Climate Reporting Blog › Transitory and physical risks | Explanation and examples related to ESG and climate change

|  September 7, 2023

🕓 Reading time 12 minutes

Table of contents

1. What are transitory risks?

2. Examples of transitory risks / transition risks

3. What are physical risks / natural risks?

4. Examples of acute physical risks related to climate change

5. Examples of chronic physical risks associated with climate change

1. What are transitory risks?

What are transitory risks / transition risks in general?

Transitory risks are risks that occur temporarily or temporarily and generally do not have long-term effects. The term is used in various contexts, including ESG and climate change, as well as economic, financial, and business considerations.

It is important to note that transitory risks are generally short-term in nature and are often considered by companies and investors as part of normal business operations. Nevertheless, it is important to identify, monitor, and take appropriate measures to minimize their impact when they occur. An analysis of transitory risks is also carried out in the context of CSRD reporting important.

What are transitory risks / transition risks related to ESG?

Transition risks, or climate-related transitory risks as defined by the ESRS standards, are risks arising from the transition to a low-emission economy. A distinction is made between technology, market price, regulatory, and reputational risks.

2. Examples of climate-related transitory risks / transition risks

Here are some examples of climate-related transition risks as defined by ESRS E1:

1. Technology risks

A company's product could be displaced by a lower-emission product that comes onto the market as a result of a new technology.

2. Market price

Rising raw material costs can lead to higher costs for a product.

3. Regulatory

The introduction of CO2 pricing could lead to drastic additional costs in the current business model.

4. Reputational risks:

Short-term negative headlines or scandals can temporarily damage a company's reputation and have short-term effects on the perception of its ESG performance.

Significance of transitory ESG risks for the company

It's important to note that these transitory risks don't necessarily compromise a company's long-term sustainability goals. Long-term sustainability and responsibility remain critical, but managing short-term disruptions or challenges is also important. ESG risk management should consider both long-term and short-term perspectives and develop strategies to respond to transitory risks and achieve long-term sustainability goals. This can be done through effective reporting, crisis communication, and the implementation of ESG policies and practices.

3. What are physical risks / natural risks?

What are physical risks?

Physical risks are risks that result from natural events or physical conditions and can have potentially harmful effects on people, assets, or environmental resources. These risks can be diverse and range from natural disasters such as earthquakes, floods, hurricanes, and wildfires to long-term environmental impacts such as sea level rise due to climate change. Physical risks must also be analyzed for CSRD reporting and are often included in the ESG questionnaire requested by banks.

Distinction between acute (short-term) and chronic (long-term) physical risks

Physical risks can be divided into acute (short-term or sudden) and chronic (long-term or continuous) risks. This classification helps to better understand the nature and temporal occurrence of risks and to address them appropriately.

Acute physical risks: These risks are usually short-term and occur suddenly. They can have immediate and dramatic impacts. Examples of acute physical risks include natural disasters such as earthquakes, floods, hurricanes, or wildfires. These events can occur unexpectedly and cause significant damage.

Chronic physical risks: In contrast, chronic physical risks are longer-term or continuous risks that occur over time and develop gradually. Examples of chronic physical risks include sea level rise due to climate change, long-term water scarcity in certain regions, or slowly progressive environmental impacts such as land degradation or air pollution. These risks can have long-term economic, social, and environmental impacts.

Distinguishing between acute and chronic physical risks is important because management strategies and preventive measures can vary. Acute risks often require immediate action and emergency response, while chronic risks require long-term planning and adaptation. Companies should consider both types of risks and take appropriate measures to minimize or prevent their impact.

4. Examples of acute physical risks related to climate change

Acute physical risks related to climate change are short-term or sudden events caused by climate change or intensified climatic conditions. These risks can have significant impacts on people, the environment, and assets.

Here are some examples of acute physical risks related to climate change: 

1. Extreme weather events:

• Intense storms: Heavy rain, storm surges, and gusty winds can cause flooding and damage to coastal areas.
• Heatwaves: Extremely high temperatures can pose health risks to the population and affect agricultural production.
• Cold waves: Extremely cold temperatures and heavy snowfall can lead to winter storms and power outages.

2. Droughts and water shortages:

• Prolonged dry periods can lead to water shortages, affecting agriculture, water supplies and energy production.

3. Forest fires:

• Dry conditions and high temperatures can increase the likelihood of wildfires, which cause widespread destruction and cause air quality problems.

4. Landslides and coastal erosion:

• Heavy rain can trigger landslides in hilly areas, while rising sea levels and increased storm activity can cause coastal erosion.

5. Damage to ecosystems:

• Changes in ecosystems, such as coral bleaching associated with rising water temperatures, can affect biodiversity.

6. Infrastructure damage:

• The frequency and intensity of heavy rain and storms can damage infrastructure such as roads, bridges and railways.

7. Health risks:

• Climate change can promote the spread of diseases such as malaria, dengue fever and heat stress.

5. Examples of chronic physical risks associated with climate change

Chronic physical risks in the area of climate change are long-term or gradually developing risks resulting from changing climatic conditions and environmental impacts. Unlike acute risks, which occur suddenly, chronic risks manifest over a longer period of time.

Here are some examples of chronic physical risks related to climate change: 

1. Sea level rise:

• The gradual rise in sea levels due to climate change is a long-term risk. This can lead to coastal erosion, coastal flooding, and the loss of habitats for humans and wildlife.

2. Shift in climate zones:

• Climate change is causing climate zones to shift, with long-term impacts on agriculture, animal migrations and ecosystems.

3. Water shortage:

• Changes in precipitation patterns and the availability of water sources can lead to long-term water scarcity, which can affect agriculture, water supplies and industry.

4. Soil degradation:

• Climate change can lead to land degradation, which affects agricultural productivity and the availability of fertile soils.

5. Changes in biodiversity:

• The shifting of habitats and the adaptation of species to new climatic conditions can change biodiversity in the long term.

6. Long-term health risks:

• Climate change can cause long-term health risks, including increased heat stress, spread of infectious diseases, and chronic illnesses due to air pollution.

7. Energy resources:

• Changes in climatic conditions can affect the availability of energy sources such as hydropower, solar and wind energy.

8. Coastal infrastructure: 

• Long-term damage to coastal infrastructure such as ports, dams and jetties can affect trade and transport.