Corporate disclosures on physical risks remain “limited, incomplete and inadequate”, with “significant variability and a lack of standardisation in reporting on the impacts and preparedness for physical risk events”, a recent paper by UK pension fund Nest, UBS Asset Management, and the University of Oxford argues, underscoring the urgent need for investors to better integrate physical climate risk into their strategies.
The research highlights how extreme weather events, intensified by climate change, are already causing significant economic damage worldwide, while carbon emissions from fossil fuels and land-use change continue to increase and thereby worsen this physical risk.
To address this shortfall, the paper recommends that third party data providers should enhance the clarity and consistency of analytical models and data on physical risk events. Current climate models and associated analytics face limitations such as “limited insights on localised impacts, poor transparency on model assumptions, heavy reliance on proxies and estimations, and high uncertainty on corporate and financial decision making”.
As a result, inconsistent and opaque models lead to poor correlation across datasets and incoherent assessments, reducing investor confidence.
The researchers also advocate for listed corporates to provide granular, location-specific information about physical risks to ensure accurate assessments. This includes the availability and affordability of insurance, disclosing asset geolocations and quantifying the effects of previous material physical risk events, as well as potential future risks. To enable comprehensive risk assessment, companies should adopt a value chain approach, extending beyond operational boundaries.
While regulators and capital markets should adopt uniform frameworks for integrating climate risk data into financial decision-making, investors should actively engage with companies to encourage improved climate risk disclosure and adaptation efforts, the researchers argue.
Without improved data and clearer methodologies, investors risk misallocating capital and failing to protect portfolios from climate-induced disruptions, the paper warns. As extreme weather events become more frequent, the authors stress that proactive investment strategies integrating climate risk data are crucial for long-term financial resilience.
The International Sustainable Standards Board (ISSB) defines physical risks as “risks resulting from climate change that can be event-driven or from longer-term shifts in climate patterns. These risks may carry financial implications for entities, such as direct damage to assets, and indirect effects of supply-chain disruption.”
