Executive Summary
Banque de France is developing a practical toolkit to quantify physical climate risks because climate-driven hazards are increasingly translating into real economic losses and material financial exposure. The work focuses on turning climate science and hazard information into usable insights for monitoring financial stability, stress testing, and risk management, while acknowledging that physical risk is methodologically and data-intensive compared with transition risk. Flood modeling is currently the most advanced area, including collaboration on digital twin approaches that connect flood hazards, buildings, and loans to estimate exposure across physical assets and credit portfolios. Banque de France is also expanding its analysis to other perils such as heatwaves, windstorms, and harder-to-model hazards like wildfires, and it relies on international coordination, including work through the Network for Greening the Financial System, to improve the robustness and comparability of these approaches.
Why Central Banks Measure Physical Climate Risk
Physical climate risk matters to central banks because it affects the real economy in ways that can accumulate into systemic financial vulnerabilities. Flooding, drought, heatwaves, windstorms, and wildfires can damage physical assets, interrupt production, reduce labor productivity, and force sudden increases in operating costs, thereby weakening households and firms and, in turn, increasing credit and underwriting losses for banks and insurers. Banque de France frames this issue as increasingly urgent because awareness of climate damages is now widespread across insurers, business leaders, and local government officials, meaning the question is no longer whether climate impacts exist but how to measure and manage them credibly. For supervisors and policymakers, measurement is not an academic exercise; it is a prerequisite for understanding where exposures are concentrated, how shocks might transmit through portfolios, and whether the financial system has enough resilience to absorb losses without amplifying economic downturns.
France’s Exposure and How Climate Impacts Reach Business and Finance
France’s physical risk profile makes the need for measurement particularly concrete because the country is prone to flooding and drought, and official meteorological projections anticipate more frequent and intense heatwaves in the decades ahead. Météo‑France estimates referenced in the source material suggest temperatures could exceed 40°C by 2100 and rainfall intensity could increase by 15%, conditions that can intensify both acute disasters and chronic stressors. These hazards do not remain confined to “weather events” on a map; they manifest as business interruptions, infrastructure strain, agricultural constraints, and higher insurance costs after damaging events, all of which can affect profitability and repayment capacity. The broader macroeconomic implications can also be significant when climate impacts contribute to stagnating crop yields, influence food prices, and create persistent drags on productivity and growth, reinforcing the idea that climate change can act as a chronic opposing economic force rather than only a series of isolated shocks.
The Toolkit: Risk Mapping, Macroeconomic Methods, and the Data Problem
Banque de France is developing macroeconomic methodologies and risk mapping to identify which parts of the French economy are most vulnerable. It also emphasizes that physical risk is more complex to quantify than transition risk. The challenge is inherently multi-step because it requires translating hazards into damages and disruptions, then translating those impacts into economic outcomes, and finally linking those outcomes to financial exposures such as loans, collateral, and insurance liabilities. Banque de France highlights that simplified indicator approaches can be helpful for screening. However, it can miss key transmission channels when it relies on proportional or linear assumptions that do not reflect how firms adapt, how supply chains shift, or how financial contracts respond under stress. This is why its approach points toward a toolbox rather than a single model, recognizing that different hazards, sectors, and geographies require varying levels of granularity, depending on whether the objective is broad monitoring, sector-level vulnerability analysis, or portfolio-level stress testing.
Flood Modeling and Digital Twins: The Most Mature Physical Risk Application
Flood risk is currently the most advanced domain for detailed physical risk analysis, and Banque de France has worked with De Nederlandsche Bank and the Hong Kong Monetary Authority on a digital twin project that quantifies how flooding can affect firms and bank loans. In this approach, the analysis combines detailed flood hazard information with data on buildings and loan exposures to estimate how physical damage could translate into financial risk through the assets and operations that underpin borrower performance and collateral value. Digital twin methods are valuable because they provide a more direct bridge between the physical world and financial balance sheets, making it easier to see how exposure can concentrate in specific regions, sectors, and portfolios. Banque de France is also extending its modeling to other hazards, such as windstorms and heatwaves, while acknowledging that perils like wildfires can be more complex to estimate because they are highly variable, interact with different conditions, and create cascading impacts that do not follow a simple linear pathway from hazard to loss.
International Coordination Through NGFS and Shared Scenarios
Banque de France considers international coordination essential because physical climate risk is not confined to a single jurisdiction, and comparability is crucial when assessing systemic vulnerabilities and cross-border financial exposures. It works with the Network for Greening the Financial System, whose secretariat is hosted by Banque de France. It supports macroeconomic approaches and climate scenarios that can be shared and improved across central banks and supervisors. This coordination helps reduce methodological fragmentation, strengthens the credibility of assumptions, and supports more consistent communication of results to markets and stakeholders. Banque de France also emphasizes that it is still in a phase of building the methodological toolbox, but the intent is to make tools robust enough that they can eventually inform decisions, not just research outputs, while also being immediately helpful in monitoring risk to financial stability and shaping the way supervised institutions think about physical climate risk.
From Measuring Risk to Acting on Risk: Debates, Tradeoffs, and Next Steps
The growing sophistication of measurement also raises a more complex question: what should be done with better data once it exists? Some critics warn that central banks can end up “hiding behind measurement,” focusing on perfecting methodologies while delaying action or avoiding difficult coordination questions with governments and fiscal authorities. There is also concern that a narrow focus on exposure could encourage credit retreat from hazard-prone regions, potentially worsening vulnerability by reducing investment capacity where resilience is most needed. Other voices emphasize that physical risk analysis should be complemented by a broader macroeconomic lens that considers regional GDP impacts, labor market effects, public finance consequences, and supply chain spillovers, because these system-wide effects can feed back into financial stability in ways that go beyond direct asset damage. A recurring theme is that physical risks are lower in successful transition pathways, which supports the argument that supervisors should consider how macroprudential tools and incentives might strengthen loss-absorption capacity while also encouraging investments that support the transition and reduce long-run physical risk.
Sources:
- Costa, M. (2025, December 8). How Banque de France measures physical climate risks. Green Central Banking.
- de l’Estoile, E., Kerdelhué, L., & Verdier, T. (2024, December 12). Digital twins for bridging climate data gaps: From flood hazards to firms’ physical assets to banking risks. Bank for International Settlements.
- de l’Estoile, E., Kerdelhué, L., El Kaissoumi, L., & Gosset, L. (2025, November 18). Tools for quantifying physical climate risk (Post No. 418). Banque de France.
- Météo-France. (2025, November 5). Le climat futur en France : à quoi s’adapter ? Météo-France.
- Network for Greening the Financial System. (2024, November). NGFS long-term scenarios for central banks and supervisors: Phase V. NGFS.
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