Abstract

This paper develops a parsimonious, scenario-analysis framework to quantify physical climate loss for listed firms and equity portfolios. Physical climate loss is defined as the valuation loss arising from climate-induced physical damage, obtained by scaling future cash flows with country-level economic deviations derived from damage functions. The framework embeds these macroeconomic losses within a discounted-cash-flow model using sector-specific discount rates and vulnerability adjustments. Applying the methodology to 423 large European firms and a Developed Europe equity benchmark reveals strong cross-country and cross-sector heterogeneity in exposure to physical climate risk, as well as a portfolio-level loss of roughly –4.7% under a “current policy” scenario. Results are robust across integrated assessment models but sensitive to scenario–horizon choices. This framework, drawing exclusively on publicly available data, delivers a transparent and supervisory-aligned approach to assessing physical climate risk and informing strategic asset allocation.

Key takeaways

• Projected physical-risk GDP losses by 2100 vary widely across Europe, from about –28% in Spain to modest gains in Finland, closely matching established vulnerability indices.
• Differences in discount rates and vulnerability scores generate substantial dispersion in valuation impacts, with a sensitivity ratio of roughly 1.6 across sectors.
• The Developed Europe equity benchmark exhibits a PCL of approximately –4.7%, with results robust to model specification but sensitive to the scenario–horizon combination.

Authors

Vincent Bouchet
Director of ESG & Climate Research,
Scientific Portfolio

Nicolas Schneider, Ph.D
Senior Research Engineer,
EDHEC Climate Institute

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