Analysing physical climate risk: Approaches for the finance sector

Analysing physical climate risk: Approaches for the finance sector

By Georgina Wade

A new report by the ClimINVEST project offers a summary of existing approaches financial actors can use to analyse physical climate risks.

ClimINVEST is an initiative that aims to facilitate financial decision-making by offering tailored tools for institutions, bridging the communication gap between climate researchers and the financial community, and contributing to capacity building on adapting to climate change. The tools should also help financial actors to disclose climate risk in their portfolios, in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Exploring the physical climate risks to a financial institution, the report “Getting started on Physical climate risk analysis in finance – Available approaches and the way forward” highlights the need for specific approaches to analyse physical climate risks to the financial sector and emphasises that action must be taken. A 2017 review sampling 80 financial institutions found that while 51 percent mentioned physical climate risks in their public documents, less than a quarter reported conducting a physical climate risk analysis. And while there are existing approaches out there, not all of the selected approaches cover every type of counterparties and every aspect of potential impacts.

The report provides an overview of available approaches. Selected service providers and approaches targeting different needs include Acclimatise’s Aware for Projects, WRI’s Aqueduct Water Risk Atlas, Carbon Delta’s Climate VaR, Carbone 4 CRIS and Mercer’s TRIP framework amongst others.

The authors conclude that even though financial institutions are increasingly becoming aware of physical climate risks, they still need to integrate them into their decision making. This is an opportunity for service providers to develop further services, however data availability is still a challenge as are imperatives of commercial business models. Finally, the authors highlight that further development of climate services might benefit from a co-design process between the climate change community and the financial community.

In its next phase, the ClimINVEST project will test a public interest co-design research approach to create actionable information on physical climate risk for financial institutions.

Access ClimINVEST’s full report by clicking here.


Cover photo by Boris Stefanik on Unsplash.

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