Introduction

The report outlines why climate change is an increasingly material factor in business valuations. Many investors and companies consider climate issues qualitatively in due diligence, but explicit quantitative integration into valuations is not yet common. Limited comparable information, inconsistent scenario use, and uncertainty around economic and sector impacts constrain current practice. Evidence shows that climate-friendly sectors and companies with higher ESG ratings often trade at higher multiples, implying a lower cost of capital.

Prepared by the A4S CFO Leadership Network, part of A4S (Accounting for Sustainability), the report highlights a lack of guidance for valuators and notes that improving disclosure aligned with the Task Force on Climate-related Financial Disclosures (TCFD) is helping, although adoption remains uneven. Climate change is described as one of several risks and opportunities that should influence valuations across revenues, costs, capital expenditure and discount rates. The guide aims to help finance professionals incorporate climate-related factors systematically.

Authority and scope of the framework

The framework is positioned as a methodology for incorporating climate-related considerations into business valuation as part of existing valuation procedures. It is not a standalone valuation method and does not prescribe a specific formula or scenario. Professional judgement remains essential given data limitations and uncertainty. The report emphasises the need for meaningful climate disclosures from businesses and their peers.

Key stakeholders include asset owners, institutional investors, insurers, banks, regulators, valuation practitioners and auditors. The framework aims to support more consistent assessments across these groups by offering sources of climate information, outlining a structured process, and acknowledging limitations such as evolving disclosures and potential double counting of risks already embedded in market practice.

Climate change valuation framework

Overview

The five-step framework consists of identify, assess, filter, integrate and triangulate. It is designed to help valuators determine which climate-related risks and opportunities are relevant, measurable and suitable for inclusion in valuation models. Supporting schedules in an Excel tool provide templates for documenting analysis.

Identify

Valuators identify value drivers across revenues, costs, capital requirements, geographies and operating environments. This includes policy and legal considerations, technology changes, resource efficiency, market trends and physical climate impacts.

Assess

For each value driver, climate-related risks and opportunities are assessed in terms of sources, likelihood and potential business impact. This includes policy risk (eg carbon pricing), regulatory developments, technology shifts, market changes and acute and chronic physical climate risks (eg extreme weather, pests, changing rainfall patterns).

Filter

Risks and opportunities are filtered for materiality, ability to quantify, and relevance to valuation. The framework highlights that insufficient data may prevent inclusion of certain risks, and valuators should avoid double counting factors already implicitly reflected in market evidence.

Integrate

Quantifiable risks and opportunities are incorporated into cash flows and discount rates within discounted cash flow (DCF) and market valuation approaches. Integration may include adjusting operating costs, capital expenditure, revenues or risk premia. The report notes that risks can either increase or decrease fair market value depending on the nature and magnitude of impacts.

Triangulate

Valuators compare results against market evidence, peer disclosures and transaction data. Triangulation helps ensure climate impacts are reflected at a level consistent with what informed market participants would consider. Over time, improved data will support refinement of estimates.

Appendices 1–4

The appendices provide further detail on climate factors and valuation impacts. Policy factors include emissions trading schemes, carbon taxes and restrictions on fossil fuels. Physical risks include increased frequency of extreme weather, fire risk, droughts and pest outbreaks. The report outlines data sources and TCFD-aligned metrics that can support valuation analysis, and discusses connections with financial reporting requirements.

Appendix 5 – Case studies

Four case studies (RailCo Inc., WYZ Transmission, Candor Energy and a Forest Plantation Asset) illustrate the framework’s application. Examples show how quantifiable opportunities such as new renewable power plant connections can be modelled with adjusted cash flows and discount rates, while some risks cannot be integrated due to insufficient data. Real-estate-related assessments demonstrate how energy efficiency improvements and changing insurance costs can influence valuations. Forestry examples highlight physical risks such as fire and drought, and policy-driven opportunities such as carbon sequestration incentives.