What Is Physical Risk?

The physical risk of climate change refers to the negative impact of environmental changes on assets, economies, and communities. It encompasses risks from both frequent, severe weather events such as floods, hurricanes, and droughts, and long-term climate shifts causing sea-level rise, heatwaves, and agricultural changes. These events may damage infrastructure, cause supply chain disruption, impact agriculture, and affect health. Physical risk contrasts with transition risk, which is the financial risk associated with the economic and policy shifts during the transition to a lower-carbon economy.

Types of Physical Risk

Acute physical risk refers to harm from sudden, intense natural events such as hurricanes, floods, wildfires, or storms. Characterized by high intensity and short duration, they cause immediate, significant damage.

Chronic physical risk pertains to gradual climate disruption, including rising sea levels, extended droughts, and higher temperatures. Developing over time, these risks have lasting effects on agriculture, water resources, and regional habitability, necessitating long-term adaptations.

Physical Risk Modeling

Physical risk factors, such as extreme weather events and long-term changes in climate patterns, are increasingly being integrated into financial risk models, such as climate stress tests.

You can use MATLAB^® and Modelscape to integrate physical risk data into your financial models. Start by using Mapping Toolbox™ or Climate Data Toolbox to effectively source and analyze data on phenomena like floods and hurricanes. Next, you can assess exposure and quantify impacts, feeding accurate loss estimates into your financial models for robust risk analysis. You can use prebuilt models or bring your own, and understand how physical risks change under different climate scenarios like the NGFS or EPPA.

Once you’ve completed your initial analysis, you can embed physical risk evaluations into ongoing business and enterprise risk processes, complete with comprehensive reporting, deployment, scaling, and model governance.