A systemic approach to understanding and addressing sustainability is critical to the financial sector tackling the complex network of interconnected issues. Despite growing awareness of the interrelation of challenges that face people, nature and climate, we must recognise that integrated assessments of sustainability issues remain at an infant stage. To address this will require significant attention in the coming years to bring disparate areas of research together in the same dance.

In this report produced by the UNEP FI TCFD programme and ClimateWise, we step further toward the required systemic approach by exploring the combined financial impact of physical and transition risks. The report has developed theoretical principles and practical steps for implementation of an integrated assessment of physical and transition risks with examples of sectoral analysis. The research builds on the existing methodology and tools, as well as workshops and interviews with financial practitioners.

Principles for integrated assessment of physical and transition risk

  1. Approach: Conduct transition and physical risk analysis simultaneously
  2. Level of analysis: Be sector-specific as well as location-specific
  3. Quantification: Capture climate risk impacts via forward-looking metrics
  4. Scenario-based analysis: Take into account feedback loops between physical and transition risk
  5. Relevance: Align to TCFD pillars