Where physical and transition climate risk meet

A risk that is no longer abstract

Physical climate risk is no longer a distant scenario for real estate. In September 2026, the United Nations Environment Programme projected that warming would peak at around 1.8°C even if all national pledges were fully implemented (UNEP 2026). Europe is already the world’s fastest-warming continent (Copernicus Climate Change Service and WMO 2026). For owners and investors, the implication is clear: physical climate risk assessments based solely on a smooth pathway to 1.5°C without overshoot may understate the conditions that assets will need to withstand. For this reason, physical risk assessments should test assets against a range of warming scenarios, including higher-emission pathways well above 1.5°C, rather than a single central case.

In EVORA’s view, the industry is underinsured. Only around a quarter of natural catastrophe losses in the EU have been insured over recent decades, and just 17% of EU citizens hold cover against natural catastrophe damage to their property (EIOPA 2026). As insurers respond to rising exposure through pricing, exclusions, and reduced capacity in some high-risk locations, asset-level resilience to change is becoming increasingly relevant to whether an asset can preserve its value, remain fit for occupation, and continue to obtain insurance on viable terms. The business case is clearer still. The European Investment Bank has highlighted that every euro invested in climate adaptation and resilience can save between five and seven dollars in repairs and damage compensation (European Investment Bank 2024).

Transition risk can also affect asset value, financing, and the balance sheets of banks and insurers before any physical hazard materializes. Changes in regulation, energy prices, and minimum performance standards may increase retrofit costs, constrain rental use, or weaken borrowers’ ability to service debt. In the UK, the Bank of England’s Climate Biennial Exploratory Scenario asked major banks and insurers to assess both physical and transition risks. It found that they were likely to absorb the aggregate costs of transition, but that early and well-managed action would reduce those costs and that some could ultimately be passed on to customers (Bank of England 2022). Emerging real estate research points in the same direction. A study of 91 German office assets found no significant effect of CRREM carbon misalignment status on assessed gross asset value, but misaligned assets were 3.54 times more likely to contain vacant space (Wein et al. 2025). Research by De Nederlandsche Bank estimated that 45% to 55% of European commercial real estate could struggle to meet 2030 decarbonization targets under a 2°C scenario, with potentially substantial excess carbon costs (Caloia et al. 2022). Evidence that mortgage markets already price these risks consistently is less conclusive. A study of 1.8 million UK mortgages originated before 2018 found no clear evidence that lenders incorporated energy efficiency into interest rates (Bell et al. 2023). Transition risk is therefore financially relevant but difficult to predict and understand, as market pricing remains incomplete. Notably, this transition evidence does not incorporate physical risk, just as the insurance and adaptation evidence above does not incorporate transition risk. Each captures only part of the financial picture, which is the gap a combined view is intended to address.

At EVORA, we often find that physical and transition risks are still assessed through separate workstreams. In practice, considering them together can improve one of the most important portfolio decisions: asset and action prioritization. Below, we explore the benefits of assessing physical and transition risk together.

Finding double-risk assets

A physical risk assessment typically identifies which assets are exposed to hazards and then considers the vulnerability of each asset to those hazards. These are two components of the Intergovernmental Panel on Climate Change (IPCC) hazard, exposure, and vulnerability framework (Reisinger et al. 2020). A transition risk assessment examines a different set of pressures, including regulation, technology, energy and carbon performance, market expectations, and potential carbon misalignment. Each assessment is valuable on its own. However, overlaying their prioritized results can reveal a further category: assets facing material risk on both dimensions.

These “double-risk assets” may warrant earlier attention than assets appearing critical in only one assessment. The combined view does not replace specialist analysis, nor does it require a new risk methodology. Its value is in portfolio steering: bringing existing results together so that decision-makers can see where physical hazards, transition pressures, and financial consequences may reinforce one another.

Work and guidance are available to help connect the two perspectives. S&P Global Market Intelligence has examined physical and transition risk as two sides of the same issue (S&P Global Market Intelligence 2023). The Cambridge Institute for Sustainability Leadership and UNEP Finance Initiative describe integrated assessments as still being at an early stage and recommend conducting physical and transition analysis simultaneously while considering feedback loops between them (CISL and UNEP FI 2022). The overlay described here should therefore be understood as a practitioner approach rather than a fully standardized analytical framework.

The overlay does not require both assessments to use the same scenario framework. Transition risk assessments, using tools such as the Carbon Risk Real Estate Monitor (CRREM), identify assets that are already misaligned, or approaching misalignment, with a 1.5°C-aligned decarbonization pathway (CRREM Foundation 2026a). Physical climate risk tools follow a different logic, assessing exposure and vulnerability under selected climate and hazard scenarios. The prioritized outputs of the two assessments should, in EVORA’s view, then be mapped at asset level. Assets that rank among the higher-risk results in both become double-risk assets and candidates for earlier investigation and, where appropriate, intervention. What matters is not scenario equivalence, but transparent assumptions, consistent asset mapping, and a clear prioritization logic. Quality control of the transition risk input matters here too. CRREM accredits advisory, technical, and assurance firms as Accredited Service Providers to apply its pathways with clients, and publishes open-access computation guidance, both intended to support consistent and credible use of the methodology across the market (CRREM Foundation 2026b). Using an accredited provider, or checking results against that guide, gives decision-makers greater confidence that transition risk results are robust enough to be combined with physical risk outputs.

The potential for dual-purpose interventions

Once double-risk assets have been identified, the next question is whether planned interventions can address more than one exposure. This will not always be possible. Some measures respond to a single hazard or performance gap.

In other cases, combined benefits are tangible at both urban and building levels. A meta-analysis of 373 peer-reviewed studies found that nature-based solutions reduced daytime temperatures by an average of 2.04°C during heat periods and were also associated with reductions in building-level cooling energy demand (Wei et al. 2025). At the individual asset level, a green roof provides a practical example. It can retain and delay stormwater runoff, reduce summer heat gains, create habitat, and support biodiversity, while accessible designs may also improve amenity for occupants. Combined with photovoltaic (PV) panels, the cooler rooftop microclimate may support electricity yield, as PV performance typically declines as module temperatures rise, although the effect depends on climate and system design (Wang et al. 2025). A single roof intervention can therefore help address heat and intense rainfall while also supporting energy performance, renewable generation, biodiversity, and occupant value. Finding the right balance between these functions for the specific building is important, as the same roof area cannot necessarily serve all of them to the same extent.

The combined assessment therefore offers two distinct benefits. First, it can provide a clearer and truer picture of overall climate risk. Second, where genuine synergies exist, it can help compare measures on a broader value basis. That comparison should include avoided damage, energy and carbon performance, insurability, occupant comfort, and the asset’s longer-term ability to remain functional and attractive.

From climate risk assessment to resilient capital allocation

The practical next step is to translate the combined view into asset strategies and capital plans. Investors and managers can use it to identify priority assets, evaluate possible measures against the relevant risks, and decide which interventions should be funded first. Resilience then becomes part of a capital allocation strategy.

Here, resilience (considering both transition and physical risks) is best understood as a form of preventive risk management. It means using scenario analysis to broaden the view of an asset, identify its most material vulnerabilities, and combine measures that improve its ability to withstand and adapt to different conditions while mitigating its own impact on climate change. Adoption and use of approaches to assess both physical and transition risks and then implementing controls can help keep buildings suitable for a changing climate, support continued insurance availability on viable terms, and improve conditions for occupants. In simple terms, these approaches protect value.

Reporting and benchmarking frameworks increasingly ask real estate owners to identify both transition and physical climate risks and to describe the measures taken in response. This is important progress, but identifying risk is only the first step. EVORA encourages asset managers to go further: to review the results of both assessments side by side, use the combined view to prioritize assets and interventions, and build the resulting actions into asset management plans with clear responsibilities, budgets, and timelines. The effectiveness of those actions should then be tracked over time, for example through measurable implementation objectives, periodic reassessment of risk ratings and, where appropriate, sustainability targets. Not every portfolio or intervention will reveal synergies, but embedding the combined view in routine asset management can move practice from parallel assessment toward more integrated decision-making.

The value of a combined view is ultimately that it provides a more accurate picture of risk, which in turn shapes which assets are prioritized, which measures are funded, and how value is protected over time. The question is therefore not simply whether both risks have been assessed, but whether the results have been considered together, acted upon, and tracked to enable effective value protection.

Copernicus Climate Change Service and WMO (World Meteorological Organization). 2026. European State of the Climate 2025. https://climate.copernicus.eu/esotc/2025.

CRREM Foundation. 2026a. “The Methodology Behind the CRREM Pathways.” https://crrem.org/pathways/methodology/.

CRREM Foundation. 2026b. “Become a Partner.” https://crrem.org/partners/become-a-partner/.

EIOPA (European Insurance and Occupational Pensions Authority). 2026. Insurance Protection Gaps in a Changing Climate. April 16, 2026. https://www.eiopa.europa.eu/insurance-protection-gaps-changing-climate-2026-04-16_en.

UNEP (United Nations Environment Programme). 2026. Limiting Overshoot. September 2, 2026. https://www.unep.org/resources/limiting-overshoot.

Wang, A., R. Zhang, and N. Fu. 2025. “Beyond Sustainability: Unveiling the Complex Interactions, Risks and Future Prospects of Photovoltaic Green Roofs.” Indoor and Built Environment 34 (10): 1844–1857. https://doi.org/10.1177/1420326X251362649.

Wei, H., X. Bai, Q. Lu, et al. 2025. “Urban Cooling and Energy-Saving Effects of Nature-Based Solutions Across Types and Scales.” Nature Cities 2: 1194–1204. https://doi.org/10.1038/s44284-025-00349-0.

Wein, J., B. Gloria, B. Höhn, and S. Bienert. 2025. “Valuing Transition Risk: The Impact of Carbon Intensity on Gross Asset Values.” Journal of Sustainable Real Estate 17 (1): 2580052. https://doi.org/10.1080/19498276.2025.2580052.

European Investment Bank. 2024. “COP29 Baku: Climate Action Must Rise Above Politics.” November 12, 2024. https://www.eib.org/en/stories/climate-action-cop29-baku.

Bell, J., G. Battisti, and B. Guin. 2023. “The Greening of Lending: Mortgage Pricing of Energy Transition Risk.” Staff Working Paper No. 1,016. Bank of England. https://www.bankofengland.co.uk/working-paper/2023/the-greening-of-lending-mortgage-pricing-of-energy-transition-risk.

S&P Global Market Intelligence. 2023. “Case Study: Physical and Transition Climate Risk: Two Sides of the Same Coin?” https://www.spglobal.com/market-intelligence/en/news-insights/research/case-study-physical-and-transition-climate-risk-two-sides-of-the-same-coin.

Bank of England. 2022. “Bank of England Publishes Results of the 2021 Biennial Exploratory Scenario: Financial Risks from Climate Change.” News release, May 24, 2022. https://www.bankofengland.co.uk/news/2022/may/boe-publishes-results-of-the-2021-biennial-exploratory-scenario-financial-risks-from-climate-change.

Caloia, F., D.-J. Jansen, R. van der Molen, L. Zhang, and H. Koo. 2022. Real Estate and Climate Transition Risk: A Financial Stability Perspective. Occasional Studies 19 (4). De Nederlandsche Bank. https://www.dnb.nl/media/cniottiu/web_134119_os_real-estate_and_climate.pdf.

CISL and UNEP FI (Cambridge Institute for Sustainability Leadership and United Nations Environment Programme Finance Initiative). 2022. Climate Tango: Principles for Integrating Physical and Transition Climate Risk Assessment with Sectoral Examples. https://www.unepfi.org/themes/climate-change/climate-tango-principles-for-integrating-physical-and-transition-climate-risk-assessment-with-sectoral-examples/.

Reisinger, A., M. Howden, C. Vera, et al. 2020. The Concept of Risk in the IPCC Sixth Assessment Report: A Summary of Cross-Working Group Discussions. Intergovernmental Panel on Climate Change. https://www.ipcc.ch/site/assets/uploads/2021/02/Risk-guidance-FINAL_15Feb2021.pdf.

This article was written by Verena Luecking, Associate Director, Payal Thadani, Senior Sustainability Consultant, and Mira Segesser, Sustainability Consultant, at EVORA. Learn more about EVORA here.