Measuring What Matters: A New Approach to Assessing Sovereign Climate Risk

December 3, 2020 – Four Twenty Seven Report.  More frequent and severe extreme events driven by climate change pose a significant threat to nations around the world and understanding who and what is exposed to climate hazards is essential to pricing this risk and preparing for its impacts. This new report and underlying analytics assess sovereign exposure to floods, heat stress, hurricanes and typhoons, sea level rise, wildfires, and water stress based on the only known global dataset matching physical climate risk exposure to locations of population, GDP (Purchasing Power Parity) and agricultural areas within countries. 

Read the full report.

Globally, increasingly severe climate conditions impose growing pressure on populations and economies. The implications on economic growth, welfare, production, labor, and productivity are large, with potential material impacts on sovereign credit risk. However, assessing sovereign climate risk presents significant challenges. While most approaches to quantifying future climate risk exposure for sovereigns measure the average exposure over the entire territory of a country, this doesn’t capture whether the populated or economically productive areas are exposed to extremes. Likewise, averages of exposures to several climate hazards can mask extreme exposure to a particular hazard in a certain area of a country.

We’ve mapped the co-occurrence of hazards and exposures, explicitly factoring in the spatial heterogeneity of both climate hazards and people and economic activities across a country. This new report, Measuring What Matters – A New Approach to Assessing Sovereign Climate Risk, provides an analysis of the data. We find that all nations face meaningful risks despite their variation in size and resources. Explore sovereign climate risk in the interactive map below, based on both total and percent of a nation’s population, GDP (PPP) and agricultural areas exposed to climate hazards in 2040.

 

Key Findings:

  • By 2040, we project the number of people exposed to damaging floods will rise from 2.2 billion to 3.6 billion people, or from 28% to 41% of the global population. Roughly $78 trillion, equivalent to about 57% of the world’s current GDP, will be exposed to flooding.
  • Over 25% of the world’s population in 2040 could be in areas where the frequency and severity of hot days far exceeds local historical extremes, with negative implications for human health, labor productivity, and agriculture. In some areas of Latin America, climate change will expose 80-100% of agriculture to increased heat stress in 2040
  • By 2040, we estimate over a third of today’s agricultural area will be subject to high water stress. In Africa, over 125 million people and over 35 million hectares of agriculture will be exposed to increased water stress, threatening regional food security.
  • By 2040, nearly a third of the world’s population may live in areas where the meteorological conditions and vegetative fuel availability would allow for wildfires to spread if ignited.
  • Over half of the population in the most exposed small island developing nations are exposed to either cyclones or coastal flooding amplified by sea level rise. In the United States and China alone, over $10 trillion worth of GDP (PPP) is exposed to hurricanes and typhoons.

Read the full report.

Read the press release.

Contact us to learn more about accessing this unique dataset or explore our other physical climate risk data for banks and investors.

 

*Erratum: In Table 1 of a previous version of this report the “Agriculture Area at High Risk” column was said to be in units of 1 billion hectares. However, it is in units of 100 million hectares. 

Podcast: Banks are Getting Interested in Big Data to Figure out Their Climate Risk

How are banks, investors and financial regulators addressing climate risk?  Founder & CEO, Emilie Mazzacurati, joins Molly Wood in the Marketplace Tech podcast series, “How We Survive,” to discuss climate risk assessment and risk mitigation. The conversation covers regulatory developments, increased transparency on climate risks, resilience investment and the impact of COVID-19 on climate change conversations.

Newsletter: US Climate Risk Disclosure, Climate at Moody’s ESG and more

Four Twenty Seven's monthly newsletter highlights recent developments in climate risk and resilience. This month we feature an analysis on US climate risk disclosure, highlight developments at Moody's ESG Solutions and share recordings of recent climate risk events.

In Focus: Are U.S. Corporates Ready for Climate Risk Disclosures?

Analysis: The State of Climate Risk Disclosure in the US

The results from the U.S. presidential elections signal an impending radical shift in U.S. climate policy. President-elect Biden’s transition team identified climate change as one of four top priorities, promptly followed with the appointment of John Kerry as special envoy for climate. As part of his transition plan, Biden announced ten executive actions related to climate change that he intends to take on his first day in office. One of these measures is the requirement for public companies to disclose climate risks and greenhouse gas emissions in their operations and supply chains. This disclosure requirement aligns with a global trend, following similar announcements in the UK and in New Zealand.

In light of this increasing focus on climate risk regulation, our latest analysis uses the TCFD Climate Strategy Assessment dataset from Moody's affiliate V.E to explore how US firms stand against policy recommendations outlined in recent reports by the US Commodity and Futures Trading Commission (CFTC) and the Business Roundtable (BRT), including implementing a carbon price, conducting scenario analysis and creating products that contribute to the transition to a low-carbon economy.

We find that the largest US corporations tend to be slightly behind in terms of disclosing key indicators compared to their international peers. However, among all assessed regions, not even a quarter of the firms disclose the indicators reviewed in this assessment. This demonstrates the significant room for progress and shows that increasing firms’ capacity to assess and disclose climate risks in an informative manner remains a global challenge, aligning with findings in the TCFD's 2020 Status report released last month.
Read the Analysis
Climate Risk at Moody's ESG Solutions

Emilie Mazzacurati Appointed Global Head of Moody's Climate Solutions

Moody's announced last week that Four Twenty Seven Founder and CEO, Emilie Mazzacurati will oversee the climate solutions suite within Moody’s ESG Solutions Group, a new business unit formed earlier this year to serve the growing global demand for ESG and climate analytics. As part of its climate solutions suite, Moody’s ESG Solutions provides risk measurement and evaluation tools to understand, quantify and manage physical and transition risks, informing due diligence and risk disclosure in line with the recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).
Emilie also remains CEO of Four Twenty Seven, which is now fully owned by Moody's. 

Moody's Analytics Wins Climate Risk Award at Chartis RiskTech100®

Moody’s Analytics won the Climate Risk category in the 2021 Chartis RiskTech100®  highlighting its commitment to integrating climate analytics into its world-class risk models.
Moody’s Analytics' offering helps customers first identify whether they have exposure to climate risk in their portfolios and then quantify the credit risk implication of climate risk factors. These solutions incorporate climate risk analytics from Moody's ESG Solutions powered by Four Twenty Seven and V.E.

Moody’s: Climate Risk and Resilience at US Airports

Climate change will expose the airport sector to increased physical climate risks within the next two decades. In its report, US airports face growing climate risks, but business model and resiliency investments mitigate impact, Moody’s Investors Service leverages Four Twenty Seven’s physical climate risk data to explore potential damages from increased exposure of US airports to floods, heat stress, hurricanes, sea level rise and wildfires. The report finds significant exposure to floods and sea level rise, which can damage crucial structures, leading to significant costs or rendering the assets unusable. Hazards such as heat stress and wildfires present risks with implications for take-off and landing. Airports often undertake long-term capital intensive projects and integrating resilience measures into planning these investments will be critical. Register for free to read the report.
Climate Change and Financial Stability

Financial Stability Board Releases Report on Climate Risk

Yesterday the Financial Stability Board (FSB) released its report, The Implications of Climate Change for Financial Stability, outlining the ways in which physical and transition risks may affect the financial system. It highlights how physical risks can decrease asset prices, increasing uncertainty and how a disorderly transition could also destabilize the financial system, while an orderly transition is expected to have a less significant impact on asset prices. Likewise, the report emphasizes that climate risk could amplify credit, liquidity and counterparty risks and interact with other macroeconomic risks, with significant implications for financial stability.
Earlier this month the Federal Reserve announced its application to join the Network for Greening the Financial System, expecting to gain membership by the group's annual meeting next April. The Governor of the US Federal Reserve is also the Chair of the FSB and such recent events may foreshadow more attention to climate risks at the Fed.
Public Consultations on Climate Risk

EIOPA Consultation on Climate Change Scenarios

The European Insurance and Occupational Pensions Authority (EIOPA) opened a public consultation on its draft opinion on the supervision of the use of climate change risk scenarios in ORSA. This consultation is a follow-up to EIOPA's recommendations that insurers integrate climate risks into their governance and risk management beyond a one-year time horizon, aiming to provide additional guidance on the supervision of these processes. Respond by January 5, 2021.

Hong Kong SFC Consultation on Climate Risk Management for Funds

The Hong Kong Securities and Futures Commission (SFC) opened a public consultation on its proposed guidance for fund managers to integrate climate risk into their investment decision-making and to release climate risk disclosures. The guidance applies to all fund managers, while those with at least HK$4 billion under management would have to comply with additional requirements, such as disclosing more quantitative metrics. The recommendations reference the TCFD Recommendations to encourage consistency in risk disclosure. Respond by January 15, 2021.

TCFD Consultation on Forward-looking Metrics

The Task Force on Climate-related Financial Disclosures (TCFD) released a public consultation on decision-useful forward-looking disclosure metrics for financial institutions. Recognizing the growing need for standards guiding forward-looking, comparable climate risk disclosures, it solicits input on the utility and challenges of disclosing certain forward-looking metrics, including metrics on implied temperature rise and value at risk. Respond by January 27, 2021. 
 
Climate Analytics for Financial Risk Assessment: Panel Recordings

Moody's Analytics Synergy Americas Conference

Founder & CEO, Emilie Mazzacurati, and Moody’s Analytics Managing Director, Global Head of Quantitative Research, Jing Zhang, discuss the impacts of climate risk on credit risk in the panel, “How Floods, Wildfires, and Heat Stress Can Play a Role in Financial Reporting and CECL.” Register for free to access the recording.
 

Risk Australia Virtual 2020: Taming the Green Swan

Emilie Mazzacurati presents a keynote presentation titled “Taming the Green Swan: Incorporating Climate Risk into Risk Management.” She covers changes in the regulatory environment and how investors can use science to inform risk management and investment decisions. Emilie discusses progress made on climate risk disclosure to date, explains the latest thinking on conducting scenario analysis for climate risks and provides case studies of the economic impacts of climate risk in Asia and Australia. 
Webinar: How Real Estate Can Adapt and Prepare for Climate Risks

Join us on Thursday Dec. 10 at  9am PST / 12pm ET / 5pm GMT

We’re already seeing the impacts of climate change on our real assets—so how do we better prepare for future climate events? Four Twenty Seven will join CBRE, Measurabl and Nova Group GBC to discuss the full process of integrating physical climate risk management into real estate investment. The webinar will include an explanation of the climate data driving the analytics, how to understand physical climate risks alongside broader ESG data and how to leverage this information to mitigate risk by building resilience.

Speakers:
  • Zachary Brown, Director of Energy and Sustainability at CBRE
  • Yoon Kim, Managing Director, Global Client Services at Four Twenty Seven
  • Cameron Ravanbach, Account Manager at Measurabl
  • Rob Jackson, Vice President, Equity Markets Group at Nova Group, GBC
Register Here
Upcoming Events

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Are U.S. Corporates Ready for Climate Risk Disclosures?

Introduction

The results from the U.S. presidential elections signal an impending radical shift in U.S. climate policy. President-elect Biden’s transition team identified climate change as one of four top priorities, promptly followed with the appointment of John Kerry as special envoy for climate. As part of his transition plan, Biden announced ten executive actions related to climate change that he intends to take on his first day in office. One of these measures is the requirement for public companies to disclose climate risks and greenhouse gas emissions in their operations and supply chains.

This disclosure requirement aligns with a global trend, following similar announcements in the UK and in New Zealand, with other financial regulators across Europe and the Asia-Pacific also actively considering such measures.

Disclosures are but one of many policy measures the new Administration may implement to address potential risks from climate change on financial markets and the economy. The report published by the US Commodity and Futures Trading Commission (CFTC) in September 2020 provided an extensive list of policy recommendations for financial regulatory agencies and the government at large to regulate climate risk.

A number of these policy recommendations overlapped with the September 2020 report from the Business Roundtable (BRT)[1], where large corporations employing over 15 million in total and representing $7.5 trillion in assets(revenues) called on bold policy action to address the looming climate crisis.

Our analysis examines recommendation from the BRT and CFTC, alongside data on corporate risk disclosure, to provide an indication of how US firms are currently standing against the recommendations, and to provide a comparison to other markets.

Methodology

We use the TCFD Climate Strategy Assessment dataset from V.E, an affiliate of Moody’s, which provides a granular view of how 2,855 companies report in line with the TCFD recommendations. This data is based on a comprehensive analysis of companies’ risk disclosures, across sectors and regions. For the purpose of this analysis, we grouped firms based on the region in which they’re listed, comparing the progress of firms in the US (498 companies), Canada (109), Japan (399) and the European Union (EU) (840). Each of these regions have different approaches to  climate policy, with the EU leading the way in terms of regulatory developments for assessing and disclosing climate risk, while Japan expects markets to address financial risks from climate change through emerging best practices and market pressure. Comparing recommendations from the BRT and CFTC to companies’ risk disclosures, we grouped our analysis into two sections, first looking at recommendations around emissions reductions efforts and then discussing recommendations around risk management.

Emissions Reductions

Carbon price

Both the CFTC and BRT recommend imposing a carbon price to develop a clear price signal associated with greenhouse gas (GHG) emissions. Firms sometimes use  internal carbon pricing as a management tool, which suggests that they are more prepared to adjust to a nationwide carbon price.

We find that only 3% of assessed US firms report using an internal carbon price, which is fewer than Canada, the EU and Japan. Alongside Canada, US firms also have the highest average carbon footprint of the assessed regions, based on carbon footprint data from V.E. However, Canada shows the largest proportion of firms reporting an internal carbon price, at 19% of firms. The data shows that US firms are behind their peers and have not leveraged the use of an internal carbon price as a management tool to incentivize carbon reductions and price the externalities associated with carbon emissions.

However, we find that many firms that disclose internal carbon prices in the US are from the automobile, energy, mining and pharmaceutical sectors. These sectors are among those with the largest dependencies on energy consumption or fossil fuels, which are expected to be most exposed to transition risks. The overall low numbers are therefore balanced by the fact that the firms in these sectors that do use internal carbon prices are also those that most need to prepare for shifting climate policy.

Table 1. The percent of companies in each region disclosing each indicator.

Low-Carbon Technology

The BRT emphasizes the significant opportunity for the U.S. to continue to lead in development and commercialization of energy efficiency and renewable energy to support the transition to a low-carbon economy. It underscores the need to invest in low-carbon and emissions reduction technology to allow us to capitalize on this opportunity.

In the US, 7% of assessed firms disclose the development of products that contribute to the transition to a low-carbon economy, which is less than firms of other regions.  Japan and the EU lead the way with 19% and 18% of firms respectively reporting investments in low carbon technology. Only 1% of US firms report acquisition of businesses contributing to the transition; although all regions assessed show low uptake of this indicator. In the US, 35% of the companies in industrials, 33% in electrics and 30% in the automobile sector disclose development of products contributing to the energy transition. This demonstrates the opportunities for firms in sectors with high exposure to transition risk, such as electrics and automobiles, to invest in developing new products which would be in higher demand if climate policy increased.

The EU’s Sustainable Finance Taxonomy helps investors identify which activities contribute to climate adaptation and mitigation which in turn informs portfolio alignment with the Paris Agreement or other emissions reduction goals. The Taxonomy puts additional pressure and incentive for corporations to develop activities that directly contribute to the transition. This may explain why EU companies have made among the most progress to date, although it also may be an indication of further pressure growing outside of the EU as global investors aim to align with the taxonomy.

GHG Reduction Targets

The BRT recommends aligning policy and greenhouse gas reduction targets with scientific evidence around the need to reduce emissions. While few firms have disclosed divestment from or decommissioning of carbon intensive assets, those in the US and Japan show the least progress with only 1% of the assessed firms disclosing this indicator, while the EU shows the highest with 6%. Similar to the developments described above, as investors increasingly strive to align their portfolios with emissions reductions targets, companies will experience increased pressure to align their activities with such targets. While the US has experienced less regulatory activity to date in this regard than the other regions, this is likely to change going forward and companies prepared for those change are likely to be better positioned than others.

Risk Management

Governance

The CFTC recommends that financial firms define oversight responsibilities for climate risks for the board of directors. While this recommendation is particularly directed at financial firms, it also aligns directly with one of the TCFD recommendations, and as such will  be increasingly relevant as companies are increasingly asked to disclose their climate risks and opportunities in line with the TCFD. The BRT also recommends voluntary and transparent climate risk disclosure by corporations in line with existing frameworks.

Only 8% of US firms disclose integration of climate risk into board oversight and Japan and Europe show similar progress. Canada stands out with 19% of firms disclosing processes used by the board to monitor and oversee climate progress.

Table 2. The percent of companies in each region disclosing each indicator.

Integration into Risk Management

The CFTC report recommends that financial firms integrate climate risk monitoring and management into their governance. However, only 10% of US firms disclose integration of climate risks into their enterprise risk management. While this is similar to progress in Japan, 17% and 20% of firms in the EU and Canada respectively report integration of climate risks into their management, indicating that they are likely more well prepared both for an increase in extreme events or transition risks and for regulations around assessing and disclosing risk.

The CFTC recommends that financial firms conduct scenario analysis aligned with international efforts, In the US, 11% of firms have disclosed use of scenario analysis, which is similar to Japan and the EU. Canada stands out with 20% disclosing use of scenario analysis. There has been a rapid uptick in both the pressure to conduct scenario analysis and stress tests, particularly for banks, as well as the resources available to support these assessments, such as the reference scenarios released by the Network for Greening the Financial system in June 2020.

Conclusion

Our analysis shows that the largest US corporations tend to be slightly behind in terms of disclosing key indicators compared to their international peers. However, among all assessed regions, only a small percentage of firms disclose the indicators highlighted in this analysis, which demonstrates that there is significant room for progress. Increasing firms’ capacity to assess and disclose climate risks in an informative manner remains a global challenge.

Our analysis focused on the largest publicly trading companies, which are the first that have to comply with upcoming regulations around climate risk disclosure. The picture of progress likely looks different for mid-market firms where integration of emerging best practices for ESG and climate risk is not yet as deep.

 

[1] Moody’s Corporation, Four Twenty Seven’s parent company, is a BRT member.

Moody’s Analytics Wins Climate Risk Award at Chartis RiskTech100®

Moody’s Analytics received the Chartis RiskTech100® Climate Risk Award, highlighting its commitment to integrating climate risk analytics into its world-class credit models. As part of Moody’s ESG Solutions, Four Twenty Seven works closely with Moody’s Analytics, bringing data on granular, forward-looking physical climate risk exposure. Read the press release from Moody’s Analytics:

SAN FRANCISCO, November 23, 2020 – Moody’s Analytics has won the Climate Risk category in the 2021 Chartis RiskTech100®, the first year this category has appeared. It’s one of 10 awards for Moody’s Analytics to go along with the #2 overall ranking.

The Moody’s Analytics offering helps customers first identify whether they have exposure to climate risk in their portfolios and then quantify the impact of exposure to various climate risk factors.

“Expanding our climate risk capabilities is a top priority and one we have invested significantly in achieving,” said Dr. Jing Zhang, Managing Director and Global Head of Quantitative Research at Moody’s Analytics. “Severe climate events throughout 2020 underscore the importance and urgency for market participants to understand how climate change is already affecting—and will continue to affect—the risk and return of their portfolios.”

Measuring the physical risks associated with climate change is one piece of the climate risk management puzzle. Award-winning climate risk analytics from Moody’s ESG Solutions, powered by Moody’s affiliate Four Twenty Seven, a leading provider of physical climate risk data and V.E, a Moody’s affiliate with expertise in transition risk, ESG, and corporate disclosures, are being incorporated across Moody’s Analytics solutions. Moody’s climate solutions suite brings climate data into risk management tools, translating climate risk exposure into financial impact and credit risk across asset classes.

Our team recently conducted an AI-powered study of climate-related disclosures from roughly 12,000 companies, across industries and regions. Among the findings, which were presented to the Task Force on Climate-Related Financial Disclosures (TCFD) and are highlighted in the most recent status report on TCFD implementation: Only 17% of the companies examined had reported any climate-related information, and with significant variation in focus, content, and quality.

Capabilities from Moody’s ESG Solutions are also increasingly being leveraged by Moody’s Investors Service (the credit rating agency and sister company of Moody’s Analytics).

Moody’s ESG Solutions Group Appoints Global Head of Climate Solutions

Moody’s appoints Four Twenty Seven Founder & CEO, Emilie Mazzacurati, as Global Head of Moody’s Climate Solutions, with Moody’s ESG Solutions Group. Read the press release from Moody’s:

LONDON- (BUSINESS WIRE) – Moody’s announced today that it has appointed Emilie Mazzacurati as Global Head of Moody’s Climate Solutions. In this newly-established role, Ms. Mazzacurati will oversee the climate solutions suite within Moody’s ESG Solutions Group, a new business unit formed earlier this year to serve the growing global demand for ESG and climate analytics. Ms. Mazzacurati will report to Andrea Blackman, Global Head of Moody’s ESG Solutions. 

As global awareness and recognition of the financial risks posed by climate change increase, Moody’s is committed to meeting market needs for forward-looking, science-driven climate analytics that help advance a resilient financial system, responsible capitalism, and the greening of the economy,” said Ms. Blackman. “Emilie’s extensive climate expertise will be vital to our continued development of climate solutions and to ensuring that Moody’s is a leading voice in this important area.” 

As part of its climate solutions suite, Moody’s ESG Solutions provides risk measurement and evaluation tools to understand, quantify and manage climate risks for physical and transition risk, informing due diligence and risk disclosure in line with the recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).  

Climate risk analytics from Moody’s ESG Solutions are also integrated into Moody’s Analytics risk management tools, translating climate risk exposure into financial impact and credit risk metrics for banks, insurers, and investorsSimilarly, the group’s climate data and insights are increasingly being leveraged in Moody’s Investors Service credit analysisBy offering data and analytics across asset classes, including listed and unlisted companies, real estate, infrastructure, sovereigns and municipalities, Moody’s ESG Solutions supports the integration of climate-related risks into financial decision-making and risk management. 

Moody’s ESG Solutions climate offerings build on the award-winning physical climate risk analytics from Four Twenty Seven, leading provider of climate risk data and market intelligencefounded by Ms. Mazzacurati in 2012. Moody’s acquired a majority stake in Four Twenty Seven in 2019 and recently took full ownership. Moody’s climate solutions suite also leverages data from V.E, a Moody’s affiliate with expertise in transition risk, ESG, and corporate disclosures. 

ABOUT MOODY’S ESG SOLUTIONS 

Moody’s ESG Solutions Group is a business unit of Moody’s Corporation serving the growing global demand for ESG and climate insights. The group leverages Moody’s data and expertise across ESG, climate risk, and sustainable finance, and aligns with Moody’s Investors Service (MIS) and Moody’s Analytics (MA) to deliver a comprehensive, integrated suite of ESG and climate risk solutions including ESG scores, analytics, Sustainability Ratings and Sustainable Finance Reviewer/certifier services. 

For more information visit Moody’s ESG & Climate Risk hub at www.moodys.com/esg 

Panel Recording: Taming the Green Swan

In this keynote presentation during Risk Australia Virtual 2020, Founder & CEO, Emilie Mazzacurati, discusses “Taming the Green Swan: Incorporating Climate Risk into Risk Management.” She covers changes in the regulatory environment and how investors can use science to inform risk management and investment decisions. Emilie discusses progress made on climate risk disclosure to date, explains the latest thinking on conducting scenario analysis for climate risks and provides case studies of the economic impacts of climate risk in Asia and Australia.

Report: Climate Change and Sovereign Risk

This joint report provides a comprehensive analysis of the ways in which climate risks affect sovereign risk, demonstrating new empirical evidence of how climate risk and resilience influence the costs of capital. It also explores the implications for Southeast Asia in particular, where countries are highly exposed to climate change risks and their economic consequences. Lastly, the report outlines five policy recommendations based on these findings. The report was a collaboration between the Centre for Sustainable Finance at SOAS University of London, the Asian Development Bank Institute, the World Wide Fund for Nature Singapore and Four Twenty Seven.

Download the full report.

Download the Executive Summary.

Watch the launch event.

“Climate Change and Sovereign Risk” outlines six transmission channels through which climate change affects sovereign risk and in turn the cost of capital, providing examples of each and explaining how they’re connected. It uses empirical analysis to demonstrate the significant impacts of climate risk exposure on the cost of capital. Using a sample of 40 developed and emerging economies, econometric analysis shows that higher climate risk vulnerability leads to significant rises in the cost of sovereign borrowing. Premia on sovereign bond yields amount to around 275 basis points for economies highly exposed to climate risk. This risk premium is estimated at 113 basis points for emerging market economies overall, and 155 basis points for Southeast Asian economies.

To further explore these channels, the report provides a closer look at Southeast Asia, a region with significant exposure to climate hazards such as storms, floods, sea level rise, heat waves and water stress. Physical risks are expected to considerably affect economic activity, international commerce, employment and public finances across Southeast Asian countries. Transition risks will be prominent as exports and economies become affected by international climate policies, technological change and shifting consumption patterns. The implications of climate change for macrofinancial stability and sovereign risk are likely to be material for most if not all countries in Southeast Asia.

The report highlights the need for governments to climate-proof their economies and public finances or potentially face an ever-worsening spiral of climate vulnerability and unsustainable debt burdens. It outlines five policy recommendations, emphasizing the importance for financial authorities to integrate climate risk into their risk management processes and for governments to prioritize comprehensive climate vulnerability assessments and work with the financial sector to promote investment in climate adaptation.

The report was originally posted by SOAS University of London.

Report: Measuring TCFD Disclosures

September 24, 2020 – Vigeo Eiris and Four Twenty Seven Report. The TCFD recommendations helped to catalyze a global conversation on the need for increased climate risk assessment and disclosure. While there is much progress still to be made, there has recently been significant developments in the uptake and quality of TCFD-aligned climate risk disclosures. This report explains Vigeo Eiris’ new TCFD Climate Strategy Assessment dataset, sharing key findings of how firms’ disclosure align with each element of the TCFD framework and includes a case study on how companies’ risk reporting compare to their physical risk exposure.

Download the report.

Consistent climate risk disclosure is essential to improving market transparency and building a more resilient financial system. As devastating extreme events, regulatory developments and investor pressure have led to an increase in climate risk disclosure, the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations have become a global reference. Moody’s affiliate Vigeo Eiris’ new TCFD Climate Strategy Assessment dataset provides a granular view of how 2,855 companies report in line with TCFD recommendations.

This new Vigeo Eiris and Four Twenty Seven report, Measuring TCFD Disclosures, explores the key findings from this assessment, highlighting companies’ disclosures in governance, strategy and risk management.  We find that while 30% of companies have identified at least one climate-related risk that may affect their business, only 3% have disclosed enhanced due diligence for projects and transactions. The report highlights examples from the three sectors of energy, electric & gas utilities and diversified banks to compare reporting for several indicators within each TCFD category. It  includes a case study on the energy sector to review how companies’ physical risk exposure compares to their risk disclosure. Based on Four Twenty Seven’s data on physical climate risk, we find that there is still significant discrepancy between how companies are exposed to climate risk and what they disclose. This is essential for investors to understand when leveraging disclosures to assess their own risk exposure and when engaging with companies around improving climate risk assessment and disclosure.

Key Findings:

  • Overall:
    • 30% of the companies have identified at least one climate-related risk that may affect their business and strategy over the short, medium and long term.
    • Physical risks are most frequently reported, followed by policy and legal risks.
  • Governance:
    • 15% of the companies report on having assigned climate-related responsibilities to management.
    • 16% have established processes to inform board members about climate change issues.
  • Strategy
    • 12% of all assessed companies report the development of products or services that contribute to the low-carbon economy, making it the most common Strategy disclosure.
    •  Only 8% of the European and 7% of the North American companies in the panel disclosed climate change as a material factor in their financial planning.
  •  Risk Management:
    •  30% of the assessed energy companies report using an internal carbon price.
    •  Enhanced due diligence for projects and transactions remains a minority practice, with only 3% of companies disclosing information on this specific recommendation.

Download the report.

————————————–

For more information on climate risk exposure and disclosure explore Vigeo Eiris’ transition risk data and Four Twenty Seven’s solutions for assessing physical risk exposure across asset classes.