As the real-world impacts of the climate crisis become more apparent, investors need to better understand physical climate risks. We explore how it’s possible to gain a deeper understanding.
Much of the investor focus on climate risk to date has been on managing ‘transition risk’, defined as the financial risk associated with changes in areas such as regulation, sentiment, or technology on the route to decarbonisation. However, emphasis on the physical risks that arise from changes in weather and climate is ramping up, particularly after another summer of extremes.
This year alone, China saw its most severe heatwave on record, leading to a power crunch and factories being shut. In the UK and Europe droughts were affecting ~60% of the landmass by August, placing agriculture at risk. Major rivers that serve as crucial transport and trade routes, like the Rhine, Po and Thames, experienced abnormally low water leading to severe restrictions of cargo ships. Wildfires caused thousands of evacuations, as an area across Europe equivalent to about one-fifth of Belgium was engulfed, with experts warning that this will be a record year of wildfire destruction. The forest fires also released millions of tonnes of CO2 into the atmosphere, reflecting the often exacerbating and circular nature of climate change and its impacts.
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Read more about why managing physical climate risk matters, the limitations of data and how we can respond. Download the full viewpoint to discover more.