Physical climate risk

Physical climate risk is the risk to assets, operations, supply chains or people arising directly from climate hazards, split into acute risk, discrete extreme events like a hurricane, flood or wildfire, and chronic risk, gradual long-term shifts like sea-level rise, rising average temperatures or shifting rainfall patterns. It is distinguished from transition risk, which arises from the policy, market and technology shifts of moving to a lower-carbon economy rather than from the climate itself.

Assessing physical climate risk means combining projected hazard under one or more future scenarios, typically built from downscaled climate models run against multiple shared socioeconomic pathways, with an asset-level inventory of exposure and vulnerability, a similar structure to a catastrophe model but extended to forward-looking scenarios rather than historical hazard frequency alone. Results are increasingly summarized in financial terms as a climate value-at-risk figure, letting risk be compared alongside other financial risks.

Physical climate risk assessment now underpins corporate climate disclosure regimes, lending and insurance underwriting, and infrastructure investment decisions, since regulators and investors increasingly expect it alongside transition-risk analysis under frameworks descended from the TCFD recommendations. The main pitfalls are relying only on historical loss data, which understates a hazard whose frequency or intensity is changing, and running climate-scenario analysis under only one emissions pathway, which hides how differently an asset performs across a more versus less severe future.