Accounting for risk is one of the most important duties of financial institutions, and a failure to adequately do so can have severe negative consequences not only for individual institutions, but for the whole financial sector. As the world faces the uncertainty of a changing climate, factoring in the risks that accompany these shifts is increasingly important. For financial institutions this means not just assessing the risks that accompany the necessary transition to a low-carbon economy, but also the physical risks posed by rising sea levels, changing weather patterns, and shifting ecosystem dynamics.

Overwhelmingly financial institutions have chosen to focus on transition risk over these physical climate risk, frequently failing to even conduct assessments let alone disclose the results. This paper highlights key gaps in climate-related assessment and disclosure and lays out guidance for institutions based on desk research, engagement with financial institutions, and a review of disclosures by banks and asset owners.


Key Findings:

  • Our review of publicly available disclosures shows that the identification, measurement, and disclosure of climate-related physical risks by financial institutions are currently incomplete and inadequate for stakeholders to assess the extent of physical risks facing these institutions and their clients.
  • Less than half of the financial institutions surveyed have reported on physical risk analysis in their climate disclosures.
  • Around a quarter of the banks assessed have conducted a form of physical risk scenario analysis. Of those banks, less than 20% are assessing the impact of those scenarios on their businesses.
  • Scenario-based physical risk assessments currently reported in disclosures focus on a limited set of hazards and usually one or two sectors.
  • Physical risk assessments based on historical data can provide useful information on current risks but should not be a substitute for climate-related risk assessments based on data from forward-looking climate models.


Executive Summary:


In 2017, the Financial Stability Board (FSB) launched the Taskforce on Climate-related Financial Disclosures (TCFD), which published its recommendations and guidance on assessing and disclosing the risks of climate change by corporates and financial institutions. The TCFD recommendations categorised climate-related risks into two principal categories: transition risks from the shift to a lower-carbon economy, and physical risks from the physical impacts of climate change. Climate-related risk disclosures by financial institutions tend to focus more on transition risks, resulting in a possible physical risks “blind spot.” In current TCFD-aligned reporting, quantitative disclosures are more widely available for transition risks than physical risks, which have been typically discussed in qualitative terms. Regulators, including the European Central Bank (ECB) and the U.S. Securities and Exchange Commission (SEC) have also found physical risks to be less commonly disclosed relative to transition risks in ECB-supervised banks1 and Russell 3000 companies2. Specific guidance on the assessment and disclosure of physical climate-related risks tends to be less widespread than guidance on transition risks. In order to drive more widespread disclosure of climate risks, the TCFD updated its implementation guidance in 2021, released a report on “Metrics, Targets, and Transition Plans,” and published supporting guidance on the use of scenario analysis for non-financial corporates. Supervisors and regulators have also identified the gap in disclosures of physical climate risk, and the ECB has developed climate-related and environmental risk guidance, according equal import to both physical and transition risks. This report aims to underline the key physical risk elements of a climate-related disclosure.

About this Report

This report concentrates on physical risk disclosure practices by financial institutions and provides a resource for them to develop such disclosures. The authors used three principal methods to identify current good practices and to develop guidance:

  • Desk research
  • Engagement with financial institutions through webinars, a survey, and a workshop
  • Review of publicly available disclosures by a sample of financial institutions who are leading on climate change mitigation and net zero under the Glasgow Financial Alliance for Net Zero (GFANZ).

Physical risk assessment and disclosure is not part of finance sector net-zero frameworks, but these populations of financial institutions were sampled as they constitute a climate leadership group which is taking a ‘double materiality’ approach to climate, i.e. not only addressing what impact they are having on the climate, but also assessing what impact the climate will have on their businesses. This report covers three of the four TCFD thematic areas—Strategy, Risk Management, and Metrics and Targets—and eight of the eleven TCFD-recommended disclosures. The Governance recommendations were excluded from this report as they do not cover physical or transition risks specifically, but rather, overall climate-related risks. We also excluded the second recommended disclosure of the Metrics and Targets thematic area, which concerns greenhouse gas (GHG) emissions and is therefore not directly relevant for physical risks.



1 The ECB found in 2020 that around 54% of institutions reviewed do not disclose the impact of transition risks on their business strategy, compared to 56% of institutions not disclosing the impact of physical risks. More recently, the ECB finds that “31% of banks disclose a strategic impact of both physical and transition risk, 10% of transition risk only and 2% of physical risk only."

2 The SEC’s findings arise from analysis of 10-K filings submitted to the Commission between 27 June 2019 and 31 December 2020.