By Robin Hamaker-Taylor
Acclimatise has led the development of a new guidance document on physical risk assessments for investors. Developed with the Institutional Investors Group on Climate Change (IIGCC), the guidance collates good practice for physical risk assessments across the stages of a typical risk assessment process. The Understanding Physical Climate Risks and Opportunities guidance was developed over the last year, in close conjunction with IIGCC staff, leading investors, and Dr Rory Sullivan of Chronos Sustainability.
Download the full guidance here
The guidance helps investors understand physical climate risks and how they are measured. It also provides investors with practical guidance on how they can begin to analyse, assess and manage the risks and opportunities presented by physical climate hazards.
Written specifically with investors in mind, the guidance can be used without prior climate expertise. Examples of how peers have conducted physical risk assessments and processes are included throughout, and investors are provided with 20 key questions to help them to plan their assessments or sense-check what they have already done.
Why does physical climate risk matter to investors?
The Earth’s climate has already warmed by approximately 1.0°C above pre-industrial levels, according to the IPCC. Current trajectories show temperatures are expected to rise by 3.2°C by the end of the century, even if all current unconditional commitments under the Paris Agreement are implemented, according to the UN Environment Programme.
More frequent and more extreme weather and climate events, as well as gradual shifts in rainfall patterns, temperature, sea levels, sea ice and glacial retreat, are some of the changes already underway. Physical risks are here now and will continue to unfold, with financial implications throughout the investment chain.
Many asset owners and managers recognise climate change as one of the largest systemic risks to their investment portfolios. To date, however, relatively little attention has been paid to how institutional investors might assess and report on the physical risks and opportunities arising from climate change. This is despite a growing evidence base demonstrating the economic consequences of increasingly severe climate change.
“As a changing climate alters the fabric of economies, societies and environments across the world, it pays to be prepared,” said John Firth, CEO, Acclimatise. “The investors that can act now to both manage physical climate risks and grasp the opportunities to invest in resilience stand to be in the most secure position in the long-term. This guidance acts as a first step to achieving this.”
What does the report cover?
The newly published guidance will help investors to:
- Better understand the investment implications – both risks and opportunities – resulting from the physical impacts of climate change.
- Take practical steps to identify, assess and manage climate-related physical risks across their portfolios, through the approaches covered in the guidance.
- Identify ways to invest in solutions that support greater resilience to climate change as well protecting investments from physical-climate related risks. Both approaches are key to strengthening broader societal adaptation to climate change.
- Draw on additional available tools and data sources in identifying and assessing specific risks, and opportunities, across different asset classes.
The guidance document provides a comprehensive overview of physical climate risk assessment and management, including the following chapters:
- Review of physical climate risks and how are they measured;
- Chapters which follow the steps of a physical
- Understanding the context
- Setting the objectives and scope
- Physical climate risk assessment variable selection (timescale, scenarios);
- Analysis of physical climate risk-related opportunities; and
- Monitoring, management and reportingof physical climate risks.