When most people hear "physical risk," they picture a flood map. A heatwave. A storm hitting an asset. Climate risk, in other words. But physical risk is a much wider category; and climate is only one corner of it. Understanding how these terms nest is the difference between seeing a single hazard and seeing the full surface of exposure. It is also why, at Darwin, we cover all 3 — nature, physical and climate risk are not separate workstreams but one nested system, assessed through a single lens.
The mental shortcut that creates the blind spot
Ask a risk team to assess "physical risk" and most will reach for climate data: temperature curves, precipitation trends, flood and wildfire models at asset level. That instinct is understandable — climate risk frameworks (TCFD and its successors) arrived first, came with usable data, and trained a generation of analysts to equate physical risk with climate hazard.
But that equation quietly drops most of the picture. Physical risk is not defined by the weather. It is defined by a broken dependency on nature. A physical risk materialises whenever a natural system that an asset relies on to operate degrades, becomes scarce, or turns hazardous. Climate change is one driver of that degradation — not the category itself.
How the 3 terms actually nest
The cleanest way to hold this is as three concentric sets:
Nature-related risk is the outer circle: every risk that arises from a business's dependencies on, and impacts to, nature — the ecosystem services it draws on and the pressures it puts on them. Ecosystem services are the benefits nature provides to economic activity for free: clean air and water, stable soils, pollination, the buffering of floods and other hazards, and the landscapes that draw tourism. Every asset relies on some of them, usually without ever pricing them in.
Physical risk sits inside it: the subset of nature risk that bites when those ecosystem services actually degrade or fail. Less water in the basin, fewer pollinators in the field, unstable ground under the foundations.
Climate risk sits inside that: the subset of physical risk driven specifically by climate hazards — acute (floods, storms, heatwaves, wildfires) and chronic (sea-level rise, shifting rainfall, rising temperatures).
So the relationship is strict containment: climate physical risk ⊂ physical risk ⊂ nature risk. Climate regulation is itself just one of the mitigating services nature provides. When you assess only climate, you are assessing one branch of one category — and treating it as the whole tree.
The 4 families of ecosystem services and where climate actually sits
Ecosystem services fall into 4 broad families, and each one generates its own physical risks when it degrades. Crucially, most of these risks are not climate risks at all — they would materialise even in a perfectly stable climate, whenever a service is degraded by pollution, over-extraction, land-use change or habitat loss.
Enabling services — air quality, soil condition, water quality, pollination. These are the background conditions that keep production possible. Roughly 75% of the world's leading food crops depend to some degree on animal pollination, a service valued at US$195–387 billion a year (Source: IPBES). A collapse in pollinators — driven by pesticides, habitat loss and disease — directly cuts yields for coffee, cocoa, fruit and nuts. Degraded soils, air quality and water quality hit dependent assets the same way, with no weather event required.
Mitigating services — nature's buffering of hazards. This is where climate risk actually lives. When the natural systems that absorb shocks degrade — wetlands that buffer floods, vegetation that regulates temperature and holds ground moisture — you get climate acute risks (floods, storms, heatwaves, wildfires), climate chronic risks (sea-level rise, shifting rainfall, rising temperatures), and geological risks (subsidence, landslide, seismic exposure). Clay shrink-swell subsidence alone — soils expanding and contracting and cracking foundations — costs French insurers around €1 billion a year on average, rising to €3.5 billion in 2022, and threatens more than 12 million homes (Source: CCR).
Provisioning services — what nature supplies (water, raw materials, food, fibre). Water stress is just one example. When an aquifer is over-extracted or a basin is allocated to too many users, the water simply isn't there. In 2021 TSMC, the world's largest chipmaker, had to truck water into its fabs during Taiwan's worst drought in over half a century — production continuity threatened not by a storm, but by a depleted shared resource (Source: Fortune). Over-extraction and land-use change degrade water provisioning with or without a climate signal.
Cultural services — recreation, tourism, landscape and heritage value. When the natural asset is the product, its degradation is the risk. Coral bleaching erodes reef-tourism economies; thinning snowpack undermines ski resorts. The dependency is on a functioning, attractive ecosystem — a cultural service — and it can be lost to biodiversity decline and pollution, not only to temperature.
Why the distinction is worth getting right
An asset-level climate model captures temperature and precipitation. It does not capture the compounding degradation of the natural systems an asset actually runs on — the upstream catchment, the pollinator population, the soil structure... 2 assets with identical climate-hazard scores can carry very different physical risk once you account for the ecosystem services they depend on.
Yet that being said, it is true that climate change is not only a type of physical risk, it is also one of the 5 direct drivers of nature loss identified by IPBES, alongside land-use change, pollution, over-exploitation and invasive species. So warming doesn't only sit in the inner circle; it also pushes outward, accelerating the decline of the other ecosystem services. Climate change is a leading contributor to pollinator decline, drives the coral bleaching that erodes reef-tourism economies, and deepens the water stress that strains provisioning (Source: IPBES). The nesting still holds — climate hazards are a genuine subset of physical risk — but climate also amplifies the wider nature risk that surrounds them, which makes the case for assessing the whole picture stronger, not weaker.
That is the practical payoff of the nesting. Climate risk tells you how the weather is changing around an asset. Physical risk — properly scoped as a subset of nature risk — tells you whether the natural systems the asset depends on will still be there to support it. The first is necessary. Only the second is complete.
So the point is not that nature risk is a different, narrower thing to worry about instead of climate. It is the opposite: because the circles nest, assessing nature risk by definition already captures physical risk — and the climate risk nested inside it. Looking at nature is not a detour around climate and physical risk; it is the only vantage point wide enough to see all three at once.
At Darwin, we assess physical risk as part of the full nature-risk picture — mapping the ecosystem-service dependencies behind each asset, climate and non-climate alike. Book a demo to see it in practice.