More focus needed on physical climate risk

ESG Risk Review talked to Stuart Large, business development director, Jupiter Intelligence, about climate risk – what it includes, getting the right data and analytics, and building resilience and enabling adaptation.

What does climate risk include?

Stuart Large: Climate risk includes both physical and transition risk. Physical risk is closely related to risks arising from climate change impacts and climate-related hazards, while the term ‘transition risk’ typically refers to risks associated with transition to a low-carbon economy. Physical risks involve risks from climate change including risk to facilities and infrastructure, impact on operations, water and raw material availability, and supply chain disruptions. Physical climate risks can be event driven (acute) or associated with longer-term shifts in climate patterns (chronic).

Are these best dealt with separately or part of a holistic approach?

Stuart Large: These are best dealt with as a holistic approach but Jupiter’s opinion is that physical risk does not get the attention it deserves. The potential threats to our economic stability of not understanding physical impacts to businesses could be devastating. So, while much of the world is focused on getting to net zero, or tackling transition risk in a silo, governments and companies must focus on physical climate risks to learn how to adapt and build resilience until we get to net zero.

Is it difficult for risk managers to get the right data on climate risk for their organisations? What sort of data is required?

Stuart Large: Collecting data for physical climate risk consists of obtaining information on key assets that are critical for operations and that, if impacted by extreme weather from climate change, could pose a material threat to the business. From there, climate risk analytics like those from Jupiter do the rest. The analytics technology identifies which assets are at risk today and up to the year 2100 so that organisations can find ways to adapt and mitigate losses.

Is this a particular problem when it comes to supply chains?

Stuart Large: Supply chains are already being affected by extreme weather events from climate change. Whether it be the impacts to crops or impacts to physical assets, the supply chain will continue to be disrupted and more dramatically as time goes on. Pharmaceutical companies like AstraZeneca are starting to see the value of physical climate risk analytics. Imagine not being able to get medicines to people due to a broken supply chain, because a manufacturing plant is damaged in a hurricane, as happened in Puerto Rico in 2017, or extreme weather creates flooding in major distribution centre.

Is this largely driven by reporting requirements or a true desire for resilience?

Stuart Large: The short answer is both but it’s truly based on each company’s stage along their climate understanding journey. Jupiter actually wrote an eBook on this topic laying out the five stages of climate risk maturity. What we found is that many companies are focused on meeting regulatory reporting requirements and some are taking things one or two steps further to protect their businesses, build resilience, and our economic stability in the grand scheme of things.

What are risk/insurance managers looking for from climate analytics – is it partly about insurer’s underwriting requirements?

Stuart Large: Insurers are looking to reduce their risk. For instance, in California, many insurance providers have pulled out of high-risk wildfire areas, leaving many homeowners in the lurch with no insurance or with minimal insurance through regional plans. Flooding in Florida is another area where we are seeing insurers pulling out. Being armed with climate risk data helps them look deep at their portfolios and portfolio risk and adjust their business strategies. Banks are similarly looking at the same when it comes to lending. Do you want to lend $1m for a home in a high risk area when its value will be $700k in 20 years based on climate data?

Is cat modelling available to corporates in the way it is available for (re)insurers?

Stuart Large: Cat models are fine, but they are flawed in projecting physical climate risk and should not be used alone.

When it comes to climate resilience, what are the key factors?

Stuart Large: Climate resilience comes from understanding the risk first. Then comes adaptation. While we wait for a net-zero world, companies need to adapt, which means taking the known risk that was identified from using climate risk analytics, and finding ways around what is coming. If we know that in 2050 extreme heat will stop the supply chain because workers can’t drive delivery trucks in weather over 35°C at a certain level of humidity, without air conditioning, we adapt with air-conditioned vehicles or make other adjustments. If we know that flooding or other extreme weather will reduce wheat production in the US, we find ways around whatever that extreme weather brings. It’s all about adaptation while we build toward a stronger future.