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 goes a step further, asking how sensitive each asset is and how well it can cope and 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 describes acute physical risks as arising “from weather-related events such as storms, floods, drought or heatwaves, which are increasing in severity and frequency.”
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. Most frameworks use the acute and chronic split, but they do not file every hazard the same way. IFRS S2 and the EU hazard list both put drought under acute, while many assessments measure it as a slow drying trend, so state which classification you follow.
In practice: a river flood that shuts a plant for a week is acute. Rising cooling bills at a data center over a decade are chronic.
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 Runs in Practice
Most engagements follow the same arc, whoever runs them.
- Decide which places belong in scope, and write down why. Owned sites come first, then key suppliers, ports, and the roads between them. The list you happen to have addresses for is rarely the list that matters. Our guide to choosing which sites belong in a climate risk screen covers this step.
- Pin each place to the right spot. A point at the city center can land a factory in the wrong flood cell. Building-level coordinates are the cheapest accuracy gain in the whole job.
- Screen every site across all hazards, scenarios, and time horizons. This gives a rating per hazard and shows which few sites and hazards stand out.
- Check the screen against what has already happened. Past floods and landslides near a site either back up a rating or expose a gap, such as flooding from blocked drains that river maps never show.
- Go deep only where it counts. For the handful of material sites and hazards, turn ratings into money: water depth, damage to the building, and an expected annual loss. Our facility-level assessment methodology walks through those steps.
- Bring in the site team. Floor heights, flood barriers, backup power, and spare suppliers change the answer, and screening models assume none of them exist.
- Write it up so someone else can check it. Record the scenarios, data versions, assumptions, and what was left out. Auditors ask how the scope was set as well as how the numbers were built, as our guide to physical climate risk data assurance explains.
How to Prioritize Physical Climate Risks Across Locations
Rank sites by the worst hazard that matters to what each site does, rather than by an average of all hazards. A single blended score can hide one severe flood risk under eleven mild ones, which is why a composite climate risk score works best as a starting point. Then weigh the value at stake and how hard the site would be to replace.
Common Mistakes in Physical Climate Risk Assessment
- Reading a Low river-flood rating as “this site does not flood.” River maps model rivers, while intense local rain can still flood a site outside every mapped floodplain.
- Treating a zero as proof of safety. On a coarse global grid, a zero can mean the model cannot see water at that scale.
- Reading too much into scenario differences before mid-century. The emission pathways barely separate until then.
- Expecting a screening rating to be a loss figure. A rating tells you where to look; the money comes from the deeper step.
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 |
| Intermediate | SSP2-4.5 | about 2.7°C | A middle-of-the-road planning case |
| 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.
Before about 2040 the three pathways sit close together, near 1.5°C of global warming in the IPCC’s best estimates, so most of the gap between them opens up from mid-century on.
The pathways also line up with what regulators ask for. The high pathway (SSP5-8.5) is an example the 2023 version of ESRS E1 gives for a high-emissions scenario; the revised version leaves scenario analysis optional. Australia’s rules ask for one scenario well above 2°C and one at 1.5°C, and SSP1-2.6, at about 1.8°C, is lower than today’s policies but above 1.5°C. 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 is now part of mandatory reporting in a growing number of jurisdictions. IFRS S2 builds on the recommendations of the TCFD, which disbanded in 2023, and more than 40 jurisdictions have decided to use the ISSB standards or are taking steps to do so.
| Framework | Jurisdiction | Physical Risk Requirement | Scenario Rule | Status |
|---|---|---|---|---|
| IFRS S2 | More than 40 jurisdictions using it or taking steps | Identify physical risks; disclose amount and percentage of assets or business activities vulnerable to them | Scenario analysis suited to the company; say whether one scenario matches the latest international climate agreement | Para 22, 29(c) |
| UK SRS S2 | UK | Same physical risk requirements as IFRS S2 | Same as IFRS S2 | UK-endorsed February 2026; in-scope listed companies comply or explain for periods from 1 January 2027 (first reports 2028) |
| AASB S2 | Australia | Same asset metric as IFRS S2 | At least 1.5°C and one scenario well exceeding 2°C | Largest entities from periods starting 1 January 2025; others phased in to 2027 |
| CSRD / ESRS E1 | EU companies with more than 1,000 employees and over €450 million turnover | Identify hazards in own operations and the upstream and downstream value chain; assess exposure and sensitivity; report assets at material physical risk | Revised version: may use scenario analysis; if used, disclose whether a high-emission scenario was used. 2023 version: describe hazard identification considering at least high-emission scenarios. | 2023 version for financial years 2024-2025; either version for 2026; revised version (in force 10 November 2026) from 2027. |
| California SB 261 | Companies over $500 million revenue doing business in California | Climate-related financial risk report every two years | TCFD-based | Enforcement paused by a federal appeals court order in November 2025 |
| CDP (voluntary) | Global | Hazard-by-hazard physical risk questions | IPCC scenarios accepted | Voluntary |
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 uses climate scenarios and time horizons, often pairing an intermediate 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 figures as well as narrative.
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 takes a similar line, asking for the value of assets at material physical risk before adaptation actions (the carrying amount in the revised version; an amount and percentage in the 2023 version). 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.
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. Supervisors such as the ECB expect banks to build climate risk into capital planning and stress tests, and the Basel Committee published a voluntary climate disclosure framework in June 2025.
- Real estate investors: acquisition due diligence, valuation adjustments, and insurance cost projections.
- 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 asks companies to disclose the key elements of their physical-risk assessment method, and CDP asks hazard-by-hazard physical risk questions.
- 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 reporting prerequisite wherever IFRS S2 or a national version is mandatory.
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 the underlying climate data or the asset changes, such as new sites, major works, or new flood defenses.
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.
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 a growing number of places, yes. More than 40 jurisdictions have decided to use IFRS S2 or are taking steps to, Australia’s AASB S2 applies to its largest companies from 2025, and the EU’s ESRS E1 applies to the largest EU companies. California’s SB 261 is on hold while a court case runs, and CDP is voluntary. All of them ask companies to identify physical risks. Scenario rules differ: the revised ESRS E1 leaves scenario analysis optional.
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 suited to the company’s circumstances and asks whether one scenario matches the latest international climate agreement. Paragraph 29(c) requires disclosure of the amount and percentage of assets vulnerable to physical risks.
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Getting Started
Screening has moved from a specialized consulting engagement to an automated first step. Organizations can screen locations for climate exposure in minutes, then spend expert time on the few sites that matter.
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.
