Physical risks refer to the impacts on business performance and, through that, on the value of firms’ financial assets and investors’ portfolios, induced by acute risks, i.e. weather-related events such as floods and hurricanes, and chronic risks, e.g. temperature increase, sea-level rise and biodiversity loss.
For instance, a flood that critically damages a firm’s productive plants could impair the firm’s profitability and even lead to bankruptcy, if the affected plants are a core part of the firm’s business. The economic loss can then translate to a financial loss, whereby the loss in performance translates to a negative adjustment in the financial assets (e.g. stocks, bonds) or an inability to repay outstanding loans that eventually affecting investors directly. If these activities have liability cover, e.g. insurance, then insurance (and reinsurance) firms could also suffer from larger claims.