What is physical climate risk?
Physical climate risk arises when a climate hazard affects assets, people, operations, or the value chain and creates a financial consequence. Acute risks are event-driven, such as floods, cyclones, or wildfires. Chronic risks develop through longer-term shifts, such as rising mean temperatures, changing rainfall, drought, or sea-level rise. The TCFD recommendations separate physical risk from transition risk and connect both to strategy, risk management, metrics, and financial planning.
Guidance from the New Zealand External Reporting Board (XRB) on New Zealand Climate Standard 1 (NZ CS 1) says physical risk depends on hazard and exposure (paragraph 22(d)). Test vulnerability too: whether floodwater reaches a press, how long production stops, and whether another site can take the work.
Why does physical climate risk matter to you?
An investor, lender, insurer, customer, or regulator may ask what you assessed and how the findings affect decisions. NZ CS 1 paragraph 14 asks reporting entities to classify physical or transition risks, name sector and geography where relevant, and show how they inform capital deployment.
Financial effects include asset damage, inventory loss, downtime, higher insurance costs, lower revenue, repair spending, or supplier interruption. NZ CS 1 paragraph 15 asks for anticipated financial impacts and time horizons. Paragraph 22(d) asks for the amount or percentage of assets or activities vulnerable.
How does physical climate risk work?
Set the boundary: site coordinates, critical equipment, inventory, utilities, logistics links, and key suppliers. Define each time horizon in years. Record any suppliers, distribution links, or other parts of the value chain you excluded, as NZ CS 1 paragraph 19(c) requires.
Match each location to a dated hazard source and climate scenario. Assess exposure, then vulnerability using building level, drainage, equipment height, water dependence, backup power, alternative capacity, and recovery time. Express the result as exposed carrying value, production percentage, interruption days, or adaptation capital.
Keep the source, scenario, assessment date, asset register, assumptions, owner, controls, and action. Reassess on a stated cycle. NZ CS 1 paragraphs 18 and 19 ask how physical risks are identified, assessed, managed, prioritised, and integrated into risk management.
What mistakes should you avoid?
- Calling a flood, heat, or wildfire map a quantified risk without the site location, asset value, vulnerability, and time horizon.
- Assessing only owned premises when a sole paper supplier, electricity connection, warehouse, or freight link could stop production.
- Mixing physical risk with transition risk from climate policy, technology, markets, or legal change.
- Reporting a red-amber-green score without the threshold, financial consequence, source document, assessment date, and action owner.
Is physical climate risk the same as transition risk?
No. Physical risk comes from climate hazards and changing patterns. Transition risk comes from policy, legal, technology, market, or reputation change. Record them separately because their drivers, time horizons, controls, and financial effects differ.
What should you send when an investor asks about physical climate risk?
Send the boundary, dated hazard sources, scenarios, site and supplier list, asset values, time horizons, vulnerability method, financial assumptions, exclusions, controls, owners, and approval record. For every percentage, name the total it was divided by and show where that total appears in the asset register or operating records.
Does every New Zealand company have to disclose physical climate risk?
No. NZ CS 1 paragraph 3 applies to entities required by the Financial Markets Conduct Act 2013 to prepare climate statements; others may elect or be directed to use it. A private company may still receive a lender, insurer, customer, parent, or investor request, so check its wording and current legal scope.