Physical risk refers to the potential damage caused by climate-related hazards. Physical risk can be acute, if derived from extreme weather events and hazards: floods, landslides, extreme temperatures, storms and hurricanes, droughts, wildfires; or chronic, if related to the more gradual effect of global warming: gradual increase of sea level, reduced crops harvesting, lower labor productivity due to higher temperatures, for instance.
Key Takeaways
- Physical risk refers to the potential damage caused by climate-related hazards. Physical risk can be acute if deriving from extreme weather events and hazards, or chronic if related to a more gradual effect of global warming. By affecting individual businesses, households and the broader economy, climate risks could translate into financial risks and affect sovereign debt’s pricing and sustainability.
- Using models based on IPCC’s climate scenarios, it is possible to assess countries’ exposure to climate hazards at different time horizons. According to the scoring provided by our sovereigns’ ESG data provider Verisk, the regions most exposed to physical risks by 2050 are Africa, Asia and the Americas. Europe is comparatively less exposed than other regions but still faces significant risks, as it is currently the fastest-warming continent.
- In Asia, climate hazard risks are more significant in south and south-east Asia than in east Asia. Verisk’s Climate Hazard index shows that Singapore, Thailand, India, Indonesia and Sri Lanka face the highest risks by 2050 and 2080. Meanwhile, Japan, South Korea, Taiwan and China appear less at risk, although a high temperature scenario would significantly increase their exposure to acute and chronic climate hazards by 2080.
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