New climate risk reports help businesses assess the impact of global warming

Credit: Imperial College London

The new climate risk “classification” announced today is the first framework of its kind to classify the risks of climate change to businesses.

Created by the Climate Financial Investment Center (CCFI) of the Business School New classification method Lenders, investors and regulators will be better able to better assess the risks of climate and natural capital that can affect an organization.

This report makes the first attempt to systematize natural capital risk into a systematic taxonomy that is not normally displayed in traditional risk and credit analysis. It is also the first attempt to understand the widespread physical and transitional climate risks that can affect a company’s financial profile.

The report groups the three traditional climate risks facing companies and adds additional categories as follows:

  • Both acute and chronic physical risks such as water and heat stress, sea level rise
  • Adaptation-related transition risks — how coastal infrastructure adapts to the effects of physical risks
  • Transition risk associated with mitigation, from regulatory compliance risk to reputation and litigation risk
  • Natural capital risk-risk that itself reflects the depletion of both renewable and non-renewable resources affected by climate risk factors

The first three risk categories represent traditional approaches to climate. risk assessmentAnd the report seek to organize these into levels of financial impact at the enterprise level, including margins, cash flows, leverage ratios, and potential impacts on asset valuations.

The fourth category represents the new risk assessment category. This is the first attempt to systematize such risks into a systematic framework. This constitutes a risk from natural disasters that can be accelerated as a result of some form of natural capital depletion or disruption, especially in the area of ​​water availability.

The four key indicators selected: subsidy loss risk, depletion risk, boundary condition risk, and geopolitical risk are becoming increasingly important policy objectives for both the public and private sectors.

Bob Bühl, Emeritus Researcher at the Climate Finance & Investment Center at Imperial College Business School and lead author of the report, said: However, this knowledge is useless to lenders and investors unless these risks are further subdivided in terms of their scope, timing, potential, and potential financial impact. “

The classification method aims to be a framework that helps stakeholders identify climate risk before it affects asset use, stranded assets, income and profit declines, or other financial indicators. increase.

“Without talking directly to the risks posed by climate change from the perspective of investors or creditors, certain companies or sectors are exposed to increasingly long-term climate impacts in terms of potential financial impacts. It is not possible to assess the extent to which it is, “Mr. Bühl said.

Michael Wilkins, Executive Director and Practical Professor of the Center for Climate and Financial Investment at Imperial College Business School, said: The EU’s green taxonomy is a useful tool as a set of investment opportunities, but it may be focused on the industrial sector rather than the enterprise, which is generally not the case, so its potential usefulness as a risk monitor. There are limits. Evaluate the costs associated with the transition you are trying to encourage. “

Increasing concerns among lenders, investors and regulators about climate risk have pointed to the need for more rigorous assessments, and business schools are more comprehensive than any other study done so far. It was decided to develop a typical taxonomy.

“This taxonomy is intended to complement traditional financial analysis and is useful for situations with a clearer perspective,” added Buhr. “At the same time, this is Classification method The economic impact of climate change becomes more apparent and more systematic and should be considered essential. “

Complete report, “What is climate Financial risk? A Field guide For investors, lenders and regulators ” download From the Imperial College Business School website.

European regulators ask banks to assess climate risk

Quote: The new Climate Risk Report is Global Warming (February 2022) obtained by companies from on February 23, 2022. 23 days) to help assess the impact

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New climate risk reports help businesses assess the impact of global warming

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