Climate risk must also be reassessed

Let's stop treating climate risk as a static data point

Every year, companies update their economic and financial assumptions. Has the price of raw materials changed? Budgets are revised. Have interest rates moved? The cost of capital is recalculated. Has a currency appreciated? Exposure and hedging efficiency are reassessed. The WACC (Weighted Average Cost of Capital) used the previous year is not kept simply because it was already the subject of a study.

For physical climate risk, however, many companies still take a different approach. A study is conducted. Assets are located. Their exposure to heat, flooding, drought, or storms is identified. In the most advanced approaches, their vulnerability is analyzed and potential losses are quantified. Then the report is finalized, priority sites are identified, and the exercise is considered complete.

This approach is based on a fundamental error: treating climate risk as a fixed characteristic of an asset. It is not.

A snapshot of risk does not allow it to be managed over time

Physical risk results from the intersection of several variables: a climate hazard, an asset's exposure, its vulnerability, and the financial consequences of damage or business interruption. Yet none of these dimensions is static.

The climate is changing. Observations are expanding, and models are updated. But the asset changes too: a building extension, a new production line, modified drainage, replaced refrigeration equipment, flood protections, changes in inventory or production value. Therefore, there is no reason for a site's risk to remain identical from one year to the next.

The summer of 2026 provides a good illustration. At the site of a major European client we studied, the 1991–2020 climate normal was about 6 days per summer above 30°C. In the summer of 2026, the site experienced 38, including eleven consecutive days. The peak temperature increased, but much more slowly than the duration of exposure. For a business, it is often the recurrence of heat, rather than the single record, that alters the constraints placed on equipment.

Should we conclude that the climate projections were wrong? No. The level observed in 2026 was close to the upper Q90 threshold projected for 2050: 38 observed days versus 39.7, while the 2050 median was only 18.3. Such a scenario was therefore well represented within the risk distribution.

However, its realization alters the information currently available to decision-makers. Just as with other economic and financial factors, new information must lead to re-evaluating assumptions.

What was not profitable yesterday may become so today

Consider a temperature-controlled company planning to reinforce the cooling system of an industrial site. In 2025, the investment seems high in light of expected annual losses. The Expected Annual Loss (EAL) is absorbable, the risk of interruption is limited, and the return on investment of adaptation is insufficient. Not investing immediately is entirely rational at that point. But this decision is only valid based on the information and assumptions that produced it.

In 2026, the accumulation of hot spells shows that equipment is stressed for longer periods than anticipated. The probability of exceeding capacity increases. The cost of a day of downtime, the value of exposed production, or the value of the assets may also have changed. The EAL increases. Maximum loss evolves. The cost of inaction does too. An investment that did not cross the profitability threshold yesterday can now surpass it and become a priority for business continuity.

However, updating does not systematically mean observing an increase in risk. Consider a company that has invested: it has resized its cooling system, created redundancy, relocated sensitive equipment, increased drainage capacity, or protected the site against flooding. The climate hazard may not have decreased. Its vulnerability, however, has changed.

Why continue to assign it the same level of expected loss as before the works? The assessment must incorporate the asset's new configuration and recalculate its residual risk. This is what allows the economic efficiency of adaptation to be measured ex-post: how much EAL was avoided? How has the distribution of tail risks evolved? Has the risk of business interruption decreased sufficiently relative to the committed CAPEX?

In other words, adaptation investment must also be capable of being marked-to-market (revalued). This is a prerequisite for moving from a compliance mindset (we conducted a climate study) to a genuine management mindset: we know how our risk is evolving and whether the capital deployed to reduce it is effective.

Bringing climate risk into the budget cycle

Finance departments update their economic and financial variables with every budget cycle. They look at current exposure, exchange rates, existing hedges, and their effectiveness. They revise their assumptions regarding interest rates, raw materials, or the cost of capital when conditions change.

Why should climate data be exempt from this discipline?

It should enter the same management loop:

1. integrate observations from the past year and newly available data to update scenario-based projections;

2. update the exposure and vulnerability of assets that have evolved;

3. recalculate financial consequences: EAL, asset-level extreme losses (PML), portfolio Climate VaR, and business interruption losses;

4. compare expected losses against the cost of adaptation measures;

5. measure the effectiveness of investments already made;

6. revise CAPEX and OPEX priorities when the ratio between the cost of action and the cost of inaction has shifted.

Climate risk is not a report: it is a position to be re-evaluated

This is probably the main takeaway from the summer of 2026. An analysis of physical climate risks should not be conceived as a one-off assignment that ends with the delivery of a report. The report is a dated snapshot.

What a company needs is to know each year where its risk has increased, where it has decreased, why it has changed, and where an investment becomes economically justified.

A warehouse considered low-vulnerability in 2025 may no longer be so in 2027. An investment dismissed for lack of return can become a top priority. Conversely, one million euros invested in adaptation may have reduced expected losses enough to alter the asset's risk profile, and this reduction must be objectively measurable.

We find it completely normal to update the price of a raw material, an exchange rate, or a WACC before deciding where to invest the next euro. Climate risk deserves the same discipline. Assessing it once is conducting a study. Re-evaluating it regularly is managing a risk.