Physical Climate Risk: From Environmental Threat to a Key Business Variable

Climate change is no longer solely a matter of energy transition or regulation: its physical impacts are emerging as a determining factor for the real economy. The increasing frequency and intensity of extreme weather events are transforming how companies, investors, and financial institutions assess risks, make decisions, and allocate capital.

---

A New Dimension of Climate Risk: Tangible and Growing

For years, the climate debate has focused on emissions and decarbonization. However, physical climate risk, the direct impact of events such as floods, droughts, wildfires, or storms, is gaining  greater prominence due to its immediate and concrete nature.

This risk manifests in two complementary dimensions:

• Acute risk, associated with extreme events such as floods or wildfires.


• Chronic risk, linked to structural changes such as rising temperatures, water scarcity, or sea level rise.

Both interact and amplify one another, shaping a more uncertain and demanding environment for the global economy.

Economic Impact: From Individual Assets to the Entire System

Physical climate risk affects the economy through multiple dimensions.

At the microeconomic level, it translates into:

• Direct damage to assets (infrastructure, housing, factories, or crops).


• Operational disruptions affecting production and services.


• Supply chain disruptions with global impact.

At the macroeconomic level, its effects are amplified:

• Lower growth and productivity.


• Inflationary pressures.


• Deterioration of public finances.


• Increased vulnerability of key sectors such as agriculture, energy, transport, or tourism.

Additionally, factors such as rising insurance premiums or the loss of insurability in certain areas are beginning to reshape the economic risk landscape.

Measuring to Manage: The Challenge of Quantifying Physical Risk

Effective management of physical risk requires an advanced analytical approach based on three pillars:

• Climate hazard: what events may occur and with what intensity.


• Exposure: which assets or activities are at risk.


• Vulnerability: the capacity to withstand and recover.

This involves integrating climate models, geospatial data, and damage functions to estimate potential impacts across different scenarios and time horizons.

At BBVA, this vision represents a strategic commitment to developing in-house capabilities. Through the BBVA Adapta project, an internal tool has been developed for granular and forward-looking measurement of physical risk, enabling the generation of actionable metrics for both risk management and business purposes.

This approach enhances risk exposure understanding, facilitates a more strategic dialogue with clients, and helps identify financing opportunities linked to adaptation and resilience.

An Economic Impact Already Visible

Physical climate risk now holds a significant economic dimension. In 2025, natural disasters generated global losses of approximately $260 billion, less than half of which were insured.

In key geographies such as Colombia, this risk is particularly significant. Nearly 47% of the territory faces high or very high levels of climate risk, with events such as floods and landslides recurrently affecting both populations and economic activity. In 2025 alone, thousands of emergencies were recorded, directly impacting hundreds of thousands of families.

These figures reflect a clear reality: physical risk is no longer a future threat but a structural variable shaping economic development.

Financing Adaptation: The Next Major Opportunity

The growing relevance of physical risk ushers in a new investment agenda: financing adaptation.

According to UNEP FI estimates, the private sector could mobilize around $50 billion annually toward adaptation solutions if regulatory frameworks are strengthened and public-private collaboration is enhanced.

In this context, financial institutions play a key role as:

• Capital mobilizers toward resilient solutions.


• Risk managers, integrating physical risk into decision-making.


• Strategic partners for their clients in adaptation processes.

At BBVA, the development of advanced analytical tools and the integration of physical risk into strategy not only mitigate risks but also unlock opportunities in an environment where resilience becomes a competitive advantage.

From Risk to Opportunity: A New Agenda for the Financial Sector

Physical climate risk is redefining the rules of the game. What was once an environmental externality is consolidating as a key factor in asset valuation, strategic planning, and capital allocation.

For the financial sector, this represents a dual responsibility: to anticipate and manage increasing risks, while facilitating the transition toward more resilient economic models.

In this new context, the ability to measure, understand, and finance adaptation will determine whether institutions merely react to change, or lead it.