With physical risk, collaboration is key

For institutional investors, physical climate risks — floods, wildfires, extreme heat, and cyclones — are no longer distant possibilities; they are financial realities. These risks threaten asset values, disrupt operations, and erode long-term returns. But the central problem is not simply one of scientific modelling - it is structural.

- Carl Prins

Critical climate risk data is fragmented across the capital supply chain: asset owners, fund managers, and operating entities each hold pieces of the puzzle, but rarely bring them together.

In today's market, no single player can develop a credible, comprehensive physical climate risk strategy in isolation. Collaboration is not a 'nice to have' it is the only pathway to the granularity and accuracy that resilient portfolios require.

The challenge

Physical climate risks have three defining characteristics that make them particularly challenging for asset owners:

The stakes are high. Finance Watch's March 2025 report warns that underestimations in climate scenarios are widespread, leaving unmanaged vulnerabilities that can cascade through financial systems. Green Central Banking's February 2025 analysis projects global GDP losses of at least 50% from unmitigated climate shocks. The European Central Bank's July 2025 update revealed that only one-third of banks integrate climate risks into capital planning - underscoring how systemic the gap remains. Similar warnings from the Financial Stability Board and UNEP FI point to the same conclusion: without a new approach, the system will remain exposed.

Why traditional models fall short