Climate and Nature Financial Risk
The Global Risks Alliance (GRA)
Physical climate risk is the financial risk from climate hazards: acute events such as floods, storms and wildfire, and chronic shifts such as heat, drought and sea level rise. It reaches finance through damaged collateral, interrupted operations, falling property values and rising insurance costs. This page sets out how physical risk transmits to financial institutions, how it is measured, and who decides.
GRA · In development · service level R0
Physical climate risk is the financial risk from climate hazards, such as floods, storms, wildfire, heat and sea level rise, that damage assets and disrupt activity. It reaches finance through collateral values, borrower income and insurance availability. Credit committees, supervisors, insurers and investors hold the decisions.
Where a portfolio's assets sit, and how much of its value is most exposed. Hypothetical assets, not an assessment.
The working screen behind this subject: its structure, terms and states. Names are placeholders and values illustrative.
Physical climate risk · Bank loan book · Exercise 3
basis points, illustrative
Direct and indirect asset exposures. The dossier below sets out how the risk develops, what is measured, where the data come from, how it is modelled and who decides.
Property in flood zones or exposed coasts can lose value as damage, insurance costs and buyer awareness rise. Mortgages and real estate loans secured on it carry higher loss given default.
Heat, flood and drought interrupt production, logistics and labour. Firms' revenues and ability to repay fall, often at suppliers far from the hazard.
Rising losses push premiums up and capacity out. Uninsured assets transfer losses to owners and lenders and can lower property values further.
A lender concentrated in one region suffers many borrower losses at once. Regional banks and local governments are most exposed.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| Acute physical risk | Risk from event-driven hazards such as floods, cyclones and wildfires. |
| Chronic physical risk | Risk from gradual climate shifts such as rising temperatures and sea levels. |
| Loss given default | The share of an exposure lost if a borrower defaults, after recoveries such as collateral sale. |
Each indicator carries its unit, its cadence, the kind of source behind it and the evidence label a value would carry. No values are shown: a programme supplies them under its own authority.
| Indicator | Unit | Cadence | Source type | Label |
|---|---|---|---|---|
| Loan exposure to high physical risk areas | currency and share of portfolio | annual | Bank disclosures and supervisory data | DECLARED |
| Collateral in flood zones | share of mortgage collateral value | annual | Bank data with hazard maps | MODELLED |
| Expected annual damage to portfolio assets | currency per year | per assessment | Physical risk models | MODELLED |
| Insurance coverage of collateral | share insured against relevant perils | periodic | Bank and insurer data | REPORTED |
| Physical risk score by asset | score from vendor or internal model | annual | Physical risk providers | MODELLED |
| Economic losses from climate-related disasters | currency | annual | Disaster loss databases | ESTIMATED |
The topic as a computational graph: named sources feed the methods, an evidence review gates the outputs, and the decisions stay with the authorities that hold them.
Fig. 02Nodes carry their type, two metric rows and a state; connectors show what feeds what; dashed frames name the owners; the timeline is the cadence. Design of the pipeline, not a record of a run.
Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.
| Source | What it gives | Licence class |
|---|---|---|
| ECB climate-related indicators | Experimental physical risk indicators for euro area financial exposures | Free, ECB terms |
| NGFS climate scenarios physical risk data | Chronic and acute physical risk damage functions | Free, NGFS terms |
| Copernicus Climate Data Store | Climate projections and indicators | Free and open, Copernicus licence |
| First Street Foundation and similar property-level hazard data | Property-level flood, fire and heat risk scores | Proprietary, terms to check |
| EIOPA and ECB reports on climate physical risk | Analysis of physical risk in EU insurance and banking | Free, EU reuse terms |
| FEMA National Risk Index | County-level natural hazard risk in the United States | Public domain |
Climate and Nature Financial Risk prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.
| Who decides | The question | Evidence this page serves |
|---|---|---|
| Bank credit risk committees | Whether to adjust lending, pricing or collateral valuation for physical risk | Exposure, hazard and insurance evidence with sources |
| Prudential supervisors | Whether physical risk is adequately managed and capitalised | Supervisory data, scenario results and model reviews |
| Insurers | Whether to continue writing cover in high-hazard areas | Hazard trends and loss experience |
| Investors | How physical risk affects asset values in portfolios | Physical risk data with uncertainty |
Risk is commonly expressed as the combination of hazard, exposure and vulnerability. A flood of a given depth causes damage that depends on building type, elevation and protection. Damage becomes insurance claims, repair costs, lost revenue and, for borrowers, reduced ability to repay. Chronic changes erode value more slowly, for example as heat lowers labour productivity or rising seas raise the cost of protecting coastal property.
Indirect effects can exceed direct damage. A factory may be undamaged but unable to operate because a supplier, port or power plant is. Many institutions underestimate these effects because they are hard to trace.
Probabilistic models of events and damage, informed by climate and atmospheric science. Many were built for current climate and need adjustment for change.
Linking asset locations to hazard maps, using spatial statistics and geostatistics. Asset locations are often imprecise. See Model and measurement gaps.
Relating hazard intensity to damage. Functions are uncertain and vary by region and asset type.
Tracing indirect exposure through suppliers and infrastructure. Supply-chain data are incomplete.
The current service level is R0: information and enquiries. An enquiry receives a reference and names the next step; applications, payments, compute allocations and registrations open only when their team, terms and review capacity exist.