Climate-related financial risks: the TCFD framework for SMEs

Quick answer. Climate-related financial risks fall into two families: physical risks (flood, drought, heatwave) and transition risks (regulation, technology, market, reputation). The TCFD framework structured their analysis around four pillars. Since 2023, those recommendations have been carried by the IFRS S2 standard and, in Europe, by the CSRD's ESRS E1. Understanding these risks helps an SME anticipate their effect on cash flow and financing.

An SME is not a listed bank, yet climate enters its accounts through several doors: an insurer revising a premium after a flood, a bank questioning physical risk exposure before a loan, a large client asking for a transition plan. The climate-related financial risk framework, made popular by the TCFD, gives a common language to handle these questions. This article explains the distinction between physical and transition risks, the evolution of the TCFD framework towards current standards, and where an accountant adds value.

The key distinction sets two families of risk apart. Physical risks stem directly from climate phenomena. They are acute when tied to a one-off event (flood, storm, fire), and chronic when they result from a long-term shift (rising temperatures, water stress, sea-level rise). For an SME, this means damaged sites, disrupted supply chains or rising insurance costs.

Transition risks, in turn, arise from the move towards a low-carbon economy. They are regulatory (new standards, carbon tax), technological (obsolescence of a process), market-related (clients turning away from a product) or reputational. A company heavily dependent on fossil energy or an emissive process carries high transition risk, even if it has never suffered a single climate event.

The Task Force on Climate-related Financial Disclosures (TCFD) was created in 2015 by the Financial Stability Board (FSB), with recommendations published in 2017. It proposed organising information around four pillars: governance, strategy, risk management, and metrics and targets. This split became the global reference for climate reporting.

A key point to know in 2026: the TCFD completed its work and was disbanded in October 2023. Monitoring was handed to the IFRS Foundation and its ISSB board. The four pillars have not disappeared: they are fully carried into the IFRS S2 climate standard, which is now the international baseline. A company applying IFRS S1 and IFRS S2 effectively meets the TCFD recommendations.

In Europe, the same logic runs through the CSRD directive and its climate standard, ESRS E1: physical and transition risks, transition plan, and double materiality analysis (climate effects on the company and the company's effects on climate).

Even without a reporting duty, an SME faces a trickle-down effect. Large groups subject to the CSRD must document their value chain: they pass their questions on to suppliers. Banks integrate climate risk into credit analysis. Insurers adjust premiums and deductibles to physical exposure. An SME able to present its climate risks and the start of an adaptation plan therefore stands out in a tender or a financing request.

The TCFD framework recommends testing a business model's resilience against several climate scenarios. For a large group, this mobilises sophisticated models. For an SME, the exercise can stay proportionate: identify the 2 or 3 major risks, estimate their potential effect on revenue and costs, and list mitigation actions. The aim is not the accounting precision of a bank stress test, but an honest map that informs investment and insurance decisions.

In the files we follow, climate is too often treated as a communication topic, when it is a risk topic, hence a management one. The right entry point is not the sustainability report, but a simple question: what, in climate, can move my cash flow over the next 3 to 5 years. Framed that way, the analysis becomes useful to the director, rather than an imposed exercise.

Our conviction is that an SME gains from formalising, even roughly, its physical and transition risks before the bank or insurer asks. Anticipating gives room to negotiate; enduring loses it.

The most overlooked risk is not the spectacular climate event, but the slow erosion of an asset's value. A site in a flood zone, a high-emitting process, equipment that will become non-compliant: all can lose value or become hard to finance, well before any loss event. It is this creeping transition risk that weighs on a company's value at a sale or handover, and that is best made explicit early.

An accounting firm is not a climatology practice. Fine assessment of physical hazards belongs to specialists. The accountant works where climate meets the numbers:

• Financial translation of risks: estimating the potential effect of a physical or transition risk on profit and cash flow.
• Link with the accounts: impairment of exposed assets, provisions, depreciation periods to reassess.
• Reporting preparation: structuring the climate information requested by banks, insurers or clients.
• Investment plan: costing and financing adaptation and reduction actions.

This is the angle of our support in CSR and CSRD sustainability reporting, often extended by outsourced CFO support. Upstream, a first carbon footprint by scopes provides the quantified material for transition-risk analysis.

A food-industry SME applies for a loan to expand a site. The bank adds a question on exposure to physical and transition risk. With no structured answer, the review drags on for 3 months. Reviewing the file, we map two major risks: water stress on supply and the expected rise in energy cost. Each is quantified in margin terms, with a mitigation plan. The bank then has a readable file, and the negotiation resumes on sound footing.

• TCFD integrated, not gone: the TCFD was disbanded in 2023, but its four pillars live on in IFRS S2 and, in Europe, in ESRS E1.
• Trickle-down effect: even unobligated, an SME receives climate questions from its large clients, banks and insurers.
• Double materiality: the European framework asks to examine both climate effects on the company and the company's effects on climate.
• Proportionality: for an SME, scenario analysis must stay simple and useful to the decision, not modelled on a large group's.