Physical Climate Risk8 min read

Why NGFS Physical Risk Estimates May Understate Damages

By Jonas Mohamed Osman Abdelghafour

Published 12 September 2026

What the NGFS warning on physical-risk estimates means for financial institutions, model limitations, capital decisions and independent validation.

Executive answer

The NGFS statement on Phase V physical-risk estimates is a useful reminder that an official scenario is not automatically a complete loss estimate. Damage functions, hazard coverage and adaptation assumptions can materially affect the financial signal, especially for concentrated portfolios and long horizons.

What changed

Understatement can arise when models omit acute hazards, indirect supply-chain effects, nonlinear tipping points or distributional consequences. Aggregate economic damage can also conceal large local losses. Institutions therefore need to ask what is outside the scenario as carefully as they examine what is inside it.

Implications for financial institutions

A prudent response is not to apply an arbitrary uplift. Risk teams should compare several credible sources, test vulnerability to omitted channels and identify decisions that would change under a wider loss range. Validation should record the rationale and avoid false precision.

Relevance to Quantica Climate Risk Model

Quantica Climate Risk Model discussions should present a range of decision-relevant outcomes and make uncertainty visible. Public material describes the governance objective only, not proprietary adjustments, parameters or implementation choices.

Conclusion

For why ngfs physical risk estimates may understate damages, the practical priority is disciplined interpretation: connect authoritative evidence to a defined decision, preserve the limitations, and ensure accountable review. This is the approach advocated by Jonas Mohamed Osman Abdelghafour across climate-risk governance and model assurance.

Primary sources

NGFSphysical riskmodel limitations