Investors demand enhanced physical risk information due to escalating climate dangers
In the face of increasing extreme weather events, the need for proactive investment strategies that integrate climate risk data has become more crucial than ever. These strategies are essential for ensuring long-term financial resilience.
The International Sustainable Standards Board (ISSB) defines physical risks as those resulting from climate change, either event-driven or from longer-term shifts in climate patterns. However, a recent research by Nest, UBS Asset Management, and the University of Oxford finds corporate disclosures on physical climate risks to be limited, incomplete, and inadequate.
The research emphasizes the urgent need for investors to better integrate physical climate risks into their strategies. It recommends that third-party data providers should enhance the clarity and consistency of analytical models and data on physical risk events.
The paper also suggests that companies should adopt a value chain approach for comprehensive risk assessment, extending beyond operational boundaries. This includes the availability and affordability of insurance, disclosing asset geolocations, quantifying the effects of previous material physical risk events, and potential future risks.
Current climate models and associated analytics face limitations such as limited insights on localized impacts, poor transparency on model assumptions, heavy reliance on proxies and estimations, and high uncertainty on corporate and financial decision making.
To address these challenges, Nest, UBS Asset Management, and the University of Oxford propose several measures to enhance clarity and consistency in reporting physical climate risks for investors. These measures focus on developing standardized frameworks and guidance to ensure that disclosures are comparable, transparent, and decision-useful.
The recommended approaches include standardized reporting frameworks, consistent terminology and metrics, scenario analysis and stress testing, integration with financial decisions, transparency and disclosure, and active engagement with companies.
These measures aim to make climate risk information more actionable for investors by improving the quality and usability of disclosures. By implementing these measures, listed corporates can provide granular, location-specific information about physical risks, and regulators and capital markets can adopt uniform frameworks for integrating climate risk data into financial decision-making.
It is important to note that without improved data and clearer methodologies, investors risk misallocating capital and failing to protect portfolios from climate-induced disruptions. As carbon emissions from fossil fuels and land-use change continue to increase, worsening physical climate risks, it is essential that these measures are implemented to ensure a sustainable and resilient financial future.
Incorporating environmental science and climate-change insights, the research urges investors to integrate physical climate risks into their strategies, utilizing the recommendations from Nest, UBS Asset Management, and the University of Oxford. These suggestions include standardizing reporting frameworks, adopting a comprehensive value chain approach for risk assessment, and advocating for enhanced clarity and consistency in analytical models and data on physical risk events from third-party data providers. This proactive approach in financial investing could potentially help listed corporates provide more actionable climate risk information, ensuring a sustainable and resilient future amidst escalating physical climate risks.
