Clear, present and underpriced: the physical risks of climate change

This report provides a scenario-based analysis drawing on 21 global climate models to assess the physical risks of climate change on investment portfolios, aligning with recommendations from the Task Force on Climate-Related Financial Disclosures. It accounts for the probability of multiple extreme events occurring across locations and through time in any given simulation. These assessments were conducted under a range of different greenhouse gas emissions scenarios.

The approach provides a granular assessment of physical climate risks at the asset, portfolio, or industry level. This includes damage to fixed assets, like buildings and property, labor force disruptions, falling crop yields, rising energy demand, and other impact categories.

This analysis fills a gap in quantifying the physical risks of climate change. As “climate risk” has entered the mainstream investment lexicon, most of the attention has focused on the financial implications of transitioning to a lower-carbon economy. Historically-calibrated statistical models used by investors, insurers, corporate risk officers, and government planners to assess the likelihood of extreme events can significantly underestimate actual risk, both now and in the future. Recent advances in econometric research, data processing, and scalable cloud computing make a rigorous, evidence-based, asset-level accounting of physical climate risk possible.