Physical Risk vs Transition Risk

Climate-related risk splits into two broad families, and the distinction shapes almost everything about how you analyse it.

Physical risk arises from the changing climate itself — acute events like floods and wildfires, and chronic shifts like rising average temperatures or sea levels. It affects assets, operations, and supply chains directly.

Transition risk arises from the response to climate change — policy, carbon pricing, technology shifts, and changing customer expectations. It affects business models, competitiveness, and asset values, often well before any physical impact materialises.

A well-run risk assessment treats these as related but distinct workstreams, each requiring different data, different scenarios, and different stakeholders.