{"id":1575,"date":"2025-06-17T15:24:32","date_gmt":"2025-06-17T15:24:32","guid":{"rendered":"https:\/\/blogs.mathworks.com\/finance\/?p=1575"},"modified":"2025-06-17T15:24:32","modified_gmt":"2025-06-17T15:24:32","slug":"modeling-physical-climate-risk-across-financial-portfolios","status":"publish","type":"post","link":"https:\/\/blogs.mathworks.com\/finance\/2025\/06\/17\/modeling-physical-climate-risk-across-financial-portfolios\/","title":{"rendered":"Modeling Physical Climate Risk Across Financial Portfolios"},"content":{"rendered":"<p><strong>Financial institutions are reassessing long-term risk models as physical climate events like hurricanes, floods, and wildfires become more frequent and more severe.<\/strong> Traditional natural catastrophe (NatCat) models, which typically address near-term insured losses, do not fully capture the decades-long horizon or the systemic financial effects of chronic climate shifts.<\/p>\n<p>In a recent webinar, <em>Assessing Physical Climate Risk: Implications for Financial Institutions<\/em>, <a href=\"https:\/\/www.linkedin.com\/in\/stuart-theakston-9363461\/?originalSubdomain=uk\">Stuart Theakston<\/a> and <a href=\"https:\/\/www.linkedin.com\/in\/annika-huprikar-361769165\/\">Annika Huprikar<\/a> from MathWorks demonstrated how firms can extend NatCat models to simulate climate-conditioned events\u2014such as future hurricanes\u2014and quantify their impact on assets, firm valuations, and investor portfolios.<\/p>\n<p>Watch the <a href=\"https:\/\/mathworks.highspot.com\/items\/6836eeb9c0ce4c31266b5052?lfrm=shp.2\">recorded webinar<\/a> to see the complete demonstration.<\/p>\n<h2><strong>Understanding the Risk Triangle<\/strong><\/h2>\n<p>A foundational concept in climate risk modeling is the <em>risk triangle<\/em>, which combines three components:<\/p>\n<ul>\n<li><strong>Hazard<\/strong> \u2013 the nature and intensity of the event, such as wind speed or flood depth<\/li>\n<li><strong>Exposure<\/strong> \u2013 the physical or financial assets potentially affected<\/li>\n<li><strong>Vulnerability<\/strong> \u2013 the sensitivity of the assets to the hazard, including resilience measures<\/li>\n<\/ul>\n<p>This framework is commonly used in insurance modeling. But to support forward-looking financial risk analysis, it must evolve to include climate scenario conditioning and long-term asset value impacts.<\/p>\n<p><img decoding=\"async\" loading=\"lazy\" class=\"alignnone  wp-image-1584\" src=\"http:\/\/blogs.mathworks.com\/finance\/files\/2025\/06\/Screenshot-2025-06-17-092339.png\" alt=\"\" width=\"796\" height=\"510\" \/><\/p>\n<h2><strong>Simulating Future Hurricanes Using Climate Scenarios<\/strong><\/h2>\n<p>The demo focused on hurricane risk under different climate scenarios (RCPs). Using MATLAB, the team generated synthetic storm tracks for a chosen year (e.g., 2045) and intensity profile aligned with RCP 8.5, a high-emissions scenario. These were then simulated against a synthetic portfolio of coastal assets.<\/p>\n<p>By analyzing damage distributions across assets, the model outputs two key risk metrics:<\/p>\n<ul>\n<li><strong>Expected Annual Impact (EAI)<\/strong> \u2013 the average projected damage<\/li>\n<li><strong>Return Period (RP100)<\/strong> \u2013 the 99th percentile of damage, representing tail risk<\/li>\n<\/ul>\n<p><img decoding=\"async\" loading=\"lazy\" class=\"alignnone  wp-image-1581\" src=\"http:\/\/blogs.mathworks.com\/finance\/files\/2025\/06\/Screenshot-2025-06-17-092359.png\" alt=\"\" width=\"788\" height=\"552\" \/><\/p>\n<h2><strong>From Asset-Level Damage to Firm and Investor Impacts<\/strong><\/h2>\n<p>The demo extended risk analysis beyond physical damage. A <em>Climate Discount Dividends Model (CDDM)<\/em> was used to calculate how both acute risks (storm damage) and chronic risks (sector output changes under climate stress) affect firm equity valuations.<\/p>\n<p>These adjusted valuations were then rolled up into investor portfolio-level equity shocks, showing how different investment allocations lead to varied risk outcomes\u2014even under the same climate scenario.<\/p>\n<p>&nbsp;<\/p>\n<p><img decoding=\"async\" loading=\"lazy\" class=\"alignnone  wp-image-1578\" src=\"http:\/\/blogs.mathworks.com\/finance\/files\/2025\/06\/Screenshot-2025-06-17-092409.png\" alt=\"\" width=\"797\" height=\"557\" \/><\/p>\n<h2><strong>Why Start Now?<\/strong><\/h2>\n<p>This modeling approach enables firms to:<\/p>\n<ul>\n<li>Align climate risk analysis with NGFS and other regulatory scenarios<\/li>\n<li>Quantify long-term impacts on value, not just short-term insured losses<\/li>\n<li>Incorporate local hazard data, physical exposure, and firm-level financials<\/li>\n<li>Inform portfolio construction, capital planning, and disclosures<\/li>\n<\/ul>\n<p>All of this can be done using MathWorks tools for climate modeling, financial analytics, and geospatial data processing\u2014within one transparent, customizable environment.<\/p>\n<h2><strong>Talk to Us<\/strong><\/h2>\n<p>To learn more about modeling physical climate risk in MATLAB, watch the full <a href=\"https:\/\/mathworks.highspot.com\/items\/6836eeb9c0ce4c31266b5052?lfrm=shp.2\">webinar recording,<\/a> or get in touch at <a href=\"mailto:climatefinance@mathworks.com\"><strong>climatefinance@mathworks.com<\/strong><\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<div class=\"overview-image\"><img decoding=\"async\"  class=\"img-responsive\" src=\"http:\/\/blogs.mathworks.com\/finance\/files\/2025\/06\/Screenshot-2025-06-17-092339.png\" onError=\"this.style.display ='none';\" \/><\/div>\n<p>Financial institutions are reassessing long-term risk models as physical climate events like hurricanes, floods, and wildfires become more frequent and more severe. Traditional natural catastrophe&#8230; <a class=\"read-more\" href=\"https:\/\/blogs.mathworks.com\/finance\/2025\/06\/17\/modeling-physical-climate-risk-across-financial-portfolios\/\">read more >><\/a><\/p>\n","protected":false},"author":204,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[22,40],"tags":[],"_links":{"self":[{"href":"https:\/\/blogs.mathworks.com\/finance\/wp-json\/wp\/v2\/posts\/1575"}],"collection":[{"href":"https:\/\/blogs.mathworks.com\/finance\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.mathworks.com\/finance\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.mathworks.com\/finance\/wp-json\/wp\/v2\/users\/204"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.mathworks.com\/finance\/wp-json\/wp\/v2\/comments?post=1575"}],"version-history":[{"count":1,"href":"https:\/\/blogs.mathworks.com\/finance\/wp-json\/wp\/v2\/posts\/1575\/revisions"}],"predecessor-version":[{"id":1587,"href":"https:\/\/blogs.mathworks.com\/finance\/wp-json\/wp\/v2\/posts\/1575\/revisions\/1587"}],"wp:attachment":[{"href":"https:\/\/blogs.mathworks.com\/finance\/wp-json\/wp\/v2\/media?parent=1575"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.mathworks.com\/finance\/wp-json\/wp\/v2\/categories?post=1575"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.mathworks.com\/finance\/wp-json\/wp\/v2\/tags?post=1575"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}