What does the term 'climate risk' refer to?

The term 'climate risk' fundamentally encompasses the potential financial impact of climate change on an investment's value and performance. This concept is critical as it acknowledges that climate change can lead to both direct and indirect consequences for businesses and investments. These impacts may stem from physical changes in climate, such as more frequent extreme weather events, as well as from transition risks, which arise as economies shift towards lower-carbon solutions.

In the investment context, understanding climate risk is essential for assessing long-term viability and sustainability. Investors increasingly need to consider how climate-related issues might affect not only the environmental and social governance (ESG) profiles of their holdings but also their overall financial returns. This aligns closely with the growing emphasis on integrated climate risk assessments in investment decision-making processes.

The other options do not encapsulate the broader implications of climate risk: one option focuses narrowly on regulatory aspects, while another targets transient temperature changes. The fourth option restricts climate risk to biodiversity loss, which is only one of many areas affected by climate change. Thus, the comprehensive nature of option B reflects the complexities and multifaceted impacts of climate risk faced by investors.