For more than a decade, ESG integration has helped investors incorporate sustainability into portfolio decisions. Much of this effort has focused on transition risk, including carbon emissions, decarbonisation pathways and alignment with climate targets.
However, a recent paper, From Transition to Physical Risk: Rethinking Portfolio Management (Luciani & Roncalli, 2026), argues that another dimension of climate risk deserves far greater attention: physical climate risk.
The missing dimension of climate risk
Physical climate risk refers to the direct impacts that climate hazards can have on assets, infrastructure and business operations.
These hazards include flooding, wildfires, drought, extreme heat, severe wind events and landslides.
According to the authors, physical climate risks are already affecting asset values, disrupting supply chains and influencing business performance. Yet, compared with transition risk, they remain underrepresented in many investment decisions.
Why ESG metrics are not enough
One of the paper’s key findings is that traditional climate metrics, such as carbon intensity, have only a weak relationship with physical climate risk exposure.
In other words, a company may perform well on ESG indicators or have a relatively low carbon footprint while still being highly exposed to climate hazards because of where its assets are located.
This creates an important blind spot for investors.
Managing transition risk and managing physical climate risk are complementary objectives, but they are not the same. Strong ESG performance does not automatically translate into climate resilience.
Why asset-level analysis matters
The paper uses a simple framework to explain physical climate risk:
Risk = Hazard × Exposure × Vulnerability
This highlights why asset-level analysis is becoming increasingly important.
Risk is influenced not only by the climate hazards affecting a particular location, but also by the exposure of individual assets and their ability to withstand and recover from those hazards.
Two assets exposed to the same flood or heatwave can experience very different levels of damage depending on their design, condition and resilience.
This is why organisations need climate intelligence that goes beyond company-level averages and examines assets individually.
Looking beyond exposure
Exposure is only part of the story.
Understanding where climate hazards exist helps identify potential risks, but it does not reveal how severely an asset may be affected.
Vulnerability and resilience play an equally important role.
Organisations that understand both exposure and vulnerability are better placed to prioritise adaptation measures, manage future costs and improve the long-term performance of their assets and portfolios.
What this means for asset managers
Climate risk management is evolving.
The focus is shifting from ESG reporting towards climate intelligence, from carbon metrics towards physical risk assessment, and from company-level indicators towards asset-level insights.
For asset managers, infrastructure owners, real estate investors and financial institutions, understanding physical climate risk is becoming an essential part of investment analysis and risk management.
How CLIMATIG supports physical climate risk assessment
At CLIMATIG, we help organisations assess physical climate risks across individual assets and entire portfolios.
Our assessments cover 12 physical climate hazards, multiple future climate scenarios and long-term planning horizons. We combine asset-level risk scoring with portfolio-wide analysis, climate cost estimation and adaptation recommendations to support more informed investment and resilience decisions.
As climate risks continue to evolve, organisations need more than sustainability reporting.
They need a clear understanding of how climate hazards may affect their assets, operations and long-term value.
Because measuring sustainability is only part of the equation.
Building resilience is what creates lasting value.