Physical vs Transition Climate Risks: A Practical Framework for Corporate Disclosure

What Are Climate-Related Risks: Definition and Why They Matter for Corporate Disclosure

Climate risks can be defined as the risks associated with the risks borne by enterprises concerning climate change. Based on the TCFD report, there are two primary types of these risks. The first one is called the physical risk which refers to the risk brought about by changes in the environment due to climate change. The second is transition risk which refers to the risk arising from the transition into the low-carbon economy.

The disclosure of both physical and transition risks has become obligatory through legislation rather than voluntary in major economies. All three accounting standards, namely, IFRS S2 (effective from 2024), ESRS E1 within the EU CSRD, and BRSR in India, demand climate risk disclosure. Businesses having a worldwide presence, having investors, and exporting their products have no choice but to report their climate risks based on different scenarios.

Types of Climate Risk: Physical, Transition, and Liability

What Is Physical Climate Risk: Acute vs Chronic Risks Explained

Physical climate risk arises from the physical impacts of a changing climate, assessed through the IPCC formula:

Risk = Hazard x Exposure x Vulnerability.

Acute physical climate risks are discrete, event-driven hazards with rapid onset:

• Cyclones, hurricanes, and tropical storms

• Riverine, coastal, and flash flooding

• Wildfires and extreme heat events

• Severe precipitation and hailstorms

Chronic physical climate risks are gradual, long-term shifts in climate systems:

• Rising mean temperatures and persistent heat stress

• Sea-level rise and coastal erosion

• Shifting monsoon patterns and prolonged drought

• Glacial melt and freshwater supply disruption

India suffers from exposure to both types of risks at the same time. The acute physical climatic risk has increased drastically with 4,419 deaths caused by climate changes in 2025, where extreme climatic conditions were experienced on 331 out of 334 days (Down to Earth, 2025). Furthermore, chronic risks have led to a predicted 160-200 million Indians dying due to heatwaves in 2030 (World Bank).

What Is Transition Climate Risk: Policy, Market, Technology, and Reputational Risks Explained

The transition climate risk comes about due to the systematic move toward a lower-carbon economy. The four subtypes of transition climate risks as per TCFD and IFRS S2 include the following:

Legal and policy-related: Legal and regulatory changes, including the CCTS emission intensity goals for nine industries set by India, SEBI BRSR Core mandatory requirements, as well as border adjustments concerning steel, cement, and aluminum imports under the EU CBAM.

Technology-based: Transition costs as a result of the movement toward lower-emission technology and asset stranding due to higher-carbon assets: power stations using coal, combustion engines, and carbon-heavy capital equipment.

Market: Changes in market supply, demand, and prices as a result of changes in consumer demands and investors’ preferences: reduced demand for carbon-heavy products, such as fossil fuels.

Reputational: Losses in brand and stakeholder trust due to inactivity regarding climate change or because of greenwashing accusations in sustainable disclosure.

Climate Transition Risk: Carbon pricing alone can affect up to 13% of companies’ earnings (Persefoni, referring to TCFD report), making it a financial factor related to Indian export industries and carbon-intensive producers.

Physical Risk vs Transition Risk: Key Differences at a Glance

Real-World Examples of Physical and Transition Climate Risks Across Industries

How to Identify, Assess, and Disclose Physical and Transition Risks: Step-by-Step Framework

Step 1:

Define scope and boundaries. Identification of the specific physical assets, operations, and value chain nodes that need to be assessed. Identification of the location of the physical assets based on the IPCC hazards dataset and the national disaster management database.

Step 2:

Identify relevant climate hazards. With respect to physical risk, assess both acute and chronic hazards for each asset according to IPCC scenario (SSP/RCP) data. In respect to transition risk, identify the relevant regulatory instruments: CCTS, EU CBAM, BRSR Core, and decarbonisation scenarios by sector.

Step 3:

Assess exposure and vulnerability. Utilize the following equation for the assessment: Risk = Hazard x Exposure x Vulnerability. Define asset-level exposure and the organization’s adaptive capacity.

Step 4:

Run climate scenario analysis. Stress-test strategy against a low-emissions pathway (1.5°C/2°C) and a higher-warming scenario (3-4°C) to identify divergent financial impacts across both physical risk and transition risk dimensions.

Step 5:

Quantify financial materiality. Conduct stress-testing against a scenario with low emissions (1.5°C/2°C) and a scenario of higher warming (3-4°C), highlighting divergences in financial implications between physical risk and transition risk dimensions.

Step 6:

Disclose under the applicable framework. Map the outcomes according to TCFD four pillar disclosure: Governance, Strategy, Risk Management, Metrics and Targets, or IFRS S2 disclosure standards, or ESRS E1 dual materiality disclosure, depending on the jurisdiction.

Climate Risk Disclosure Frameworks: TCFD, IFRS S2, and ESRS E1

Common Challenges Companies Face in Climate Risk Assessment

These are some common challenges constantly being encountered by firms in physical and transition risk assessments:

• Lack of facility-level data: facility-level climate hazards geospatial data is typically not systematically obtained, except in extractives and infrastructure industries.

• Complex scenario selection and interpretation: choosing and understanding IPCC scenarios (SSP1-1.9 up to SSP5-8.5) requires specific knowledge that firms typically lack.

• Challenges in financialization: converting hazard risks to audit-proof financial indicators is difficult for the time being.

• Absence of scope 3 coverage: physical risks in the value chain are commonly not considered due to data unavailability, leading to understatements in reporting.

• Fragmented India data sources: India does not have one single national climate risk model including IMD, NIDM, and IIT data sets.

How Oren Helps Companies Assess and Disclose Climate Risks

Oren provides end-to-end climate risk assessment and disclosure advisory for companies navigating TCFD, IFRS S2, ESRS E1, and India's BRSR reporting obligations.

Oren's climate risk services cover: physical risk screening at asset and facility level using IPCC-aligned hazard models; transition risk identification mapped to India's regulatory environment (CCTS, BRSR Core, EU CBAM); climate scenario analysis across 1.5°C and 3-4°C pathways; financial materiality quantification; and full TCFD, IFRS S2, and ESRS E1 disclosure drafting.

For Indian listed companies subject to BRSR Core assurance and value chain disclosure requirements from FY 2025-26, Oren's structured physical risk and transition risk framework provides the data-backed documentation that third-party assessors and regulators require.