Transition and physical risk
intersect with the climate risk asset to create a difficult interplay.
In-depth investor analysis is
required to assess company and asset climate risk.
There are no clear patterns
indicating how resilient corporate assets are.
Care must be taken when
analyzing this information with regard to specific locations and industries.
The Taskforce on
Climate-related Financial Disclosures provides companies and investors with
guidelines to better understand and disclose their physical and transitioning
climate risks.
These risks are identified and
disclosed in a standardized way under the TCFD guidelines.
Companies only considered
material risks and opportunities when calculating their climate change
materiality.
For 51% of companies, the
materiality criteria was kept a secret.
Portfolio managers concerned
about physical and transition risks typically covered similar topics in their
reports.
Disclosed risks typically
include short-term and long-term implications for the portfolio and assets.
It's difficult to comprehend
what these terrifying risk estimates mean for individual businesses and the
financial institutions that lend to and invest in them.
A group of scholars from both
finance and climate disciplines identified four major reasons for this in an
article called “Asset-Level Climate and Cascading Financial Losses.”
It's hard to prove financial
losses from physical hazards such as weather.
This is because current
analysis methods for climate hazards aren't well enough to connect them to
people's assets- or even physical goods in general. Because these risks remain
murky, many institutions cannot properly determine their physical risk.
I- Physical climate risk
disclosures for asset owners
Studying this issue marks a major
step in the development of space finance.
Another beneficial consequence
is the increased transparency of companies regarding their tangible assets.
The United States Securities
and Exchange Commission proposed the climate risk disclosure rule with the goal
of making regulatory initiatives.
The rule was meant to be like
other initiatives such as the rule proposed by the SEC.
The proposed rule from the SEC
states that companies must identify the location of their property, process or
operation when determining physical risks.
This information must be found
at the zip code level.
Providing more location-based
asset data would be greatly enhanced by making such disclosures.
Companies and investors should
seek to better understand their climate Risk using guidelines provided by the
Taskforce on Climate-related Financial Disclosures.
They should also make greater environmental
disclosures and transparency.
Accurate long-term information
about an asset's worth is crucial when disclosing it.
This is because investing in
real assets is a long-term venture.
Potential customers will
demand to know the physical hazard mitigation measures installed at the
property level.
Although the long-term effects
of some climate change elements remain uncertain, they will increasingly want
to know about this information when buying real estate assets.
When performing financial due diligence
when selling an asset, using the TCFD structure is a reliable shortcut.
Providing a report using this
template aligns all information related to material climate topics.
II- Risk assessment for physical
climate risks
Many businesses need
information about physical climate risks in order to assess and disclose these
risks.
This is an evolving and
growing challenge that many businesses face.
There are even business
centers that provide this information so that their clients can measure
downtime and loss of cash.
Probabilistic physical climate
risk assessments determine the potential damage caused by specific acute
physical risks such as hurricanes, floods and wildfires.
The second step is to perform
a risk assessment that shows the damage potential caused by all physical
assets.
From 2035 to 2050, the
assessment covers the risk of tropical cyclones in Mexico on various time
scales.
This includes covering the
risks of Mexico's climate change on a short-term basis, 2035, or a long-term
basis, 2050.
New laws and technological
advances are likely to make physical risk assessment easier.
The barriers to this
assessment aren't insurmountable, and they're likely to decrease in the future.
Another big issue when doing
bank assessments is creating reliable methods.
COMMENTS