By Laura Canevari
Investors and asset managers are increasingly taking action to advance their transition to a low carbon, climate resilient economy and prepare for the financial impacts of climate change. Such is the case, for example, of Macquarie Group Limited, a multinational independent investment bank and financial services company headquartered in Sydney, Australia. As part of their continued efforts to align to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), Macquarie conducted heat-mapping and climate scenario analysis on physical and transition risks in its holdings. The bank has released a new report reflecting on its progress to date against the four pillars of the TCFD (governance, strategy, risk management, and metrics).
Acclimatise deployed its HeatMapR toolkit to help Macquarie undertake a high-level analysis of physical climate risks on its global equity and lending portfolios against two climate scenarios. The heatmapping exercise used 1.5°C and 4°C warming scenarios*, representing good practice by selecting a high and low-risk scenario. The HeatMapR tool pulled climate hazards data for three time horizons, namely 2020, 2030 and 2050. A wide range of hazards were analysed in the exercise, including chronic climate change variables (e.g. temperature, precipitation, sea level rise) and extreme weather events such as bushfires. The results of these analyses were presented as a set of summary heatmaps, and a similar exercise for transition risk was conducted alongside Acclimatise’s physical heatmapping workstream.
As noted in Macquarie’s report, the Acclimatise HeatMapR outputs provide a strategic tool to identify potential areas of their holdings where more detailed analysis is needed; heatmapping can also be used to guide further analysis and investment decision making. The findings of the heatmapping exercise for physical climate risks show that most severe impacts are expected to occur after 2050, but also that climate vulnerabilities are different across sectors and sub-sectors and in particularly are highly dependent on the country of exposure.
Thorough its climate risk heatmapping and scenario analysis, Macquarie determined that physical and transition risks present in its holdings were not considered to be material. Reasons for this include the fact that the firm has a sufficiently diverse portfolio, and the their exposures to counterparties at risk are short term, as compared to the time scenarios examined. Finally, the exercises revelated that Macquarie has limited lending exposure to risky sectors.
Over the course of 2020 and beyond, Macquarie will continue implementing its guidelines on climate risk governance and continue to refine and embed climate change considerations within its existing risk management frameworks. In particular, it aims to continue refining scenario analysis and to further integrate these exercises into their existing risk procedures and stress testing. In addition, it also aims to assess the resilience of its business premises to physical climate risks in the coming year.
Click here to access Macquarie’s full report.
* scenarios are warming scenarios by 2100, above and a warming by 2100, relative to pre‐industrial levels.