Physical risks

All global economic enterprise depends on the functioning of earth systems, such as a stable climate and on ecosystem services, such as the provision of biomass (raw materials). Nature-related physical risks are a direct result of an organisation’s dependence on nature. Physical risks arise when natural systems  are  compromised,  due  to  the  impact  of  climatic  events  (e.g., extremes  of  weather  such  as  a  drought),  geologic  events  (e.g.,  seismic events  such as  an  earthquake) events  or  changes  in  ecosystem equilibria, such as soil quality or marine ecology, which affect the ecosystem services organisations  depend  on.  These  can  be  acute,  chronic,  or  both.  Nature- related physical risks arise as a result of changes in the biotic (living) and abiotic    (non-living)    conditions    that    support    healthy,    functioning ecosystems.  Physical  risks  are  usually  location-specific.  Nature-related physical risks are often associated with climate-related physical risks.

Physical risks are fundamental in the context of sustainability and the principles of ESG (Environmental, Social, Governance). These risks encompass all dangers that arise directly from natural events or physical environmental changes and potentially have harmful effects on businesses, infrastructures, and societies. They can be divided into two main categories: acute and chronic physical risks.

Acute physical risks occur suddenly and are typically associated with natural disasters such as earthquakes, floods, hurricanes, or wildfires. Such events can cause significant damage to infrastructure, supply chains, and business operations. In contrast, chronic physical risks develop over longer periods. Examples include rising sea levels, long-term water scarcity, and air pollution, which lead to gradual changes in environmental conditions with far-reaching economic and social consequences.

For companies, understanding physical risks is crucial, as their impacts can vary significantly depending on the industry, location, and vulnerability. Sectors such as agriculture, real estate, and energy supply are particularly affected. Financial institutions must pay close attention to physical climate risks, as they play a central role in assessing credit risks and investment decisions.Assessing and managing these risks requires a systematic analysis of hazards, exposure, and vulnerability. Companies need to develop both short-term emergency measures and long-term adaptation strategies to be resilient to these challenges. In today’s business world, considering physical risks is an essential component of effective risk management and sustainable corporate governance.