Physical risk is the potential for financial loss from the direct, tangible consequences of climate change, such as damage to assets from extreme weather or changing environmental conditions. Understanding this risk is crucial for businesses and investors to protect their portfolios and adapt to the unavoidable impacts of a warming planet.
Physical risk represents the direct financial threat posed by the physical consequences of a changing climate. As global temperatures rise, the frequency and severity of climate-related events increase, posing a direct danger to physical assets, supply chains, and business operations. This risk is a core concern for investors, corporations, and governments, as it can lead to significant value destruction, higher insurance costs, and operational disruptions. Addressing it requires both mitigating future climate change and adapting to the impacts already underway.
To properly assess and manage it, physical risk is typically categorized into two main types:
These two forms of risk are often interlinked; for instance, chronic increases in average temperatures can exacerbate the severity and frequency of acute wildfires and droughts.