Climate change – navigating risks and opportunities

Climate change is becoming a defining theme of the global economy.

Rigorous strategies are needed for investors to manage risks and take opportunities during the expected transition to a decarbonised world. Our research and tools focus on providing new thinking and solutions to help guide investors as the impact of climate change unfolds.

How will the physical risks of climate change affect companies?

By Marc Hassler and Andrew Howard

Our new analysis can quantify the physical impact climate change has on companies around the world.  The costs could be considerable.

The potential costs to some companies of insuring their assets against the impact of climate change could equate to more than 4% of their market values, according to our new physical risk assessment.

This new analysis – the latest addition to Schroders’ climate change investment capabilities – focuses on the often-overlooked risks posed to bricks and mortar.

It is based on the premise that – in theory – companies could insure themselves against the physical damage they may sustain from climate change-induced environmental changes, such as extreme weather events.

Our physical risk framework – which we have applied to over 10,000 companies globally – calculates what businesses would have to pay to insure their physical assets against hazards caused by rising global temperatures and weather disruption.

Comparing that implied cost to companies’ market values provides a systematic way to help measure, monitor and manage the risks companies face.

Which sectors are most affected?

We have identified oil & gas, utilities and basic resources as the sectors most exposed to the physical impact of climate change. The potential cost of insuring their physical assets equates to more than 3% of their market values.

The sectors least at risk are technology, personal & household goods and healthcare.

Andrew Howard, Head of Sustainable Research, Schroders, said:

 “Disruption from the effects of changing weather patterns globally looks unavoidable – it seems inevitable that risks to physical assets and infrastructure will get bigger.

“However, most climate analysis focuses on the impacts of steps to limit temperature rises, such as carbon prices or clean energy investment. Physical risks, on the other hand, have received less attention.

“That oversight is remiss; the impacts are lower, but they are also more certain. Our proprietary framework assesses companies’ exposures to physical climate risks.

“The lag between greenhouse gas emissions and temperature rises means a further rise in global temperatures looks inevitable given the emissions we have already released.

 “Predictably, capital-intensive sectors operating in more vulnerable parts of the world face the biggest impacts, whereas those with asset-light business models are least exposed.”

This physical damage analysis will help inform the investment decisions of Schroders’ analysts and fund managers, as well as gauge the exposures facing the portfolios they oversee. 

It follows the launch of Schroders’ Climate Progress Dashboard and Carbon Value at Risk model, which have also been designed to help investors’ more accurately assess the risks posed by climate change.   

More information and insights on Schroders’ Sustainability strategic capability can be found on the team’s website here.

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