Physical Risk

Physical risks are usually divided into two types. Acute risks come from specific events, such as hurricanes, floods, wildfires and heatwaves. Chronic risks come from gradual changes, such as rising temperatures, rising sea levels, changing rainfall and water shortages.

These risks can damage property and infrastructure, disrupt supply chains, reduce agricultural output, increase operating costs and reduce the value of assets. They also affect insurers, which pay claims, and banks, whose borrowers may struggle to repay loans.

For example, a manufacturer with factories in a region prone to flooding may face damage, production stoppages and higher insurance costs. Homeowners in areas facing rising wildfire or flood risk may find insurance becoming more expensive or unavailable, reducing property values.

Companies and investors assess physical risk by analysing the locations of assets and suppliers and modelling how climate change may affect them under different scenarios. Managing physical risk can involve adaptation measures, such as flood defences and more resilient buildings, insurance and avoiding high-risk locations.