Physical and transition climate risks describe two key risk categories arising from climate change and the transition to a low-emission economy. Both are an integral part of robust climate risk analyses and play a central role in climate strategies and sustainability reporting.
Physical climate risks arise from the direct impacts of climate change on the environment, infrastructure, and people. They can be divided into acute and chronic risks. Acute physical risks are short-term, sudden events such as extreme weather, flooding, storms, heatwaves, or wildfires, which can cause immediate damage to sites, assets, or supply chains. Chronic physical risks develop over the long term, for example through rising average temperatures, water scarcity, sea-level rise, or gradual changes in ecosystems. These risks can impair resource availability, location attractiveness, or the long-term viability of business models.
Transition climate risks, also known as transition risks, arise from the shift toward a climate-neutral economy. They primarily affect four areas: regulation, technology, market, and reputation. Examples include rising costs due to CO₂ pricing, stricter legal requirements, loss of market share to lower-emission alternatives, or reputational damage resulting from inadequate climate action. Transition risks are often short-term in nature, but can have significant financial impacts if not addressed early.
For companies, a structured analysis of both risk types is essential. It forms a core component of any climate strategy and is closely linked to the development of transition plans. At the same time, physical and transition climate risks are an integral part of sustainability reporting. A robust risk assessment also supports requirements from Sustainable Finance and improves alignment with ESG ratings, thereby strengthening the company’s long-term resilience.
