The financial risk of climate damages to physical assets may be underestimated by over 80 per cent, finds new research conducted by Professor Irene Monasterolo, and her co-authors from Vienna University of Economics and Business, Utrecht University, the University of Venice and the University of Zurich.

The research introduces a novel approach to assess better the risk of climate change on firms and investors.

They find that financial losses are underestimated by up to 70 per cent when analyses do not consider geolocation and climate risk, and by up to 82 per cent when tail risks are overlooked.

These profound discrepancies show the need to mainstream asset-level data in climate risk assessment and climate stress tests. This allows for avoiding a large underestimation of losses and quantifying the investment needs for adaptation, which in turn helps to design effective policies and investments to adapt to climate change.

“Our findings demonstrate the severe consequences of neglecting asset-level climate risk assessments,” the researchers write. “This methodology empowers policymakers, investors, and stakeholders to make informed decisions that enhance resilience to climate change,” says Professor Irene Monasterolo.

The researchers translated climate risks into economic and financial losses, in an application to Mexico - a country that is already largely affected by climate change, is a relevant recipient of FDI, is integrated into regional and international value chains, and is a significant recipient of climate adaptation finance.

The paper was published in Nature Communications.