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physical risk pricing framework

Gain the ability to price physical risk

Nature remains largely external to financial markets, so the ecosystem conditions that shape climate- and nature-related physical risk are still not priced endogenously. TLG’s framework closes that analytical gap by bringing hazard, exposure, ecosystem vulnerability, and sector dependency into one pricing architecture, translating physical risk into conventional financial mechanisms until the market is able to internalise it directly.

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the market failure

Physical risk is mispriced because it is largely absent

Absent from the inputs

Equity betas, credit spreads, insurance premia and cash-flow forecasts all assume the underlying ecosystem is stable. None ingest ecosystem integrity.

Nature is a buffer or an amplifier of hazards

A flood, a drought, a heatwave - the economic damage depends on how degraded the underlying ecosystem already is. Vulnerability is non-linear. Conventional models don't include this.

Disclosure without price

TNFD and CSRD push reporting on nature, but they don’t price it. Until physical risk is endogenously priced, and unless otherwise explicitly priced the application of transitional tooling, the risk is being absorbed quietly - by lenders, by equity holders, and by insurers.
for equity

Nature Risk Premium (NRP): The missing term in the cost of equity

NRP is an additive adjustment to the cost of equity within CAPM, calibrated from vulnerability (V = 1 − EII), physical stress (P = Hazard × Exposure) and sector-specific dependency coefficients. It is designed as a transitional pricing signal, correcting for externalities until markets converge to endogenous pricing over time.

Re = Rf + β · (Rm − Rf) + NRP
NRP = a(V) + b(P) + c((V)(P))²
An additive adjustment within CAPM — it operates inside existing valuation logic, not in place of it.
Fig 01 / Nature Risk Premium formula

V = vulnerability, derived from measured ecosystem integrity

P = physical stress: hazard × exposure

a, b, c = dependency coefficients, calibrated per sector

for debt

Nature Risk Adjustments (NRA): the same logic, applied to credit

Debt prices risk through creditworthiness, not premia. The Nature Risk Adjustment (NRA) turns the same inputs into rating adjustments that flow through to credit spreads, collateral haircuts, covenant design and loan tenor.

Expected Loss = PD × LGD × EAD
Ecosystem degradation raises PD directly; where collateral value depends on land condition, it raises LGD too.
Fig 03 / Nature Risk Adjustment
Sector calibration

Sector-calibrated. Because dependency is sector-specific.

NRP coefficients vary materially by sector. The dependency coefficient governs how strongly an industry’s economics are coupled to ecosystem services.

NRP (pp) by physical stress × ecosystem integrity
Fig 04 / NRP lookup — Agriculture example
use cases

Where it applies

Equity valuation / DCF

Apply the NRP as an additive adjustment to the cost of equity (CAPM extension), increasing the discount rate for companies with high ecosystem exposure — without requiring changes to cash flow forecasts.

Portfolio screening

Use NRP scores to rank or filter holdings by physical risk exposure, flagging assets in high-dependency sectors (e.g. agriculture) operating in degraded ecosystems.

ESG / sustainability integration

Embed a quantified, financially-expressed nature risk signal into equity analysis frameworks alongside existing ESG scores.

Credit assessment

Apply Nature Risk Adjustments (NRA) to probability of default and loss given default inputs for issuers with material ecosystem dependencies

Credit rating calibration

Justify discrete rating adjustments for borrowers in land-backed, infrastructure, or nature-dependent sectors under elevated hazard-exposure conditions

Loan structuring

Inform collateral haircuts, covenant design, and loan tenor for assets whose long-term performance is tied to ecosystem integrity (land, infrastructure, project finance)
what you get

Built for you in Landler

The framework runs in Landler, deployed as a custom build. We scope it around your portfolio, your sections, your instruments, and your needs.

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