Measuring physical climate risk

Executive summary

  • At the end of last week, the US Global Change Research Program Climate Science Special Report stated that it is extremely likely that human activities, especially emissions of greenhouse gases, are the dominant cause of the observed warming since the mid-20th century. Thus far, investors’ approach to boosting climate resilience has typically involved measuring the carbon emissions of issuers in their investment portfolios. This carbofoot-printing exercise helps assess the transition risk (i.e. the transition to a low-carbon economy) to a portfolio as global efforts to limit temperature rise below two degrees centigrade gather momentum. However, this strategy fails to take into account the physical risks of climate change, such as sea level rise, droughts, flooding, and cyclones. These, in our mind, pose a far more immediate threat to investment portfolios.
  • Addressing this gap, however, is far from easy. To do so, investors first need to identify the physical locations of the companies they invest in, a task made tricky by the generally poor corporate disclosure around these topics. Investors then need to master the increasingly complex science around climate change to understand the vulnerability of these corporate production and retail sites. And finally, investors would need to account for the nature of the business activity being carried out in these locations to gauge the sensitivity to specific climate hazards. For instance, more energy and water intensive industries will be more directly affected by extreme heat and water scarcity while sectors such as construction, mining, retail, tourism and agriculture will be particularly sensitive to daily weather fluctuations.
  • Thankfully for investors, this white paper seeks to do all of that. We leverage data analytics from Four Twenty Seven, which maps the physical locations of corporate facilities around the world alongside climate models. Four Twenty Seven’s scoring methodology identifies both the geographic exposure to climate hazards of individual companies, but, also the business sensitivity of facilities or companies to those hazards. In our view, this delivers powerful results since we can now identify over a million corporate sites and the risks to each site from heat stress, extreme rainfall, water stress and sea level rise.
  • Asia is particularly vulnerable since five out of six people occupying the highest climate risk zones globally live there. The Asian Development Bank warned that, without mitigation action, Asia will experience temperature rise of six degrees centigrade by the end of the century.  Of extreme concern is the region’s vulnerability to sea level rise. For example, China leads the world in terms of coastal risk with 145 million people and economic assets living on land ultimately threatened by rising seas. Hence, Four Twenty Seven has mapped the physical climate risks for 500 large and mid-cap constituents of an Asia ex-Japan listed equity index.
  • We believe investors have no place to hide when it comes to the effects of physical climate change since even if emissions were cut to zero tomorrow, society will still face intensifying extreme weather events over the next several decades. We are keen to promote the disclosure by companies of annual and once in a lifetime climate risks so that we can manage these risks even more accurately going forward.
  • We hope you find this white paper informative and we very much look forward to discussing with you the ways to address the multitude of risks and opportunities physical climate risk presents to corporates, investors, and regulators around the world. 
  • Click here to read the whole article.

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