Climate risk is usually organised into a small number of categories. Getting the taxonomy right matters, because disclosure frameworks and risk models are structured around these same categories. This guide covers the complete set.
The Top-Level Split: Physical vs Transition
At the highest level, climate risk divides into physical risk (the direct impact of a changing climate on physical assets) and transition risk (the financial impact of moving to a low-carbon economy). Most frameworks add a third category, liability risk, which flows from the other two. Everything below is a subdivision of these families.
Physical Risk: Acute and Chronic
Physical risk splits by time profile. Acute risk comes from discrete extreme events; chronic risk comes from gradual, long-term shifts.
- •Acute: floods, wildfires, tropical cyclones, storm surge, hail, and heatwaves.
- •Chronic: sea-level rise, rising mean temperatures, changing precipitation patterns, and water stress.
Transition Risk: Four Drivers
Transition risk is usually broken into four drivers, following the TCFD framework:
- •Policy and legal: carbon pricing, emissions limits, disclosure mandates, and litigation.
- •Technology: disruption from lower-carbon alternatives that strand existing assets.
- •Market: shifting supply and demand, input costs, and changing customer preferences.
- •Reputation: stakeholder perception, divestment pressure, and access to capital.
Liability Risk
Liability (or litigation) risk is the exposure to legal claims for failing to mitigate, adapt to, or disclose climate risk. It sits alongside physical and transition risk because it can be triggered by either - for example, claims following inadequate disclosure of physical exposure, or challenges to a transition plan. It is increasingly material for directors and officers.
How the Categories Map to Frameworks
These categories are not academic - they are the reporting structure. TCFD and the ISSB's IFRS S2 organise disclosures around physical and transition risk. The EU's CSRD/ESRS E1 requires reporting on both, plus the financial effects. Structuring an assessment around the standard taxonomy from the start makes disclosure far easier later.