Physical risk from climate change could cost the global economy over $1.2 trillion annually by the 2050s, according to S&P Global. Floods, heat waves, wildfires, and rising seas are already damaging infrastructure, disrupting supply chains, and reducing asset values.
Physical risk refers to the potential for financial loss or operational disruption caused by climate-related hazards. These hazards fall into two categories: acute events like storms and floods, and chronic shifts like sea level rise and prolonged drought. Organizations that depend on physical assets, supply chains, or agricultural inputs face direct exposure to these hazards.
Below, we break down the 12 physical climate hazards, explain how physical risk is assessed, and compare it to transition risk.
What Is Physical Risk?
Physical risk is the potential for damage, disruption, or financial loss caused by climate and weather-related hazards. The Task Force on Climate-related Financial Disclosures (TCFD) defines physical risk as risks resulting from climate change that can be event-driven (acute) or longer-term shifts (chronic) in climate patterns.
Physical risk differs from transition risk, which stems from the economic shift toward a low-carbon economy. While transition risk involves policy changes, technology disruption, and market shifts, physical risk involves direct damage from the climate itself.
Regulatory frameworks including TCFD, the EU’s Corporate Sustainability Reporting Directive (CSRD), and SEC climate disclosure rules now require organizations to identify, assess, and disclose their physical risk exposure. Understanding physical risk is no longer optional for companies with material climate exposure.
What Are the Physical Risks of Climate Change?
Physical risks of climate change split into two categories based on how they manifest: acute risks that strike suddenly and chronic risks that build over time.
Acute Physical Risks
Acute physical risks are event-driven hazards with sudden onset and short duration. They cause immediate damage to infrastructure, operations, and human health. Six acute hazards form the core of most physical climate risk assessments:
- Heat waves — Prolonged periods of extreme heat that stress power grids, reduce labor productivity, and cause heat-related illness
- Extreme rainfall — Intense precipitation events that trigger flash flooding and overwhelm drainage systems
- Severe storms — High-wind events including hurricanes, cyclones, and thunderstorms that damage structures
- Wildfires — Fire weather conditions driven by high temperatures, low precipitation, and dry vegetation
- River floods — Precipitation-driven flooding from river overflow, often compounded by terrain and land cover
- Landslides — Slope failures triggered by heavy rainfall on steep or unstable terrain
Chronic Physical Risks
Chronic physical risks develop gradually over years and decades. Their cumulative impact reshapes operating conditions for businesses and communities. Six chronic hazards complete the physical risk picture:
- Sea level rise — Coastal inundation from thermal expansion and ice melt, projected to reach 0.44-0.77 meters by 2100 under moderate to high emissions
- Temperature change — Long-term warming trends that shift growing seasons, energy demand, and habitability
- Precipitation change — Shifts in annual rainfall patterns that alter water availability and flood frequency
- Drought — Extended periods of below-average precipitation that strain water supplies and agriculture
- Water stress — Growing imbalance between water demand (withdrawals) and available supply
- Cold stress — Extreme cold days that affect infrastructure, agriculture, and human health in mid-to-high latitudes
The 12 Physical Climate Hazards
Each physical risk hazard is measured using specific climate variables and datasets. The table below shows all 12 hazards with their data sources and what they measure, drawn from Continuuiti’s climate hazard definitions.
| Hazard | Type | What It Measures | Primary Data Source |
|---|---|---|---|
| Heat Wave | Acute | Heat wave days per year (days above baseline + 5°C) | NASA NEX-GDDP-CMIP6 |
| Extreme Rainfall | Acute | Maximum daily precipitation (mm/day) | NASA NEX-GDDP-CMIP6 |
| Severe Storm | Acute | Severe storm days per year (wind speed exceedance) | NASA NEX-GDDP-CMIP6 |
| Wildfire | Acute | Fire Weather Index (temp × drought × wind × land cover) | NASA NEX-GDDP-CMIP6 + ESA WorldCover |
| River Flood | Acute | Flood potential (max precip × terrain modifier) | NASA NEX-GDDP-CMIP6 + NASA SRTM |
| Landslide | Acute | Landslide susceptibility (rainfall × slope factor) | NASA NEX-GDDP-CMIP6 + NASA SRTM |
| Temperature Change | Chronic | Mean temperature deviation from baseline (°C) | NASA NEX-GDDP-CMIP6 |
| Cold Stress | Chronic | Cold stress days per year (below-threshold minimums) | NASA NEX-GDDP-CMIP6 |
| Precipitation Change | Chronic | Ratio of future-to-baseline annual precipitation | NASA NEX-GDDP-CMIP6 |
| Drought | Chronic | Severe drought months per year (SPI proxy) | NASA NEX-GDDP-CMIP6 |
| Sea Level Rise | Chronic | Projected sea level rise (meters) + coastal exposure | IPCC AR6 WG1 |
| Water Stress | Chronic | Water withdrawal-to-supply ratio (%) | WRI Aqueduct 4.0 |
How Is Physical Risk Assessed?
Assessing physical risk follows a structured approach similar to medical screening: a broad screening identifies high-risk locations, and detailed assessment follows where needed.
Screening-level assessment evaluates all 12 hazards across a location portfolio using climate model projections, elevation data, terrain characteristics, land cover, and distance to coast. Key data sources include:
- NASA NEX-GDDP-CMIP6 — Bias-corrected climate projections at ~25km resolution for temperature, precipitation, and wind speed
- WRI Aqueduct 4.0 — Basin-level water stress data with future projections
- IPCC AR6 — Sea level rise projections under multiple emissions scenarios
- NASA SRTM — 30-meter elevation data for terrain and coastal exposure
- ESA WorldCover — 10-meter land cover classification for wildfire susceptibility
Assessments run under two emissions scenarios: SSP2-4.5 (moderate mitigation, ~2.7°C warming by 2100) and SSP5-8.5 (fossil-fueled development, ~4.4°C warming). Results project across four time horizons: baseline, 2030, 2040, and 2050. Each hazard receives a risk rating on a 5-tier scale from Low to Extreme.
Automated platforms like Continuuiti assess all 12 hazards in under two minutes per location, making it possible to screen hundreds of sites across a supply chain or real estate portfolio.
Explore Physical Risk Topics
Each physical hazard involves distinct drivers and assessment methods. These guides cover specific risk types in depth:
- Sea Level Rise – Causes, IPCC AR6 projections, and coastal flooding impact through 2100.
- Sea Level Rise Projections – Detailed IPCC data for 2050 and 2100 under SSP scenarios, with regional breakdowns.
- Temperature Anomaly – What temperature anomalies reveal about climate risk exposure at specific locations.
Physical Risk vs Transition Risk
Climate risk has two sides: physical risk from hazards and transition risk from the economic shift to a low-carbon economy. Both fall under the TCFD framework, and both require scenario analysis. For a detailed transition risk vs physical risk comparison, see our dedicated guide. Here is how they compare:
| Dimension | Physical Risk | Transition Risk |
|---|---|---|
| Cause | Climate and weather hazards | Policy, technology, and market shifts |
| Examples | Floods, heat waves, sea level rise, drought | Carbon pricing, stranded assets, green regulations |
| Timeline | Already occurring, worsening through 2100 | Accelerating with policy action |
| Assessment | Location-specific, data-driven | Sector and policy dependent |
| TCFD Relevance | Scenario analysis required | Scenario analysis required |
Why Physical Risk Matters for Organizations
Physical risk has direct financial implications that grow each year. S&P Global estimates climate-related physical damages will reach $885 billion annually by the 2030s and exceed $1.2 trillion by the 2050s under a moderate emissions pathway.
Four factors make physical risk a priority for organizations:
- Supply chain disruption — A single flood or heat wave at a key supplier location can halt production across an entire network. Screening supplier portfolios for physical risk exposure identifies vulnerable nodes before disruption occurs.
- Asset valuation — Properties in high-risk flood zones, coastal areas, or wildfire-prone regions face declining values and increasing insurance costs. Physical risk data informs investment and divestment decisions.
- Insurance availability — Insurers are withdrawing coverage from high-risk areas. Understanding physical risk exposure helps organizations anticipate coverage gaps and rising premiums.
- Regulatory compliance — TCFD-aligned disclosure is now mandatory in the EU (CSRD), the UK, and expanding globally. Organizations must quantify and report their physical risk exposure using recognized scenarios and methodologies.
Frequently Asked Questions
What are physical risks of climate change?
Physical risks of climate change are the potential for damage, disruption, or financial loss from climate-related hazards. These include acute events like heat waves, floods, storms, wildfires, and landslides, as well as chronic shifts like sea level rise, temperature change, drought, and water stress. Together, 12 distinct hazards make up the physical risk landscape.
What is the difference between acute and chronic physical risk?
Acute physical risks are event-driven hazards with sudden onset, such as floods, heat waves, storms, and wildfires. Chronic physical risks develop gradually over years and decades, including sea level rise, temperature change, drought, and water stress. Both types require assessment, but they differ in timeline and how organizations prepare for them.
How is physical risk measured?
Physical risk is measured using climate model projections, elevation data, terrain analysis, and supplementary datasets. Each of the 12 hazards has specific metrics. Results are rated on a 5-tier scale from Low to Extreme under multiple emissions scenarios and time horizons.
What industries are most affected by physical risk?
Industries with significant physical assets, supply chain dependencies, or agricultural exposure face the highest physical risk. Real estate, agriculture, energy, insurance, transportation, and manufacturing are among the most affected sectors.
What is the difference between physical risk and transition risk?
Physical risk comes from direct climate hazards like floods, heat waves, and sea level rise. Transition risk comes from the economic shift to a low-carbon economy, including carbon pricing, technology disruption, and changing regulations. Both are covered under TCFD disclosure requirements.
Physical risk is quantifiable and location-specific. A structured screening of all 12 hazards identifies which locations face the highest exposure and which hazards drive the most risk. From there, detailed site-level assessments provide the depth needed for investment decisions, insurance negotiations, and regulatory disclosure.
