From Acute Shocks to Chronic Disruptions: Navigating the Full Spectrum of Physical Climate Risks

The Task Force on Climate-Related Financial Disclosures (TCFD) has developed an instrumental framework for organizations to assess and disclose climate-related risks. A central component is the evaluation of physical risks driven by climate change, such as increased flooding, heatwaves, droughts, and storms.

As global temperatures rise, acute catastrophic events and chronic shifts in weather patterns endanger corporate assets and disrupt supply chains worldwide. TCFD provides vital guidance on how organizations can model potential financial impacts of escalating physical threats using scenario analysis across short- and long-term horizons.

TCFD aims to make these existential hazards more visible to investors and executives by quantifying physical climate risks and incorporating them into financial filings. Though disclosure poses challenges, the TCFD framework empowers businesses to enhance their climate resilience and adaptation strategies. As physical climate hazards increase in frequency and severity, robust physical risk assessment and transparency will become more crucial.

Rising Heat and Water Levels: The Dual Threats of Physical Climate Change.

Rising heat presents significant physical climate risks. For example, increasing temperatures above 35°C can dramatically reduce solar panel efficiency, decreasing performance.

Prolonged heatwaves cause droughts and wildfires by producing tinderbox conditions and interfering with infrastructure operations. Droughts also induce water scarcity, potentially prompting mass migration from areas that become uninhabitable within ten years—such conditions result in unstable supply chains, unable to cope with rapid population shifts.

On the other hand, increasing water-related events also generate substantial physical climate risks. Elevated precipitation from evaporation leads to flooding, we are now witnessing flooding exceeding 1.5 feet, going over flood defenses.

Periodic sea level rise inundates coastal areas, destroying property and disrupting lives. Though flooding eventually recedes to reveal usable land, recovery is arduous. Extreme storms and tornadoes further compound these water-related physical risks.

The array of impacts on assets, operations, and workforces demonstrates the importance of evaluating both acute and chronic physical climate risks driven by heat and water through disclosure and adaptation efforts as these threats escalate.

Differentiating Acute and Chronic Physical Climate Impacts.

Physical climate risks are categorized as either acute or chronic in nature.

Acute risks refer to sudden, severe events like flash floods, hurricanes, and storms. The increasing frequency of acute risks can damage infrastructure and supply chains, incurring substantial repair costs.

Mitigating acute risks is difficult since climate-proofing structures are expensive and not necessarily financially practical. Insurers now offer catastrophe bonds to build reserves, which are expensive for regular payouts. Mitigation hardships might compel supply networks to relocate, wreaking hardship on local communities.

In contrast, chronic risks are long-term shifts like rising temperatures, causing recurring heat waves. Southern Europe has experienced 40°C heatwaves that halt solar power generation, requiring mitigation strategies. In addition, agriculture is a significant income source in Europe; therefore, chronic heat requires irrigation infrastructure and alternative crop planning.

While acute shocks rapidly destroy, chronic risks gradually impair assets, operations, and workforces. Understanding both types of physical climate risk is crucial when assessing business vulnerabilities.

Physical Climate Threats to Facilities, Supply Chains, and Employees.

Physical climate risks directly impact business assets and workforces. Facilities may need enhancement to withstand acute weather events, which can involve major costs to flood-proof or redesign structures.

Relocating supply chain infrastructure is an option, but it disrupts operations and sales if customers remain in the same place. Given the business implications, adaptation requires expensive interventions that companies must disclose to stakeholders.

Moreover, workforce viability in harsh conditions is another key concern. In drought-stricken developing regions, water scarcity prevents employees from being able to drink or work, forcing migration that hurts local operations. Providing water access or relocating supply chains also carries high costs.

Between asset resilience, operational continuity, and workforce health, physical climate risks create financial burdens that compound if left unaddressed. Agriculture yields are declining, trade is being disrupted, and commodity price changes are reverberating throughout the economy, reducing consumer demand and GDP.

Evaluating and disclosing these multi-faceted impacts is essential for businesses to adapt and survive climate change.

From Historical Data to Future Scenarios: The Nuances in Climate Projection.

Disclosing physical climate risks poses forecasting challenges. Historical data fails to predict future weather patterns, as climate change alters temperatures and events. Advanced modeling is required to project risks; Fathom from the University of Bristol is an example of an efficient modeling platform. Fathom analyzes past climate events and then adjusts for future scenarios to assess flood risks globally.

Complex modeling necessitates high levels of institutional knowledge and expertise. Despite imperfections, output data must still inform action to avoid business disruptions involving millions in potential impact.

With the limitations of current data and projections, disclosing physical risks requires acknowledging uncertainties while making the best mitigation decisions possible. Even with difficult forecasting, clear communication about potential climate impacts and adaptation strategies provides stakeholders with valuable insight into a company’s readiness.

Motivating Action on Physical Climate Risk Through Scenario Modeling and Disclosure.

In summary, the TCFD framework provides vital tools for evaluating and disclosing escalating physical climate risks. By requiring vulnerability assessments, TCFD puts these threats on the radar of companies and investors across sectors, driving preventative action. Firms are prompted to make assets and operations more resilient when gaps are identified.

TCFD also enables scenario modeling to highlight potential climate impacts on finances, assets, and reputations under various future conditions. This intelligence steers mitigation plans to adapt and avoid losses. Moreover, transparent disclosures build trust and accountability with stakeholders by granting visibility into response strategies.

From acute disasters to chronic disruptions, physical climate risks present a systemic threat to business continuity and financial stability. TCFD’s quantification of risks through scenario analysis is crucial for motivating strategic investments in resilience and adaptation.

Despite disclosure difficulties, enhanced transparency and preparation will prove critical as threats multiply. By centering physical climate risk in financial reporting, TCFD can spur the action needed to fortify portfolios and secure our shared future.