irreversible changes such as ice sheet collapse or ocean circulation shifts – warning these events are difficult to model but could have severe and sudden financial impacts.

“Climate science identifies potential tipping points, thresholds beyond which changes become self-reinforcing and potentially irreversible. Examples include ice sheet collapse, Amazon rainforest dieback, or ocean circulation changes.  

“The impacts from tipping points are difficult to model due to likely step changes in either physical or transition risks but should be considered due to the severe financial impact these may bring.

“Tipping points are different from tail risks as they have a higher likelihood, but the timing is uncertain, and the step change is not a one-off effect.”

The paper says a key challenge is translating climate risks and opportunities into financial impacts, requiring businesses to understand how climate events flow through their operations, value chains and ultimately affect revenue, costs and performance.

“Entities may find it helpful to start by understanding their environment, industry and unique characteristics, including the parts of the business most exposed to climate risks and opportunities; the climate impacts most material to the financial position and performance; and understanding the value chain and how the risks and opportunities interact through this.”

It says businesses need to consider how climate risks flow through to financial outcomes, with physical impacts such as flooding or heat affecting operations, while policy and market shifts influence costs and revenue, requiring a clear link between climate events and financial performance.

“Entities could consider building an explicit translation layer that is specific to them, rather than jumping directly from climate science to profit and loss impacts. An impact pathway is a useful tool to trace how a climate event or trend could affect the entity and ultimately its finances.”

For each material climate-related risks and opportunity identified in the climate risk assessment, mapping the specific pathways through which it affects finances is a valuable analytical step.  

The paper warns climate risks are unlikely to occur in isolation, with overlapping and compounding events – such as droughts, heatwaves and policy shifts – potentially amplifying overall financial impacts.

“Economic disruption from transition could affect the capacity to invest in physical resilience. Recognising the correlation between risks is essential for impact assessment.”

It says treating related risks as fully independent may significantly understate the potential impacts of climate-related risks and opportunities, given correlated risks are likely to occur together in the future. 

“They could occur simultaneously, or one could trigger another.” 

The paper says modelling can help turn complex climate uncertainties into useful financial insights. 

“Climate-related risks and opportunities affect costs, revenues, and asset values in ways that are hard to predict. 

“By modelling, entities can test assumptions, estimate potential impacts, and identify areas of greatest exposure or advantage. This supports informed decisions on investment, resilience, and resource allocation through credible analysis.”