Physical Climate Risk in the United States Equity Market: Quantifying State–Sector Heterogeneity

This paper develops a parsimonious, scenario-analysis framework to quantify physical climate loss for US listed firms and equity portfolios. Physical climate loss is defined as the valuation loss arising from climate-induced physical damage, obtained by scaling future cash flows with country-to-State disaggregated economic deviations projected from damage functions. 

The framework embeds these macroeconomic losses within a discounted-cash-flow model using sector-specific discount rates and vulnerability adjustments. Applying the methodology to 500 large U.S. firms and an U.S. equity benchmark reveals strong cross-state and cross-sector heterogeneity in exposure to physical climate risk, as well as a portfolio-level loss of roughly -4.0% under a “current policy” scenario. 

Results are robust across integrated assessment models but sensitive to scenario–horizon choices. This framework, drawing exclusively on publicly available data, delivers a transparent and supervisory-aligned approach to assessing physical climate risk and informing strategic asset allocation.

Key Takeaways
• Projected physical-risk GDP losses by 2100 vary widely across U.S. states, from about -48.6% in Florida to modest gains in Alaska.
• Differences in discount rates and vulnerability scores generate substantial dispersion in valuation impacts, with a sensitivity ratio of roughly 1.6 across sectors.
• The U.S. equity benchmark exhibits a CPL of approximately -4.0%, with results robust to model specification but sensitive to the scenario–horizon combination.