Banks screening loan books. Insurers pricing coastal policies. Operations teams checking whether a key supplier sits in a flood zone. They all face the same question: how exposed is this location to a changing climate, and what could it cost?
Physical climate risk assessment answers that question. It is the part of a wider climate risk assessment that looks at physical hazards like floods, heat, drought, and rising seas, rather than the policy and market shifts that make up transition risk. This guide explains what a physical climate risk assessment covers, the 12 hazards it measures, the scenarios and time horizons it uses, and which rules now require it. By the end you will know which framework applies to you and where to read next.
What Is Physical Climate Risk Assessment?
Physical climate risk assessment is the process of finding, measuring, and judging the damage and losses that climate hazards could cause to assets, operations, and supply chains. Transition risks come from the move to a low-carbon economy, such as policy changes and market shifts, and can leave carbon-heavy stranded assets on the balance sheet. Physical risks are different. They come straight from the changing climate itself.
Organizations run these assessments to see their exposure to events like flooding, extreme heat, drought, and rising sea levels. The results feed strategic planning, regulatory disclosures under frameworks like TCFD and IFRS S2, and investment decisions across portfolios and facilities.
The goal is simple: know which locations face the most climate exposure, understand how that exposure shifts over time, and act before the risk lands. A climate vulnerability assessment takes this further by weighing three things for each asset: its exposure, its sensitivity, and its capacity to adapt.
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Acute vs Chronic Physical Risks
Physical climate risks fall into two groups, based on how they show up.
Acute Risks
Acute risks are sudden, event-driven hazards that cause immediate damage. They include:
- Floods: river overflow, flash floods, coastal storm surge
- Cyclones and hurricanes: high winds, storm damage, infrastructure destruction
- Wildfires: rapid spread, property loss, poor air quality
- Extreme storms: hail, tornadoes, severe thunderstorms
- Heat waves: short bursts of high temperature that hit operations and health
Acute events are often insurable, but they can still cause catastrophic losses. They are growing more frequent and more intense as global temperatures rise. IFRS S2 Appendix A defines acute physical risks as “event-driven, including increased severity of extreme weather events such as cyclones, hurricanes, or floods.”
Chronic Risks
Chronic risks build up slowly, over years or decades. They are long-term shifts in the climate itself:
- Sea level rise: permanent coastal flooding, saltwater intrusion
- Temperature increase: steady warming that raises cooling costs and strains habitability
- Precipitation changes: shifting rainfall patterns, regional drying
- Water stress: long-term scarcity from groundwater depletion and lower snowpack
- Drought: extended dry spells that hit farming and water supply
Chronic risks are harder to insure and often call for adaptation spending or relocation. A simple way to hold the difference: acute risks are the catastrophic shocks, chronic risks are the slow erosion. A complete assessment tracks both, because watching only one hides the other. Every major framework asks companies to identify acute and chronic physical risks separately.
The 12 Physical Climate Hazards
A physical climate risk assessment measures exposure across many hazard types. A thorough one covers at least these 12 climate hazards:
| Category | Hazard | Type | Primary Impact |
|---|---|---|---|
| Temperature | Heat Wave | Acute | Worker safety, cooling demand, equipment failure |
| Cold Stress | Acute | Freeze damage, heating costs, transportation delays | |
| Temperature Change | Chronic | Long-term operational costs, crop viability | |
| Precipitation | Drought | Chronic | Water scarcity, agricultural losses, supply chain |
| Extreme Rainfall | Acute | Flash flooding, infrastructure damage | |
| Precipitation Change | Chronic | Regional water availability shifts | |
| Compound | Wildfire | Acute | Property destruction, air quality, evacuations |
| Landslide | Acute | Terrain instability, infrastructure loss | |
| Severe Storm | Acute | Wind damage, hail, power outages | |
| Hydrological | River Flood | Acute | Inundation, supply chain disruption |
| Sea Level Rise | Chronic | Coastal property loss, saltwater intrusion | |
| Water Stress | Chronic | Basin-level water scarcity, competition for resources |
Each hazard gets its own risk rating. Those ratings are then combined into a single composite score that reflects the location’s overall exposure.
How a Physical Climate Risk Assessment Works
These four steps are the shape of almost any physical climate risk assessment, whether you run it in-house or buy it from a provider:
1. Location Identification
The assessment starts by pinning down each asset, facility, or supplier location. Precise coordinates are matched to climate data grids so the hazard mapping is accurate. A property at sea level faces different risks than one 50 meters higher, even in the same city, so location detail matters.
2. Hazard Analysis
Each location is checked against past climate records and forward-looking projections. Data sources usually include:
- NASA NEX-GDDP-CMIP6 climate projections (downscaled global climate models)
- WRI Aqueduct for water stress
- Global flood and storm databases
- IPCC sea level rise projections
3. Exposure Scoring
Each hazard is scored on a standard scale. The score reflects how often and how severely that hazard is expected to hit under the chosen climate scenario.
4. Composite Risk Calculation
The individual hazard scores are weighted and combined into one composite risk score. That gives a single number for comparing locations, while the hazard-by-hazard breakdown stays available underneath.
Knowing a site is high-risk is not the same as knowing how much money is at stake. Turning a hazard rating into a dollar figure is where the deeper method comes in: data sources, the rating scale, return periods, and the limitations any credible assessment should disclose.
Climate Scenarios and Time Horizons
Climate risk is not a single forecast. It is a range, and you bracket that range with emission scenarios. These are if-then pathways from the IPCC, built on Shared Socioeconomic Pathways (SSPs): if emissions follow this path, then temperatures and extreme events change by this much. Most assessments read across three pathways.
| Pathway | Scenario | Warming by 2100 | What it answers |
|---|---|---|---|
| Low (Paris-aligned) | SSP1-2.6 | about 1.8°C | Risk locked in even if the world cuts emissions deeply |
| Moderate (current policy) | SSP2-4.5 | about 2.7°C | The most likely planning baseline |
| High (worst case) | SSP5-8.5 | about 4.4°C | The stress test |
The low pathway is Paris-aligned, meaning warming held well below 2°C, and it carries the insight most worth keeping. It shows the locked-in floor: the exposure that stays even if the world cuts emissions deeply. You adapt to that floor; you cannot mitigate it away. Reading all three pathways tells you two things at once: how much risk is already committed, and how much more is still in your hands.
The pathways also line up with what regulators ask for. The high pathway (SSP5-8.5) meets the high-emissions scenario that ESRS E1 and AASB S2 require, while a moderate pathway (SSP2-4.5) covers the current-policy baseline. For a deeper look at how these are built, see our guides to SSP scenarios and RCP scenarios.
Each pathway is read across several time horizons:
- Baseline: current climate exposure
- 2030: near-term planning horizon
- 2040: medium-term exposure
- 2050: long-term strategic horizon
Comparing pathways shows which locations are most sensitive to the emissions path. That is useful intelligence for long-term capital allocation and programmatic risk screening via API.
Which Regulatory Frameworks Require Physical Climate Risk Assessment?
Physical climate risk assessment has moved from a voluntary best practice to a regulatory requirement. Eight major disclosure frameworks now require, or strongly expect, companies to identify, assess, and report physical climate risks. The shift sped up in 2024, when the TCFD folded into the ISSB and made IFRS S2 the global baseline for climate disclosure.
| Framework | Jurisdiction | Physical Risk Requirement | Scenario Mandate | Key Reference |
|---|---|---|---|---|
| IFRS S2 | Global (30+ countries) | Identify acute and chronic risks; quantify amount and percentage of assets vulnerable | 2+ scenarios; Paris-aligned recommended | Para 29(c) |
| UK SRS S2 | UK (mandatory from 2027) | Identical to IFRS S2; physical risk requirements unchanged | Identical to IFRS S2 | Para 29(c) |
| CSRD / ESRS E1 | EU (~10,000 companies) | Screen physical risks with documented data sources and methodology | High-emissions scenario mandatory for physical risks | E1-2, E1-11 |
| AASB S2 | Australia (FY 2026+) | Identical to IFRS S2; must use a scenario well exceeding 2°C | 1.5°C + well exceeding 2.5°C | Para 29(c) |
| CDP question 3.1.1 | Voluntary (24,000+ disclosers) | Per-hazard disclosure across 29 dropdown categories | IPCC SSP scenarios accepted | question 3.1.1 table |
| TCFD (legacy) | Global (transitioning to ISSB) | Assess proportion of assets and activities exposed to physical risks | 2°C or lower + a physical risk scenario | Strategy c) |
| Basel / ECB | Banking (global / EU) | Collateral-level hazard exposure; climate stress testing | NGFS scenarios + the bank’s own severe scenario | Principles 5, 8, 12 |
| BRSR | India (top 1,000 listed) | Material ESG issue identification including climate risks | None required | Q24, Principle 6 |
Three requirements show up across nearly every framework. First, companies must identify and classify both acute and chronic physical risks at the asset or facility level. Second, the assessment must cover several climate scenarios and time horizons, usually pairing a moderate pathway (SSP2-4.5, about 2.7°C) with a high-emissions pathway (SSP5-8.5, about 4.4°C). Third, most frameworks now ask for financial numbers, not just words.
The sharpest point of agreement is the asset vulnerability metric. IFRS S2 Paragraph 29(c), UK SRS Paragraph 29(c), and AASB S2 Paragraph 29(c) all require disclosure of the “amount and percentage of assets or business activities vulnerable to climate-related physical risks.” ESRS E1-11 takes a similar line, asking for the carrying amount of assets materially affected by physical risks. For a company that reports under several frameworks, one physical climate risk assessment covering 12+ hazards under SSP scenarios and multiple time horizons can feed the data several of them need at once. For a full side-by-side view, see our climate disclosure frameworks comparison.
The recurring need across all of them is structured, scenario-based hazard data at the asset level. Platforms like Continuuiti provide 12-hazard physical climate risk assessment under SSP scenarios, with flood damage estimates that feed the Para 29(c) asset vulnerability metric shared by IFRS S2, UK SRS, and AASB S2.
Who Needs Physical Climate Risk Assessment?
Physical climate risk assessment serves several groups, each with its own driver. Find yourself below, then follow the link to what applies to you.
- Financial institutions: portfolio screening, loan underwriting, and collateral risk mapping. Basel Pillar 3 and ECB climate stress testing need asset-level physical risk data for ICAAP submissions.
- Real estate investors: acquisition due diligence, valuation adjustments, and insurance cost projections. In Australia alone, AASB S2 covers listed entities facing an estimated AU$611 billion in projected property value losses by 2050.
- Corporate risk managers: facility planning, supply chain resilience, and business continuity. IFRS S2 Paragraph 13 asks companies to disclose how physical risks affect the business model and value chain.
- Insurance underwriters: pricing accuracy, exposure concentration, and reinsurance negotiations.
- Sustainability teams: CSRD ESRS E1 and CDP question 3.1.1 both ask for hazard-by-hazard physical risk assessment with documented data sources and methodology.
- Listed companies: IFRS S2 Para 29(c) and its regional equivalents require the “amount and percentage of assets vulnerable to physical risks,” making the assessment a compliance prerequisite in 30+ jurisdictions.
The common thread: any organization with physical assets or supply chains exposed to weather and climate needs to quantify that exposure, and a growing number of rules now require it.
Frequently Asked Questions
What does physical climate risk mean?
Physical climate risk is the risk that climate hazards damage assets, operations, or supply chains. It splits into acute risks (sudden events like floods, storms, and heat waves) and chronic risks (slow shifts like sea level rise, warming, and water stress). It is separate from transition risk, which comes from the move to a low-carbon economy.
What are the four types of climate risk?
Climate risk is usually grouped into two physical types, acute and chronic, plus transition risk. Some frameworks split transition risk into policy, technology, market, and reputation, which is where the “four types” phrasing comes from. A physical climate risk assessment focuses on the acute and chronic physical hazards.
What is the difference between physical and transition climate risk?
Physical climate risks come from the direct impacts of climate change, such as floods, heat waves, droughts, and sea level rise. Transition risks come from the shift to a low-carbon economy, including policy changes, technology shifts, and market preferences. Physical risk assessments focus on the weather and climate hazards affecting assets and operations.
How often should physical climate risk assessments be updated?
Annual updates are recommended for portfolio-level assessments. Location-specific assessments should be refreshed when climate models are updated (typically every 3 to 5 years), when acquiring new assets, or when regulatory requirements change.
What data sources are used in physical climate risk assessment?
Common sources include NASA NEX-GDDP-CMIP6 for climate projections, WRI Aqueduct for water stress, IPCC AR6 for sea level rise, and historical weather databases for hazard frequency. High-quality assessments combine several sources for fuller coverage. See our guide to climate risk data sources for a complete list.
Is physical climate risk assessment required for regulatory reporting?
Yes. It was recommended under TCFD and is now mandatory under its successor IFRS S2, as well as CSRD (ESRS E1), AASB S2, and CDP. IFRS S2 alone has been adopted by 30+ jurisdictions. Most frameworks require companies to identify acute and chronic physical risks, run scenario analysis, and quantify the percentage of assets vulnerable to climate hazards.
How do I assess physical climate risk for a large portfolio of locations?
For portfolios with hundreds or thousands of locations, automated platforms are the most efficient approach. They batch-process coordinates against climate datasets and return standardized risk ratings for each location, which makes portfolio-wide screening and hotspot identification practical.
Is physical climate risk assessment required by law?
In many jurisdictions, yes. IFRS S2 mandates physical risk disclosure in 30+ countries. The EU’s CSRD requires it for about 10,000 companies under ESRS E1. Australia’s AASB S2 makes it mandatory for large listed entities from FY 2026. California’s SB 261 requires climate-related financial risk reports. The details vary, but all share the need for hazard identification, scenario analysis, and financial impact assessment.
What is physical climate risk under IFRS S2?
IFRS S2 defines physical climate risks as either acute (event-driven hazards like floods, storms, and heat waves) or chronic (longer-term shifts like sea level rise, temperature change, and water scarcity). Paragraphs 10 to 12 require identification and classification. Paragraph 22 requires scenario analysis under at least two climate pathways. Paragraph 29(c) requires disclosure of the amount and percentage of assets vulnerable to physical risks.
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Getting Started
Physical climate risk assessment has moved from a specialized consulting engagement to an automated capability. Organizations can screen locations for climate exposure in minutes rather than weeks, at a fraction of the old cost.
Start with clear objectives. Are you assessing a single facility or a whole portfolio? Do you need IFRS S2 or CSRD-aligned scenario analysis? Are you screening suppliers or evaluating acquisitions? Matching the scope to your use case keeps the results actionable for both internal planning and regulatory reporting.
For organizations ready to quantify physical climate exposure, Continuuiti’s Climate Risk tool runs an instant assessment across all 12 hazards, multiple scenarios, and time horizons out to 2050.
For teams building this into their own systems, see the Climate Risk API, which exposes the 12 hazards, multi-scenario projections, and batch endpoints that power the platform.
