What are physical risks in the context of climate risk?

Physical risks in the context of climate risk specifically refer to the dangers posed by the physical impacts of climate change, primarily manifested through extreme weather events. These risks can encompass a wide array of phenomena, such as hurricanes, floods, droughts, and wildfires, which have the potential to disrupt ecosystems, damage infrastructure, and affect agricultural productivity.

For businesses and financial institutions, these physical risks can lead to significant economic losses and operational challenges. For instance, a severe storm may damage a manufacturing facility or disrupt supply chains, while prolonged droughts can impact agricultural yields and water availability. Recognizing and assessing these physical risks is crucial for effective risk management and sustainability strategies, as they directly influence financial performance and long-term viability.

The other options pertain to different risk categories. Regulatory changes are more about shifts in laws that can impact business operations rather than direct environmental impacts. Financial risks linked to stock market fluctuations deal with market dynamics and investor behavior, while investment losses due to poor management pertain to internal decision-making and not external climate factors. Therefore, the correct understanding of physical risks focuses predominantly on the immediate and tangible impacts of climate-related events.