TL;DR

Climate hazards will increase in frequency and severity as we are already locked into a certain amount of global warming (how much the world warms, is up to us). The financial impacts of these hazards are vast, so measuring and evaluating climate risk is becoming an essential business practice. To evaluate risk from climate change, we need to look at the full picture: hazards, exposure (physical presence), and vulnerability (the likelihood of harm).

<aside> 💡 Risk = hazards + vulnerability + exposure

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What is Climate Risk?

Climate risk refers to the interaction of climate-related hazards with the vulnerability and exposure of human and natural systems. So it is a combination of the likelihood of harm, the potential of an event to occur, and physical presence.

The components of risk are driven by both climate and socioeconomic aspects.

Source: IPCC 5th assessment report

IPCC definitions of the terms

<aside> 📌 Hazard: "The potential occurrence of a natural or human-induced physical event or trend or physical impact that may cause loss of life, injury, or other health impacts, as well as damage and loss to property, infrastructure, livelihoods, service provision, ecosystems, and environmental resources." (IPCC)

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<aside> 📌 Vulnerability: "The propensity or predisposition to be adversely affected. Vulnerability encompasses a variety of concepts and elements including sensitivity or susceptibility to harm and lack of capacity to cope and adapt." (IPCC)

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<aside> 📌 Exposure: "The presence of people, livelihoods, species or ecosystems, environmental functions, services, and resources, infrastructure, or economic, social, or cultural assets in places and settings that could be adversely affected." (IPCC)

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Types of climate risk

Physical risk

Local changes directly related to climate effects
Will increase in frequency and magnitude under a "business as usual scenario"
Can be acute (i.e. extreme weather events) or chronic:
- Acute: Higher frequency and severity Examples: floods, droughts, heatwaves, cold waves, wildfires, hurricanes, tornados
- Chronic: Due to sustained shifts over time Examples: temperature, precipitation, sea-level rise
Source: German Federal Ministry for Economic Cooperation and Development (BMZ)

Transition risk

Arise from actions taken to manage climate change in terms of policy, liability, and technology
- Includes the risk of stranded assets: carbon-intensive assets (physical and financial) that become unusable or reduced in value