{"status":"ok","message-type":"work","message-version":"1.0.0","message":{"indexed":{"date-parts":[[2026,10,20]],"date-time":"2026-10-20T15:41:18Z","timestamp":1792510878261,"version":"4.5.0"},"posted":{"date-parts":[[2026]]},"group-title":"SSRN","reference-count":0,"publisher":"Elsevier BV","license":[{"start":{"date-parts":[[2026,1,1]],"date-time":"2026-01-01T00:00:00Z","timestamp":1767225600000},"content-version":"unspecified","delay-in-days":0,"URL":"https:\/\/creativecommons.org\/licenses\/by-nc\/4.0\/"}],"content-domain":{"domain":[],"crossmark-restriction":false},"short-container-title":[],"abstract":"<jats:p>Despite the accelerating frequency of natural catastrophes and the growing risk of climate tipping points, physical climate risk remains scarcely incorporated into portfolio construction, in stark contrast to the attention already afforded to transition risk. This paper integrates physical risk into portfolio management through an asset pricing lens, proposing two practical and complementary methods to reduce physical risk exposure in active portfolios. A flexible penalty function is introduced, which scales with a firm's physical risk exposure and includes a tunable attention parameter, capturing heterogeneity in investor sensitivity to such risks, a feature motivated by the behavioural and political fragmentation observed across markets. The penalty function is intentionally generalisable and can be readily applied within existing optimisation programmes to other extra-financial risk metrics, such as biodiversity loss, water stress or pollution. In the first approach, expected risk premia are directly discounted by the penalty prior to a minimum-variance optimisation; in the second, the adjusted premia are incorporated as subjective views within a novel Bayesian Climate Black-Litterman (C-BL) framework. Empirical application demonstrates that both methods significantly lower portfolio exposure to physical risk while mostly preserving conventional financial performance. Nonetheless, the calibration of the attention parameter exposes a clear trade-off relationship between financial returns and reduced exposure to physical risks, bearing critical implications for policymakers and practitioners. The analysis further highlights the uneven global distribution of physical risks, and the highly correlated nature of financial assets, through which physical risk exposures diffuse across supply chains and sectors. Overall, this paper provides a methodological framework for integrating physical risk into portfolio decisions, contingent on improvements in data quality and availability, as well as regulatory guidance.<\/jats:p>","DOI":"10.2139\/ssrn.7634399","type":"posted-content","created":{"date-parts":[[2026,10,20]],"date-time":"2026-10-20T14:54:08Z","timestamp":1792508048000},"source":"Crossref","is-referenced-by-count":0,"title":["Climate Black-Litterman: Physical Risk Integration in Portfolio Management"],"prefix":"10.2139","author":[{"given":"Meghna","family":"Bhaugeerutty","sequence":"first","affiliation":[],"role":[{"vocabulary":"crossref","role":"author"}]}],"member":"78","container-title":[],"original-title":[],"deposited":{"date-parts":[[2026,10,20]],"date-time":"2026-10-20T14:54:08Z","timestamp":1792508048000},"score":1,"resource":{"primary":{"URL":"https:\/\/www.ssrn.com\/abstract=7634399"}},"subtitle":[],"short-title":[],"issued":{"date-parts":[[2026]]},"references-count":0,"URL":"https:\/\/doi.org\/10.2139\/ssrn.7634399","relation":{},"subject":[],"published":{"date-parts":[[2026]]},"subtype":"preprint"}}