The built environment is the backbone of the economy, but it faces mounting threats such as structural damage and water inundation due to escalating climate risks. Roads, railways, telecommunications, and power networks are among the most exposed, accounting for nearly 80 percent of average annual infrastructure losses worldwide.
These risks extend beyond physical damage. Service disruptions caused by extreme weather can cascade across supply chains and financial markets, bringing entire economies to a standstill. The financial implications are becoming increasingly evident. Investors, insurers, and asset managers are under growing pressure to understand and manage their exposure to climate-related risks, which now influence capital allocation, underwriting, disclosure requirements, and long-term business continuity.
Today, 83 percent of the world’s cities report major climate hazards, highlighting the urgent need to improve the climate resilience of infrastructure. Climate risk assessment is the first step in this process, providing a structured approach to identify where and how physical hazards intersect with infrastructure and assets.
This article introduces the fundamentals of climate risk assessment. It examines the importance of evaluating climate risk, outlines the practical challenges in current assessment practices. The article also explores how Climate Tech is improving the quality and usability of climate data in real-world applications.
What is a climate risk assessment?
Climate risk assessment (CRA) is a structured process to identify, quantify, and evaluate the potential impacts of climate change on physical assets, business operations, and infrastructure such as transport, energy, and water.
Climate risks fall into two broad categories:
- Physical risks, which arise from acute events such as floods, storms, wildfires, and heatwaves. It also includes chronic shifts in climate patterns including rising temperatures, sea-level rise, and water scarcity.
- Transition risks, which stem from the global shift to a low-carbon economy driven by policy, regulation, market preferences, and technological disruption.
The most visible impacts stem from physical risks. These include damage to the built environment, disruption to operations and supply chains, and increased costs due to more frequent and severe weather events. The financial implications can be significant as repair costs, revenue losses, expensive insurance premiums, and compliance burdens often compound quickly.
How is a climate risk assessment done?Â
To assess climate risks, organizations use scenario-based modeling. It projects how climate hazards evolve in the future such as increased rainfall, drought, or extreme heat affecting a company’s physical assets, suppliers, workforce, and downstream operations. Where possible, these risks are translated into financial terms to inform capital planning and risk mitigation strategies.
Effective climate risk assessment takes into account the interplay between climate hazards and a company’s vulnerability and exposure. This includes factors such as the resilience of infrastructure, geographic footprint, asset type, and regulatory compliance costs. A company with operations in water-stressed regions or a supply chain concentrated in high-risk geographies will face different challenges than a diversified, resource-light competitor.
At the national or regional level, climate risk assessments estimate the broader impact on people, assets, and ecosystems aiding governments and financial institutions to prioritize investments and adaptation policies.
Benefits of conducting a climate risk assessment
As climate change intensifies, companies are exposed to increasing systemic and asset-level risks. Estimates suggest that annual fixed asset losses from climate-related hazards could reach between $560 and $610 billion by 2035.
For some sectors, particularly those that are asset-heavy or operate in high-risk geographies, physical climate risks alone could threaten 5 to 25 percent of projected 2050 EBITDA. This reinforces the urgency for companies to integrate climate resilience into forward-looking planning.
A climate risk assessment serves multiple strategic purposes:
Supports long-term financial planning
By identifying potential losses, businesses can better safeguard long-term cash flows and improve capital allocation. Quantifying risk also helps set appropriate buffers and stress-test financial models under different climate scenarios.
Strengthens regulatory compliance
As climate-related disclosure gains traction globally, CRA helps organizations to incorporate both physical and transition risks into their strategic planning and build credible adaptation strategies.
Informs risk management and insurance
Understanding exposure to climate hazards enables companies to negotiate insurance more effectively, avoid coverage gaps, and explore alternative risk transfer mechanisms.
Improves investor confidence
Investors are actively incorporating climate risk into portfolio management. Companies that demonstrate a clear understanding of their climate exposures and show progress on adaptation are better positioned to attract long-term capital.
Enables smarter capital allocation
A clear understanding of climate risk helps organizations direct capital toward assets, projects, and supply chains that are more resilient to future disruptions. This allows leadership to avoid over-investment in vulnerable areas, and reduce the risk of stranded assets. Instead, they can prioritize initiatives that deliver both financial and climate resilience over time.
However, translating climate risk into actionable insights remains a bottleneck. Inaccurate data, inconsistent methodologies, and the sheer pace of climate change continue to hinder effective climate risk assessment and management.
Challenges in the current climate risk assessment practice
While the value of climate risk assessment is increasingly recognized across industries, their practical implementation remains complex and uneven. Many organizations struggle to generate actionable insights due to fundamental limitations in current methodologies, tools, and data infrastructure.
Embedding robust climate risk assessment into financial decision-making at the scale and precision required demands urgent, collaborative progress on several persistent challenges. These are some of the most critical barriers that hinder effective climate risk assessment.
Data gaps and technology constraints
Embedding physical climate risk assessment into financial decision-making remains constrained by major gaps in data quality, availability, and analytical capability undermining the accuracy and usability of physical climate risk models.
Key challenges include:
- Insufficient granularity in climate hazard data limits the accuracy of asset-level assessments and leads to under- or over-estimation of exposure.
- Lack of standardization across datasets due to inconsistent metrics and data collection methods make it difficult to compare risks across regions, sectors, or portfolios, and hinder interoperability between tools and platforms.
- Top-down climate models offer broad coverage but lack local specificity, while bottom-up data is often highly localized but cannot scale, leaving a critical gap between global insights and actionable site-level decisions.
- High-quality data on exposure and vulnerability is often expensive to collect particularly in regions with limited institutional or technical capacity.
- Most assessments rely on mapping firm locations to regional hazard data, but this spatial mismatch can skew exposure estimates and misrepresent actual risk levels.
- Existing models often treat hazards in isolation, ignoring the interaction between events (e.g., rainfall and storm surge, prolonged heat wave and droughts), which can amplify real-world impacts.
- Emerging economies often lack access to comprehensive, up-to-date climate data, making risk assessments less reliable where they may be needed most.
Complexity of climate modeling
Climate modeling involves integrating atmospheric science, geospatial analysis, and advanced computational tools. However, limitations in model resolution, accuracy, and consistency along with uncertainty in choosing appropriate emissions scenarios hinder the generation of decision-ready insights.
Lack of transparency in methodologies
The widespread use of proprietary black-box models, especially within the financial sector limits transparency, trust, and comparability across climate risk assessments. Many third-party providers treat their methodologies as intellectual property, hindering independent evaluation and preventing users from understanding how risk scores are generated. This opacity raises concerns about accountability and may lead to decisions based on models that cannot be independently verified or improved.
Integration and scalability
Embedding climate risk assessments into decision-making across sectors and governance levels remains difficult. Some of the key challenges are:
- Translating complex assessment outputs into actionable strategies remains difficult, particularly without interdisciplinary coordination and clear governance frameworks.
- A lack of guidance persists on converting physical climate risks into financial metrics limiting their relevance for capital allocation, investment planning, and budgeting.
- Many organizations struggle to integrate climate risk insights into operational systems such as supply chain management or enterprise risk processes, reducing the practical utility of assessments.
- Most methodologies are designed for advanced economies and often cannot be directly applied in other regions without adaptation to local data, capacities, and context.
How Climate Tech strengthens climate risk assessment
As climate risks intensify, technology is playing a pivotal role in enabling more accurate, timely, and actionable risk assessments. Climate Tech startups are leveraging advanced tools like AI, machine learning and satellite data to deliver data-driven insights to help organizations plan, adapt, and respond with greater confidence.
Key innovations driving progress include:
- Climate risk modeling uses advanced computer simulations to project how climate-related hazards may evolve and impact physical assets, infrastructure, and operations.Â
- Climate risk analytics platform helps organizations integrate climate risks into financial planning, regulatory compliance, and long-term strategy. The climate risk analytics platform can be broadly divided into:
- Climate financial risk analytics helps organizations translate climate risks into quantifiable financial impacts for strategic planning, disclosure compliance, and investor confidence.
- Supply chain climate risk analytics focuses on identifying and managing climate-related risks across global supplier networks, addressing both physical and transition risks.
The Climate Tech innovations discussed above highlight how technology is now embedded throughout the climate risk assessment value chain.Â
The Net Zero Insights Climate Tech Taxonomy offers a structured, multi-layered framework that simplifies the complex climate innovation landscape and helps users identify trends, gaps, and opportunities with clarity.
Climate Risk Assessment sits within the broader Climate Tech Taxonomy under the Natural Environment vertical, specifically within the Climate Risk and Environmental Disaster Management (CREDM) category. CRA serves as a foundational capability, enabling the identification and quantification of physical climate risks. These assessments support the development of integrated CREDM strategies, translating risk data into actionable advice for resilience, adaptation, and long-term decision-making.
Why climate risk assessment must guide future planning
As climate risks accelerate in scale and complexity, financial institutions, governments, and businesses must act decisively to strengthen the resilience of both existing and upcoming infrastructure. Building disaster-resilient systems is essential for operational continuity, economic stability, and long-term value preservation.
Integrated climate risk assessments provide the foundation for smarter and more adaptive infrastructure planning. By incorporating scenario analysis and leveraging emerging Climate Tech innovations, organizations can better anticipate climate impacts. These insights help in strategic capital allocation tailored to risk exposure, and reduce the long-term costs of inaction. Strengthening climate risk assessment today is a necessary investment for tomorrow’s stability, sustainability, and competitiveness.
This article is drawn directly from our comprehensive Climate Risk Assessment Market Snapshot Report. The market snapshot offers an in-depth analysis of the solutions landscape, key technologies, market size, and emerging investment trends shaping the future of climate resilience.
