LRM6: Physical Risk Identification
Maximum Score
4 points
Prefill
Eligible
Validation
Evidence is manually validated
Does the lender have a systematic process for identifying physical risks that could have a material financial impact on the loan portfolio?
Assessment Instructions
Intent: What is the purpose of this indicator?
This indicator assesses whether and how the entity uses a systematic approach for identifying physical risks that could be financially material.
A comprehensive system for managing physical risks begins with a systematic process for identifying risks that could be financially material to an entity. Such a process ensures that subsequent risk assessments and analyses are focused on the most relevant risks to which an entity is exposed.
While many traditional physical risk assessments utilize re-analysis methods, it is becoming increasingly important to make use of forward-looking climate-driven models.
Input: How do I complete this indicator?
Select yes or no. If yes, select all applicable sub-options.
Terminology
Acute hazards
Acute hazards are physical events, such as extreme weather events, that could damage a real asset. They include cyclones, hurricanes, wildfires, and floods. Non-climate-related acute hazards include tsunamis, earthquakes, and volcanic activity.
Chronic stressors
Chronic stressors are longer-term physical shifts, such as sea level rise or changes in precipitation patterns, that can affect the operations and costs associated therein of an entity and its assets. While such stressors may not have as noticeable impacts as acute hazards within any given year, such longer-term shifts in climate patterns (e.g., sustained higher temperatures) can impact the cost of operations, availability of resources, accessibility of assets, availability of upstream or downstream suppliers, etc.
Entity-level
Explicitly applicable to the reporting entity as identified in EC1. Note that references to the overarching fund and/or group of which the reporting entity is part do not imply entity-level applicability.
Material financial impact:
In the context of this indicator, material financial impact is used in accordance with its use by the TCFD to express information about impacts on an entity and its financial manifestations insofar as such information is deemed to be material. As per the TCFD, “in determining whether information is material ... organizations should determine materiality for climate-related issues consistent with how they determine the materiality of other information included in their financial filings.” Furthermore, “asset managers and asset owners should consider materiality in the context of their respective mandates and investment performance for clients and beneficiaries.”
Systematic risk identification process
A process for identifying risks that is structured, repeatable, undergone at regular intervals, and designed in such a way that it can capture the potential risks that could prove financial material to the entity. It may be a standalone process, or it may be a step within another larger risk assessment process. Furthermore, it may leverage quantitative methods (e.g., use of modeling, data analysis, quantitative thresholds) and/or qualitative methods (e.g., expert consultation, working groups).
Validation: What evidence is required?
Evidence
The evidence and text box provided will be subject to manual validation.
The provided evidence must cover the following elements:
Demonstrate there is a systematic risk identification process for physical risks in place and not simply a generic “climate-related risk” assessment.
Demonstrate outcomes of the physical risk identification assessment. It is expected that the document list/state which risks, or lack thereof, were identified as a consequence of the risk assessment having been carried out.
The outcome-based information must pertain to the entity/portfolio in question and not only to the manager/group/business-unit level. Note: For fund-of-funds, entity-level applicability must be explicitly established.
The risk assessments must be applicable to the reporting year, or two years prior (2025, 2024, 2023). For 2025, a grace period allows participants to use assessments up to four years old, if previously accepted in 2024.
Text box: Describe the lender’s processes of prioritizing physical risks.
Examples of appropriate evidence include, but are not limited to:
For Process: A document describing the entity’s process towards physical risk assessments or other tangible proof of the entity's risk assessment activity. This process-based information can include information akin to materiality determination, scenario analysis, modeling or review of legislation.
For Outcomes: An extract of a procedure undertaken such as a risk register or matrix, checklists, scenario analysis or a section of a risk framework or risk management plan addressing physical risks. Such documents can help exhibit the outcomes of the risk assessments.
For Entity-level outcomes: Entity-level documentation that highlights specific physical risks identified for the entity. If using group-level documentation, ensure the outcomes relevant to the entity are explicitly highlighted within the broader assessment.
Other Answer
The other answer provided will not be subject to manual validation. It is used for reporting purposes only.
State the other physical risk issue.
Scoring
Scoring: How does GRESB score this indicator?
Scoring for this indicator is based on the existence of a systematic process for identifying physical climate risks.
Evidence: The evidence is manually validated and assigned a multiplier, according to the table below. The evidence must support the validation requirements.
If any requirements are not met, the evidence may be partially accepted or not accepted depending on the level of alignment with the requirements.
Accepted
2/2
Partially Accepted
1/2
Not Accepted
0
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