Physical Climate Risk
ESRS E1 requires companies to identify and assess their exposure to physical climate risks — acute events like floods and hurricanes, and chronic changes like rising temperatures and sea level rise. This is one of the most technically demanding aspects of climate disclosure.
ESRS E1 requires companies to identify and assess their exposure to physical climate risks — acute events like floods and hurricanes, and chronic changes like rising temperatures and sea level rise. Acute physical risks are event-driven: extreme heat events, flooding, wildfires, tropical cyclones, coastal storm surges, hail, ice storms.
Acute vs chronic physical risks
Acute physical risks are event-driven: extreme heat events, flooding, wildfires, tropical cyclones, coastal storm surges, hail, ice storms. These can cause sudden asset damage, supply chain disruption, and operational shutdowns.
Chronic physical risks are gradual changes: rising mean temperatures, changing precipitation patterns, sea level rise, ocean acidification, permafrost thaw. These affect long-term asset values, insurance costs, and operating conditions.
Both types must be assessed. Companies operating in coastal locations, water-stressed areas, or regions with high wildfire risk typically face the most material physical risks.
Climate scenario analysis for physical risk
ESRS E1 requires you to assess physical risks under at least two climate scenarios — one consistent with limiting warming to 1.5°C (low warming) and one representing a higher warming pathway (typically 2°C or above).
Recommended scenarios: IPCC RCP 2.6 (low warming, Paris-aligned) and RCP 8.5 (high warming, business-as-usual). The NGFS (Network for Greening the Financial System) scenarios are also widely used for financial sector climate risk assessment.
The scenario analysis must be forward-looking — typically 2030, 2050, and 2100 time horizons — and location-specific where assets are concentrated in high-risk areas.
Quantifying financial impacts under ESRS E1-9
ESRS E1-9 requires companies to disclose the anticipated financial effects of physical climate risks on their business — including potential revenue impacts, increased operating costs, asset impairment, and capital expenditure requirements.
Quantification can be at multiple levels of precision: qualitative (high/medium/low impact); quantitative ranges; or full financial modelling. The level of precision required is proportionate to the materiality of the risk.
For companies with significant physical assets in high-risk locations (coastal infrastructure, agricultural land, manufacturing in heat-stressed regions), full financial quantification will be expected by investors and assurers.
Frequently asked questions
Do we need to assess physical risks for all our global operations?
Focus on locations where you have material assets or operations. A screening of all locations using climate risk data providers (Four Twenty Seven, XDI, Moody's ESG) identifies which sites need detailed assessment.
What data providers are typically used for physical climate risk?
Commercial providers include Four Twenty Seven (now Moody's), XDI (Cross Dependency Initiative), Jupiter Intelligence, and S&P Global Climanomics. Free resources include the World Resources Institute Aqueduct (water risk) and FEMA flood maps.
How often do we need to update our physical risk assessment?
ESRS requires annual review. The assessment should be updated when: significant new climate science is published, you acquire assets in new locations, the regulatory scenario framework changes, or material new risk information emerges.