Bringing physical climate risk into institutional investing
New report identifies the top climate and extreme weather risks that affect a company’s performance.
Incorporating physical climate risk into portfolio management – think flooding, wildfire or hurricanes that disrupt business operations for weeks at a time – has largely eluded investors despite warnings by the Task Force on Climate-Related Financial Disclosures (TCFD), and more recently, the International Sustainability Standards Board (ISSB). A new report by the Intact Centre on Climate Adaptation (Intact Centre) at the University of Waterloo will help to fill this void.
Climate Risk Matrices (CRMs) – developed by the Intact Centre – identify the top climate and extreme weather risks that affect a company’s performance, and ultimately share price. The CRMs reflect the collective advice that chief operating officers, working with climate experts, identify as priority climate risks that investors should consider prior to making a buy.
Climate risk disclosure must be used to help financial markets price risk and opportunity, particularly as extreme weather records are broken with growing frequency. “Fulsome disclosures must not only identify risks, but also identify what measures need to be implemented to reduce those risks, and in so doing allow institutional investors to meet their duty as fiduciaries” said Kathryn Bakos, of the Intact Centre, and co-author of the report.
The CRMs in the report addressed electricity generation and transmission, commercial real estate, insurance and banking.
“The financial community should lead the way in developing CRMs, not just for six sectors, but for twenty-six. There is no point in talking about TCFD, Sustainability Accounting Standards Board (SASB), ESG, or any other combination of letters, if at the end of the day this stuff doesn’t translate into action that lowers the risk profile of the investable universe”, said co- author, Dr. Blair Feltmate, head of the Intact Centre.
Physical climate risk is impacting companies across all sectors and institutional investors need to factor these growing risks into portfolio management.
According to Cedric Robert, CEO of Clearsum, “early and proactive investment in adaptation can increase the resiliency of business operations, protect and enhance portfolio values, and create long-term competitive advantages for organizations in a climate-constrained economy - CRMs help to achieve all of these, as our case study in the commercial real estate sector demonstrates”.
Sonia Baxendale, President and CEO, Global Risk Institute, considers the broad picture of climate change, suggesting that “transition risk related to getting off carbon should go hand-in-hand with assessing how extreme weather might impact the performance of an issuer, and this is where CRMs offer needed guidance”.
This report should catalyze action – and diminish complacency – by the majority of institutional investors who do not factor physical climate risk into portfolio management. This report offers a practical tool (CRMs) that investors can use to assess the exposure of investee companies to extreme weather and what measures need to be put into place to reduce those risks.
Visit the Intact Centre website to download the report, “Transitioning from Rhetoric to Action: Integrating Physical Climate Change and Extreme Weather Risk into Institutional Investing”.