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Understanding physical climate risk and how to assess it

What is physical climate risk, how do you evaluate it and why do businesses need to assess it? Hans Brenna Schjønberg, Special Advisor at Position Green, clarifies what it is and how to approach it.

What is physical climate risk? 

Physical climate risk is the change in natural hazard frequency and severity that is happening under climate change. All assets are exposed to a certain number of natural hazards, but this is changing as the climate changes. Some regions will have more frequent or more severe versions of the hazards they already experience, while other regions will experience completely new hazards.

What is the difference between physical climate risk and transition risk?

Physical climate risk is the risk to businesses relating to the changes in the physical climate and environmental systems of the Earth, such as changing wind patterns and season durations. Transition risk is the risk to businesses from changes in policy and markets in response to present and future climate change. 

Very briefly you could say that physical climate risk and transition risk are opposites: In many scenarios with high transition risk, there will be less physical risk and vice versa.

What are the key physical climate risks? 

The most costly natural hazard globally is flooding. Depending on where you are located, key physical climate risks could be wildfire, extreme heat or extreme precipitation.

Why do businesses need to assess physical climate change risk?

Without knowledge of physical climate risks in the present and future, no risk management is complete. Many of these hazards have very high consequences and should be managed accordingly.

How do you evaluate climate risk?

To evaluate physical climate risk, you need climate data. Observations for the present and climate model simulations for the future. Using these types of data, you can model how the frequency and consequences of natural hazards change in the future under different climate scenarios. Finally, assess how this change in exposure translates into relevant risks for your assets and locations.

Practical use of the assessment

  • Compliance with the EU Taxonomy Merger and acquisition processes 
  • Strategic risk management
  • TCFD disclosures

How can we help? 

Think about your current exposure to natural hazards. Has any of your assets or location been impacted (or had near-misses) in the last ten years? 

Position Green provides an independent screening and assessment of physical climate risks. This allows companies to identify and mitigate potential risks to their assets and business operations, as well as provide documentation to align with the requirements in the EU taxonomy. 

Climate change imposes physical and financial risks to companies. Understanding and assessing this risk is critical for successful risk management. The EU taxonomy also requires documentation of a physical climate risk assessment for all activities classified as aligned. Furthermore, climate risk disclosure is increasingly requested in the market.

To help your company identify, assess and mitigate your physical climate risks, we can perform a Physical Climate Risk Assessment using high-resolution climate data from the EU Copernicus program. ​The assessment will fulfil the criteria for climate change adaptation in the EU Taxonomy. 

We can also help your company map and assess climate risks like heat waves, flooding, drought, and wildfire, giving an overview of companies’ exposure to climate-related hazards and risks. Finally, we can provide support to identify material risks and advice on adaptation strategies.

Hans Brenna Schjønberg

Special Advisor

Position Green

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