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How to assess and address system-level physical risks

Climate risk does not stop at the boundary of a building or facility. An organization’s resilience is inseparable from the health of the surrounding communities, ecosystems, infrastructure, and supply chains.

08/18/2026 · 3 minute read

Climate risk does not stop at the boundary of a building or facility. An organization’s resilience is inseparable from the health of the surrounding communities, ecosystems, infrastructure, and supply chains. Yet for many businesses, climate-related risks are still assessed too narrowly, often only at the level of individual assets. A more connected approach enables clients to better identify, assess, manage, and transfer system-level physical risks. The steps below can help clients begin to take that broader view.

What are system-level risks?

System-level risks are threats to the suppliers, customers, infrastructure, resources, ecosystem services, governments, regulators, capital providers, and communities that organizations depend on but do not fully control (see Figure 1).

Whereas asset-level risk is predominantly related to potential property damage and business interruption, systems-level risk is driven primarily by the threat of business interruption, with property damage as a secondary concern.

For example, a company may harden an asset against flooding or heat. However, if during an extreme weather event, transport links fail, the power supply is disrupted, workers cannot reach the site, or critical suppliers are impacted, the business is still exposed.

System-level risks are particularly important to consider in the built environment, where organizations depend on complex networks of infrastructure, labor, energy, water, logistics, public services, and local communities. In towns and cities, a heatwave, flood, or wildfire rarely remains purely a local physical hazard.

However, until now, these risks have often been underestimated. Traditional risk assessments tend to focus on physical assets because they are easier to model and more familiar to business leaders. By contrast, system-level dependencies are more diffuse. They cut across functions and stakeholders rather than sitting within a single team or budget. That makes them harder to own, harder to quantify, and easier to overlook.

01 | The Marsh Risk Climate Adaptation Framework: organizations should consider both asset- and system-level considerations

Practical steps to address system-level risk

Addressing these risks requires a broad approach. To build true resilience, organizations need to look beyond their own boundaries and actively engage with regulators, suppliers, peer organizations, and critical infrastructure providers.

As put forward in Marsh’s report, Addressing the system-level resilience gap, organizations can achieve this by taking a four-step approach: identify system dependencies, assess materiality, manage risk more effectively, and transfer residual risk where possible. This is an iterative process that should be embedded into location strategy, procurement, capital allocation, and enterprise risk management to support more resilient decision-making across the business.

Marsh has also developed practical checklists, available in the report appendix, aligned to each system-level climate risk that organizations operating in urban and industrial areas can use. Designed to be actionable, they provide a useful tool for risk managers and other risk owners across the organization.

Additionally, tools such as Marsh’s Insurance Enabler Framework can be used to identify where resilience measures can improve risk outcomes and where pricing pressure may point to deeper vulnerabilities.

Helping clients turn complex climate risk into informed action

In our work, we regularly encounter barriers such as climate risk being communicated in technical or scientific language that does not always resonate with senior decision-makers.

Another challenge is organizational fragmentation. In many businesses, climate resilience sits in silos — perhaps within sustainability, operations, risk, or business continuity — rather than being embedded across governance, capital allocation, procurement, and strategy. As a result, organizations may understand that system-level climate risks present a threat, but they do not always have a consistent way to translate that awareness into coordinated action.

At the same time, the benefits of resilience are often long term, indirect, or difficult to express in financial terms, while the costs are immediate and visible. As a result, system-level risk can appear less urgent than it truly is. Marsh’s framework and checklists provide clients with a practical way to turn this challenge into an effective response.

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Our people

Amy Barnes

Energy & Power, Climate & Sustainability Strategy Head, Marsh Risk

  • United Kingdom

Alexander Ackermann

PEMA North America Practice Leader, Marsh Risk

  • United States

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