European investors launch project on the physical risks of climate change

The Institutional Investors Group on Climate Change (IIGCC) is launching a new project to develop guidance for investors on how they integrate the risks and opportunities presented by the physical risks of climate change in their investment research and decision-making processes.

Many pension funds and asset owners recognise climate change as one of the largest systemic risks in their investment portfolios. An increasing number of investors have made commitments to low carbon investment, and there is significant interest in determining how investors can support the objectives of the Paris Agreement. To date, however, relatively little attention has been paid to how institutional investors might assess and report on risks and opportunities presented by the physical impacts of climate change, or on what they might expect from companies on the issue.

The project ‘Understanding Climate-Related Physical Risks for Investors’ seeks to address that gap. IIGCC is leading the initiative with the support of the Universities Superannuation Scheme (USS), one of the UK’s largest pension funds. Guidance will be developed with technical input from the specialist advisory firms Acclimatise and Chronos Sustainability, in collaboration with IIGCC members.

The guidance will:

• Provide an introduction to the investment implications – covering both risks and opportunities – of the physical climate impacts.
• Propose a process that investors can go through to identify, assess and manage climate-related physical risks across their portfolios.
• Provide high-level guidance on how investors might report on physical risk as part of their wider TCFD reporting.
• Offer practical suggestions on issues such as the selection and use of scenarios, the available tools and data sources for identifying and assessing risks, and an analysis of specific risks and opportunities in different asset classes.

The initiative is delivered as part of IIGCC’s ‘Investor Practices’ programme, which helps asset owners and managers better assess and manage both climate risk and opportunity, and to report on their actions more effectively.

Stephanie Pfeifer, CEO, Institutional Investors Group on Climate Change, explains: “In many ways, adaptation is the missing issue in the climate change debate. IIGCC’s new initiative will help investors to understand its importance and act on adaptation to climate change as an investment issue. This includes ensuring investors have the practical tools to account for the physical risks of climate change and are able to act on the opportunities found in addressing the issue, across both investment decisions and company engagement.”

David Russell, Head of Responsible Investment at USS, adds: “One of the key contributions of this project will be to focus on the risk posed by climate change across a range of asset classes. This will include sectors that are both dependent on access to water and other environmental resources, and those potentially impacted by a changing climate.”

The United Nations Environment Programme has shown that the cost of necessary adaptation to climate change is between $140 to $300 billion per year across the global economy by 2030 alone and point to a major gap in adaptation finance. This offers potential new investment opportunities, in which investors can help build broader climate resilience, while also mitigating future losses otherwise incurred. This initiative will help investors better understand the nature of this opportunity.

The broader economic damage resulting from the physical impacts of climate change are highly significant. A study by academics from the London School of Economic shows that 1.8% of the world’s financial assets are at risk with a 2.5°C rise in global temperature. Analysis currently points to a 4°C rise in global temperatures. In the worst-case scenarios, the losses could soar to $24tn, or 17% of the world’s assets, with devastating impacts across the global economy.