--- title: "Physical vs Transition Climate Risk: The Difference, and What ESRS E1 Requires" description: "Physical vs transition climate risk, side by side: definitions, a comparison table, how the two interact, and what ESRS E1 requires, with the TCFD-to-ESRS mapping." image: https://www.fiegenbaum.solutions/hubfs/pexels-cluster-images/753619.jpg --- [Skip to content](https://www.fiegenbaum.solutions/en/blog/physical-risks-and-transition-risks-how-to-assess-climate-risks#main-content) [![Fiegenbaum Solutions Logo](https://www.fiegenbaum.solutions/hubfs/Branding/Fiegenbaum-Solutions_Logo.svg) ![Fiegenbaum Solutions Logo](https://www.fiegenbaum.solutions/hubfs/Branding/Fiegenbaum-Solutions_Logo.svg)](https://www.fiegenbaum.solutions/en/?hsLang=en) - [English](https://www.fiegenbaum.solutions/en/blog/physical-risks-and-transition-risks-how-to-assess-climate-risks) - [Deutsch](https://www.fiegenbaum.solutions/blog/physische-vs-transitionsrisiken-der-praktische-leitfaden-fuer-die-csrd-konforme-szenarioanalyse) - Services - [Climate Risk Assessment](https://www.fiegenbaum.solutions/en/climate-risk-analysis-for-companies) - [VSME Report](https://www.fiegenbaum.solutions/en/vsme-reporting-for-smes) - [ESG Due Diligence VCs & Series A+](https://www.fiegenbaum.solutions/en/esg-due-diligence-vcs-series-a-startups) - [Corporate Carbon Footprint](https://www.fiegenbaum.solutions/en/company-carbon-footprint-methods-tools-best-practice) - Tools - [Scope 3 Quick-Check](https://www.fiegenbaum.solutions/en/scope-3-quick-check) - [ESG Investment Quick-Check](https://www.fiegenbaum.solutions/en/esg-investment-quick-check) - [CSRD Materiality Screening](https://www.fiegenbaum.solutions/en/csrd-materiality-screening) - [Pricing](https://www.fiegenbaum.solutions/en/esg-climate-consulting-fixed-prices-carbon-footprint-vsme-due-diligence-climate-risk) - [About me](https://www.fiegenbaum.solutions/en/about-me) - [Blog](https://www.fiegenbaum.solutions/en/blog) - [Contact](https://www.fiegenbaum.solutions/en/contact) ###### 9 min read # Physical risks and transition risks: How to assess climate risks By: [Johannes Fiegenbaum](https://www.fiegenbaum.solutions/en/blog/author/johannes-fiegenbaum) on 9/21/25, 8:17 AM · Last updated October 1, 2026 [Climate Risk Assessment](https://www.fiegenbaum.solutions/en/blog/tag/climate-risk-assessment) [Climate Adaptation & Resilience](https://www.fiegenbaum.solutions/en/blog/tag/climate-adaptation-resilience) ![Storm waves crashing against a pier with a lighthouse](https://www.fiegenbaum.solutions/hubfs/pexels-cluster-images/753619.jpg) Physical climate risk is the direct financial impact of climate hazards on a business, floods, heat waves, drought, storms. Transition risk is the financial impact of the response to those hazards: new climate policy, new technology, shifting markets, reputational pressure. Both trace back to the same variable, greenhouse gas emissions, from opposite directions. The [CSRD](https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464) requires companies in scope to assess both risk types together in one [scenario analysis](https://www.ipcc.ch/report/ar6/wg2/), covering at least a [1.5°C](https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement) pathway and a pathway above 3°C. **Table of Contents** 1. [Physical vs transition climate risk: the difference in one table](https://www.fiegenbaum.solutions/en/blog/physical-risks-and-transition-risks-how-to-assess-climate-risks#physical-vs-transition-climate-risk-the-difference-in-one-table) 2. [How the two risk types interact](https://www.fiegenbaum.solutions/en/blog/physical-risks-and-transition-risks-how-to-assess-climate-risks#how-the-two-risk-types-interact) 3. [What ESRS E1 requires for each risk type](https://www.fiegenbaum.solutions/en/blog/physical-risks-and-transition-risks-how-to-assess-climate-risks#what-esrs-e1-requires-for-each-risk-type) 4. [Choosing scenarios and data sources for each risk type](https://www.fiegenbaum.solutions/en/blog/physical-risks-and-transition-risks-how-to-assess-climate-risks#choosing-scenarios-and-data-sources-for-each-risk-type) 5. [Putting a number on each risk](https://www.fiegenbaum.solutions/en/blog/physical-risks-and-transition-risks-how-to-assess-climate-risks#putting-a-number-on-each-risk) 6. [FAQs](https://www.fiegenbaum.solutions/en/blog/physical-risks-and-transition-risks-how-to-assess-climate-risks#faqs) **Live data:** See how physical climate hazards such as flooding, drought and heat hit specific locations in the [Fiegenbaum Atlas climate risk dashboard](https://atlas.fiegenbaum.solutions/en/klimarisiko?utm_source=fiegenbaum-solutions&utm_medium=blog&utm_campaign=atlas-klimarisiko&utm_content=physical-risks-and-transition-risks-how-to-assess-climate-risks). ## Physical vs transition climate risk: the difference in one table Physical risk is the direct impact of climate hazards on assets, operations and supply chains. It splits into **acute** risk, single events such as floods, storms or heat waves, and **chronic** risk, gradual shifts such as rising average temperatures, changing rainfall or sea-level rise. Transition risk is the impact of the move to a low-carbon economy: **policy and legal** risk (new regulation, carbon pricing), **technology** risk (assets or processes becoming obsolete), **market** risk (shifting customer and investor demand) and **reputation** risk. Both risk types trace back to the same variable, greenhouse gas (GHG) emissions: the more emissions rise, the more physical risk compounds; the harder policy pushes to cut them, the more transition risk compounds. | Risk type | Driver | Typical time horizon | Primary data source | | --- | --- | --- | --- | | Acute physical | Extreme weather event | Short-term (0-5 years) | Copernicus Climate Data Store, EEA hazard data | | Chronic physical | Gradual climate shift | Long-term (15+ years) | IPCC AR6 projections, Copernicus | | Policy and legal transition | Regulation, carbon pricing | Medium-term (5-15 years) | EU ETS auction data, CBAM scope | | Technology transition | Asset or process obsolescence | Medium-term | Sector technology roadmaps | | Market transition | Demand and investor shift | Variable | Market and customer research | | Reputation transition | Stakeholder perception | Variable | Rating agency and media monitoring | Example: a logistics company faces acute physical risk from flooding on a delivery route and, at the same time, market transition risk from CBAM raising the cost of the high-emission suppliers it depends on. The two risks sit on different time horizons but affect the same route. ## How the two risk types interact Physical and transition risk move in something close to an inverse relationship over the long run. In a low-mitigation pathway, physical risk keeps compounding because emissions keep rising, but transition risk stays comparatively contained because policy pressure stays weak. In a fast-mitigation pathway, transition risk rises sharply, carbon prices, stranded assets, retooling costs, but physical risk is capped because warming is contained earlier. No credible scenario minimizes both at once; every pathway trades one against the other. Example: a cement producer that keeps emissions-heavy kilns running the longest carries lower near-term transition risk, no retrofit spend, no carbon-price exposure yet, but higher chronic physical risk exposure across its asset base later in the century. A producer that retrofits early inverts the trade: higher transition cost now, lower physical exposure later. ESRS E1 requires this joint view, not two separate risk lists. ## What ESRS E1 requires for each risk type Under the CSRD, **ESRS E1** requires **[double materiality](https://www.efrag.org/en/News/Public-482)** for both risk types: how the company affects the climate (impact materiality) and how the climate affects the company (financial materiality). **E1-9** covers anticipated financial effects from material physical and transition risks and from climate-related opportunities in the same disclosure point, adaptation options for physical risk sit alongside new markets or products for transition risk. **My position:** no top-10 page for this query mentions ESRS at all. That is the gap a compliance-literate comparison closes, not a longer definition. A rough map from the four TCFD transition-risk categories onto ESRS E1: | TCFD category | ESRS E1 disclosure point | | --- | --- | | Policy and legal | E1-2 policies, E1-3 actions and resources | | Technology | E1-1 transition plan, E1-4 targets | | Market | E1-9 anticipated financial effects | | Reputation | SBM-3 material impacts, risks and opportunities | Since Directive (EU) 2026/470 ("Omnibus I") took effect on 18 March 2026, the CSRD reporting obligation applies only to companies exceeding both 1,000 employees and €450 million net turnover, for financial years starting 1 January 2027, first reports due in 2028. Listed SMEs are fully exempt. Around 80% of previously in-scope companies now fall outside the obligation entirely. Source: [European Commission, Omnibus package](https://finance.ec.europa.eu/news/omnibus-package-2025-04-01_en). The physical-vs-transition assessment itself is unchanged by Omnibus, only the population of companies required to publish it has shrunk. For the full disclosure workflow, GOV-3 governance oversight, SBM-3 risk listing, and the E1-1 to E1-9 sequence, see our [full ESRS and CSRD disclosure guide](https://www.fiegenbaum.solutions/en/blog/demystifying-esrs-a-comprehensive-guide-to-european-sustainability-reporting-standards-and-csrd-disclosure-requirements?hsLang=en). ## Choosing scenarios and data sources for each risk type Physical and transition risk need different scenario families and different data. For physical risk, model at least two IPCC pathways, a lower-emission case (RCP4.5) and a high-emission case (RCP8.5), over a horizon of 30 years or more; our [RCP vs SSP scenario decision guide](https://www.fiegenbaum.solutions/en/blog/choosing-right-ssp-scenario-climate-resilient-business?hsLang=en) covers which pathway fits which sector. For transition risk, use a policy-scenario family such as the [NGFS climate scenarios](https://www.ngfs.net/en/about-ngfs/governance/ngfs-scenarios), which model orderly, disorderly and hot-house-world policy paths. Free public data sources, by risk type: - **Physical:** the Copernicus Climate Data Store for climate projections, the European Environment Agency for hazard maps, IPCC AR6 for pathway assumptions. - **Transition:** EU ETS auction data for carbon-price paths, the CBAM product scope for exposure, NGFS scenario output for macro assumptions. - **Both:** document the model version, spatial or sector resolution, and retrieval date for every source, an auditor needs to reproduce the number, not just read it. Whichever pathway you pick, document why: a single-scenario analysis, one RCP, one policy path, meets the letter of ESRS E1 but hides the spread between best and worst case, usually where the decision-relevant information sits. ## Putting a number on each risk Physical risk is quantified through exposure, hazard and vulnerability: identify the asset value at risk, estimate the probability of a hazard event from historical data and climate projections, then multiply. Example: a production site worth €50 million in a flood zone with a 2% annual flood probability carries a modest expected annual loss under a partial-damage assumption, far higher under a total-loss assumption. Transition risk is quantified through exposure to a policy or market variable: multiply a physical quantity (tonnes of CO₂e, square metres of retrofit-eligible floor space) by a projected price or cost. Example: a company emitting 100,000 tonnes of CO₂e under an assumed carbon price of €100 per tonne faces €10 million in additional annual cost, before any pass-through from suppliers facing the same price. **My position:** the harder number to get right is not the physical damage estimate, it is the transition-risk price path, because it depends on a political decision rather than a measured hazard. Most companies we see treat both risk types with the same false precision, one number, no range, when the transition-risk number in particular deserves a wide one. Both numbers need a documented method, not just a figure: which data source, which scenario, which assumptions, so a reader or an auditor can reproduce the result rather than take it on trust. That documentation, not the number itself, is what ESRS E1 actually audits. One operational note worth keeping: update both scenario sets annually, ideally by October, so there is time to fold new assumptions into a report due the following spring. ## FAQs Is "TCFD physical risk" the same as ESRS E1 physical risk? Yes, same underlying category. TCFD introduced the physical-risk and transition-risk split; ESRS E1 uses the same split but nests it inside double materiality and the E1-1 to E1-9 disclosure points. A TCFD-aligned risk register maps directly onto an ESRS E1 report. What are physical and transition risks, and why do they matter for strategy? Physical risk is direct damage from climate hazards to assets and supply chains. Transition risk is the cost of adapting to a low-carbon economy: regulation, technology, market and reputation shifts. Both change the value of the same assets, just through different mechanisms and time horizons. What does double materiality mean for these two risk types? Double materiality asks two questions at once: how does the company affect the climate (impact materiality), and how does the climate affect the company financially (financial materiality)? Physical and transition risk are the financial-materiality half; both must be assessed together, not filed as two separate exercises. How does the 2025 EU Omnibus package change who has to report on these risks? Since Directive (EU) 2026/470, CSRD reporting applies only to companies exceeding both 1,000 employees and €450 million net turnover, for financial years starting 1 January 2027, first reports due in 2028. Listed SMEs are exempt. Around 80% of previously in-scope companies fall outside the obligation entirely; the risk-assessment substance under ESRS E1 is unchanged for those still in scope. Next step Turn climate risk or ESG data into a decision? In a 30-minute intro call we map where your biggest lever is, with no obligation. 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