IFRS S2 Physical Risk Disclosure
IFRS S2 requires companies to identify and disclose their exposure to physical climate risks — acute events and chronic changes — and assess the financial effects on their business model. This is one of the most technically demanding elements of IFRS S2 and the area where most companies have the largest disclosure gaps.
IFRS S2 requires companies to identify and disclose their exposure to physical climate risks — acute events and chronic changes — and assess the financial effects on their business model. IFRS S2 Appendix A defines physical climate risks as event-driven (acute) and longer-term shifts (chronic):.
Physical risk categories under IFRS S2
IFRS S2 Appendix A defines physical climate risks as event-driven (acute) and longer-term shifts (chronic):
Acute physical risks — event-driven: Increased severity of extreme weather events — tropical cyclones, hurricanes, flooding events, extreme heat waves, wildfires, drought episodes, coastal storm surges. These create sudden asset damage, operational disruption, supply chain interruption, and business continuity failures.
Chronic physical risks — gradual shifts: Rising mean temperatures and heat stress; changing precipitation patterns and water availability; rising sea levels and coastal erosion; permafrost thaw in cold regions; ocean acidification. These affect long-term asset values, operating costs, insurance availability, and strategic viability of locations.
For IFRS S2 disclosure: identify which acute and chronic physical risks are relevant to your operations and value chain; assess the magnitude of exposure at material locations; and disclose the financial effects — actual and anticipated.
Geographic concentration matters: a company with all operations in one coastal city faces concentrated physical risk. A globally diversified company has distributed risk across different climate hazard profiles. Both must assess location-specific risks — averaging across a global portfolio masks material concentration risks.
The location-based assessment approach
IFRS S2 requires physical risk assessment at a level of granularity sufficient to identify material exposures. For most companies, this means site-level or asset-level assessment for material locations — not just a corporate-average risk score.
Step 1 — Asset location mapping: Compile a list of all material operational locations — manufacturing sites, offices, data centres, warehouses, retail stores, mines, ports, agricultural land. Include value chain locations where disruption would affect your operations (key supplier sites, critical logistics nodes).
Step 2 — Hazard screening: Screen each location against climate hazard data for relevant physical risks. Tools: WRI Aqueduct (water risk, flood risk), Four Twenty Seven/Moody's ESG (physical climate risk), XDI (cross-dependency initiative), Jupiter Intelligence, S&P Global Climanomics. Most tools provide results by latitude/longitude coordinates.
Step 3 — Exposure assessment: For locations with high hazard exposure, assess the business exposure — what assets are at risk? What operations could be disrupted? What is the financial value at risk?
Step 4 — Financial effect quantification: For material exposures, quantify the potential financial effect — asset impairment, increased operating costs, revenue disruption, increased insurance premiums. Range-based quantification (€X–€Y million impact under the high physical risk scenario) satisfies IFRS S2 even where full financial modelling is not feasible.
Physical risk and asset stranding
One of the most significant physical risk financial effects is asset stranding — assets that become uneconomical, uninsurable, or unsaleable due to physical climate impacts before the end of their intended useful life.
Coastal real estate: properties in low-lying coastal areas face flood risk, erosion, and insurance withdrawal as sea levels rise and storm surge frequency increases. Assets that are currently insurable at economic rates may become uninsurable within 20–30 years — creating stranded asset risk that should be disclosed under IFRS S2.
Agriculture: farmland in regions experiencing increasing drought, heat stress, or changing precipitation patterns faces declining productivity and eventually abandonment risk. Agricultural companies and food producers with land assets in high-risk regions face physical stranding risk.
Infrastructure: hydropower dams in watersheds with declining snowpack; data centres in water-stressed regions where cooling water becomes scarce; port infrastructure in areas with rising sea levels and storm surge risk.
For IFRS S2 financial effect disclosure: identify assets where physical climate risk creates material stranding exposure over the relevant time horizons. Quantify the book value of assets at high risk and the timeline of risk escalation under your physical risk scenarios. This is often the most financially material element of physical risk disclosure.
Frequently asked questions
What physical risk data providers are most commonly used for IFRS S2?
Commercial providers include Moody's ESG (formerly Four Twenty Seven), XDI (Cross Dependency Initiative), Jupiter Intelligence, S&P Global Climanomics, and McKinsey Climate Analytics. Free tools include WRI Aqueduct (water and flood risk), FEMA flood maps (US), and the EU Climate-ADAPT platform. Most companies use a combination of free screening tools and commercial providers for detailed site-level analysis.
Does IFRS S2 require physical risk assessment for our supply chain locations?
IFRS S2 requires assessment of physical risks that could affect the entity — including supply chain disruption. If a key supplier location faces material physical climate risk that would disrupt your operations, this is a material IFRS S2 physical risk even though it is in your supply chain rather than your own operations. Focus on tier 1 suppliers that represent concentration risk.
How does IFRS S2 physical risk disclosure differ from ESRS E1-9?
The content requirements are substantively the same — both require scenario-based assessment of physical climate risks and their financial effects. The key differences are: ESRS E1-9 also covers impact materiality (how your company affects the climate, not just how climate affects you); and ESRS E1-9 requires XBRL tagging and mandatory assurance. Preparing ESRS E1-9 satisfies IFRS S2 physical risk requirements with minor reformatting.