What Is Physical Climate Risk Assessment?
Physical climate risk assessment is the process of identifying, measuring, and evaluating the potential damages and losses to assets, operations, and supply chains resulting from climate-related hazards. Unlike transition risks (which stem from policy changes and market shifts and can leave carbon-intensive stranded assets on balance sheets), physical risks arise directly from the changing climate itself.
Organizations use physical climate risk assessments to understand their exposure to events like flooding, extreme heat, drought, and rising sea levels. These assessments inform strategic planning, regulatory disclosures under frameworks like TCFD and IFRS S2, and investment decisions across portfolios and facilities.
The goal is straightforward: know which locations face the greatest climate exposure, understand how that exposure changes over time, and take action before risks materialize. A climate vulnerability assessment helps identify which assets are most susceptible to these impacts by evaluating exposure, sensitivity, and adaptive capacity.
Acute vs Chronic Physical Risks
Physical climate risks fall into two categories based on how they manifest:
Acute Risks
Acute risks are event-driven hazards that cause immediate damage. These include:
- Floods — River overflow, flash floods, coastal storm surge
- Cyclones and hurricanes — High winds, storm damage, infrastructure destruction
- Wildfires — Rapid spread, property destruction, air quality impacts
- Extreme storms — Hail, tornadoes, severe thunderstorms
- Heat waves — Short-term temperature spikes affecting operations and health
Acute events are often insurable but can cause catastrophic losses. Their frequency and intensity are increasing 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 develop gradually over years or decades. They represent long-term shifts in climate patterns:
- Sea level rise — Permanent coastal inundation, saltwater intrusion
- Temperature increase — Baseline warming affecting cooling costs and habitability
- Precipitation changes — Shifting rainfall patterns, regional drying
- Water stress — Long-term water scarcity from groundwater depletion and reduced snowpack
- Drought — Extended dry periods affecting agriculture and water supply
Chronic risks are harder to insure and often require adaptation investments or relocation decisions. Both categories matter for disclosure: every major regulatory framework requires companies to identify and assess acute and chronic physical climate risks separately.
The 12 Physical Climate Hazards
Physical climate risk assessments evaluate exposure across multiple hazard types. A thorough assessment 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 is assessed independently with its own risk rating, then combined into a composite score that reflects overall location exposure.
How Physical Climate Risk Assessment Works
A rigorous physical climate risk assessment follows a structured methodology:
1. Location Identification
The assessment begins with precise geocoding of each asset, facility, or supplier location. Coordinates are matched against climate data grids to ensure accurate hazard mapping.
2. Hazard Analysis
Each location is evaluated against historical climate data and forward-looking projections. Data sources typically include:
- NASA NEX-GDDP-CMIP6 climate projections
- WRI Aqueduct for water stress analysis
- Global flood and storm databases
- IPCC sea level rise projections
3. Exposure Scoring
Hazard exposure is quantified on a standardized scale. Each hazard receives an independent rating based on projected frequency and severity under the selected climate scenario.
4. Composite Risk Calculation
Individual hazard scores are weighted and combined into a composite risk score. This provides a single metric for comparing locations, though the underlying hazard breakdown remains available for detailed analysis.
Climate Scenarios and Time Horizons
Physical climate risk varies dramatically depending on future emission trajectories. Assessments use standardized scenarios from the IPCC:
SSP2-4.5 (Moderate Scenario)
Assumes gradual emissions reductions and moderate climate action. Global temperature rise of approximately 2.7C by 2100. Represents a “middle of the road” pathway. This scenario satisfies the ESRS E1 requirement for a current-policy pathway and exceeds the AASB S2 threshold of 2.5C for physical risk testing.
SSP5-8.5 (High Emissions Scenario)
Assumes continued fossil fuel dependence with minimal climate action. Global temperature rise of 4.4C or more by 2100. Represents a worst-case planning scenario. ESRS E1 explicitly mandates at least one high-emissions scenario for physical risk assessment, and SSP5-8.5 directly satisfies this requirement.
Assessments should evaluate risk under both scenarios across multiple time horizons:
- Baseline — Current climate exposure
- 2030 — Near-term planning horizon
- 2040 — Medium-term exposure
- 2050 — Long-term strategic horizon
Comparing scenarios reveals which locations are most sensitive to emission pathways, valuable 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 mandate or strongly expect companies to identify, assess, and report on physical climate risks. The shift accelerated in 2024 when the TCFD formally dissolved into the ISSB, making 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(b) |
| 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 scenario well exceeding 2C | 1.5C + well exceeding 2.5C | Para 29(c) |
| CDP C2.3a | Voluntary (24,000+ disclosers) | Per-hazard disclosure across 29 dropdown categories | IPCC SSP scenarios accepted | C2.3a table |
| TCFD (legacy) | Global (transitioning to ISSB) | Assess proportion of assets and activities exposed to physical risks | 2C or lower + physical risk scenario | Strategy c) |
| Basel / ECB | Banking (global / EU) | Collateral-level hazard exposure; climate stress testing | NGFS scenarios + 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 appear across nearly every framework. First, companies must identify and classify both acute and chronic physical climate risks at the asset or facility level. Second, assessment must cover multiple climate scenarios and time horizons, typically pairing a moderate pathway (SSP2-4.5, ~2.7C) with a high-emissions pathway (SSP5-8.5, ~4.4C). Third, most frameworks now ask for financial quantification, not just qualitative descriptions.
The most specific convergence point is the asset vulnerability metric. IFRS S2 Paragraph 29(b), 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 approach, requiring the carrying amount of assets materially affected by physical risks. For organizations subject to multiple frameworks, a single physical climate risk assessment that covers 12+ hazards under SSP scenarios and multiple time horizons can satisfy the data requirements of several frameworks simultaneously. For a full side-by-side comparison of how these frameworks differ on physical risk requirements, scenarios, and timelines, see our climate disclosure frameworks comparison.
Across these frameworks, the recurring requirement 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 directly feed the Para 29(b) asset vulnerability metric common to IFRS S2, UK SRS, and AASB S2.
Who Needs Physical Climate Risk Assessment?
Physical climate risk assessment serves multiple stakeholders, each with distinct regulatory drivers:
- Financial institutions — Portfolio screening, loan underwriting, and collateral risk mapping. Basel Pillar 3 and ECB climate stress testing require asset-level physical risk data for ICAAP submissions.
- Real estate investors — Acquisition due diligence, asset 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 requires disclosure of how physical risks affect the business model and value chain.
- Insurance underwriters — Pricing accuracy, exposure concentration analysis, and reinsurance negotiations.
- Sustainability teams — CSRD ESRS E1 and CDP C2.3a disclosures both require hazard-by-hazard physical risk assessment with documented data sources and methodology.
- Listed companies — IFRS S2 Para 29(b) and its regional equivalents require the “amount and percentage of assets vulnerable to physical risks,” making physical climate risk 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 regulations now require it.
Frequently Asked Questions
What is the difference between physical and transition climate risk?
Physical climate risks arise from the direct impacts of climate change: 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 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 3-5 years), when acquiring new assets, or when regulatory requirements change.
What data sources are used in physical climate risk assessment?
Common data 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 multiple sources for comprehensive coverage. See our guide to climate risk data sources for a complete list.
Is physical climate risk assessment required for regulatory reporting?
Yes. Physical climate risk assessment 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 assessment platforms provide the most efficient approach. These tools batch-process coordinates against climate datasets and return standardized risk ratings for each location, enabling portfolio-wide screening and hotspot identification.
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 approximately 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 specific requirements 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 10-12 require identification and classification. Paragraph 22 requires scenario analysis under at least two climate pathways. Paragraph 29(b) requires disclosure of the amount and percentage of assets vulnerable to physical risks.
What is the difference between acute and chronic physical climate risk?
Acute physical climate risks are event-driven hazards that cause sudden damage: floods, heat waves, wildfires, storms, and cyclones. Chronic physical climate risks develop gradually over decades: sea level rise, long-term temperature increases, precipitation pattern shifts, and water stress. Regulatory frameworks like IFRS S2 and CDP require companies to identify and disclose both types separately.
Getting Started
Physical climate risk assessment has moved from a specialized consulting engagement to an accessible, automated capability. Organizations can screen locations for climate exposure in minutes rather than weeks, at a fraction of traditional costs.
The key is starting with clear objectives: Are you assessing a single facility or an entire portfolio? Do you need IFRS S2 or CSRD-aligned scenario analysis? Are you screening suppliers or evaluating acquisitions? Matching the assessment scope to your use case ensures actionable results that satisfy both internal planning needs and regulatory requirements.
For organizations ready to quantify physical climate exposure, Continuuiti’s Climate Risk tool provides instant assessment across all 12 hazards, multiple scenarios, and time horizons extending to 2050.
