This publication presents a methodological framework to quantify physical climate loss (CPL) for listed firms and equity portfolios in Europe. CPL is defined as the valuation loss resulting from climate-related physical damages and is measured as the difference between a baseline valuation and a valuation that incorporates climate-induced macroeconomic losses.
The framework is aligned with NGFS Phase V scenarios and combines country-level damage functions with a discounted-cash-flow valuation model. Country-specific non-linear relationships between global temperature anomalies and deviations from baseline GDP are estimated, allowing economic damages to be projected consistently up to 2100. These GDP deviations are then used to scale future firm cash flows.
Firm valuations are obtained by discounting projected cash flows using sector-specific weighted average costs of capital, reflecting differences in discounting across industries. In addition, the framework incorporates a sector-level adjustment to account for heterogeneous sensitivity to physical climate risks, based on rankings compiled from multiple ESG data providers.
The empirical application covers 423 large publicly listed firms across 15 European countries and a Developed Europe equity benchmark. Results show strong heterogeneity in exposure to physical climate risk across countries and sectors. Under a “Current Policies” scenario, projected GDP impacts by 2100 vary substantially across Europe, with larger losses in Southern European countries and smaller losses or gains in Northern Europe. Sectoral differences in discount rates and vulnerability scores further contribute to dispersion in valuation impacts.
At the portfolio level, the Developed Europe equity benchmark exhibits a physical climate loss of approximately –4.7%. Sensitivity analyses indicate that results are robust to the choice of integrated assessment model but are sensitive to the selection of climate scenario and time horizon.
Overall, the publication provides a parsimonious and supervisory-aligned approach to measuring physical climate risk in equity markets, enabling consistent comparison of exposures across countries, sectors and portfolios using forward-looking climate scenarios.
