Assessing financial risk to property portfolios from physical rainfall extremes

Abstract. Physical climate risk from extreme rainfall is often poorly understood by financial investors, potentially extending to pension funds that manage assets of substantial societal importance. There is a growing need for investors to better understand these risks to ensure financial resilience in a changing climate. We present a transparent framework to estimate current and near-future financial risk from flood damage using rainfall hazard information from regional climate projections, river flood maps, and depth-damage functions. Synthetic portfolios are constructed from non-residential built-up surface data and country-specific property values, enabling calculation of Expected Annual Damage. Results show that this physical climate risk is already substantial and projected to rise consistently across Europe, with some regions experiencing particularly large increases. Portfolio composition strongly influences risk, with asset location and value at-risk inducing greater variability than climate model uncertainty. We also demonstrate how adaptation could significantly reduce EAD and deliver a strong financial return within a short time frame, reinforcing its role as a cost-effective strategy for managing climate-related risks. This approach offers a pragmatic and transparent method for quantifying an element of financial risk from extreme rainfall using openly available datasets. Our approach is intended primarily for demonstration and awareness purposes, given its limitations such as the simplified modelling of rainfall–flood relationships and the omission of potential future changes to floodplains. Nonetheless, the findings highlight the urgent need for financial actors, such as asset managers, to integrate physical climate risk into decision-making to safeguard long-term financial resilience.