December 4, 2019 – 427 REPORT. Scenario analysis is an essential yet challenging component of understanding and preparing for the impacts of climate change on assets, markets and economies. When focusing on the short term, the warming and related impacts we have already committed to calls for scenarios that are decoupled from economic and policy activities and instead focus on the impacts that are already locked in. This report explores which impacts are already locked in, identifies how Representative Concentration Pathway (RCP) scenarios fit into the conversation, and describes an approach to setting up scenario analysis for near-term physical climate risks.
As the effects of climate change increasingly threaten financial stability, investors and regulators are seeking to understand what impacts lie ahead, and calling for an increase in physical climate risk assessment and disclosure in line with the Task Force on Climate-related Financial Disclosures (TCFD). To assess the scale of financial risk posed by physical climate change it is important to quantify risks under different climate scenarios. How will changes in extreme weather patterns, longer droughts and rising seas differ under various scenarios? Answering these questions through scenario analysis helps uncover the range of risks, allowing investors to identify assets and markets that are more likely to become stranded over time and to begin developing forward-looking resilience strategies. However, science-driven, decision-useful scenario analysis poses many challenges for businesses and financial stakeholders today, due to complex feedback loops, varying timescales, and multiple interacting factors that ultimately determine how global climate change manifests.
Figure 2. Distribution of daily extreme temperature changes in 2030-2040, expressed as a percent change, relative to a baseline of 1975-2005 under RCP 8.5. This map shows statistically downscaled global climate models averaged together, for this time frame and scenario. NASA Earth Exchange Global Daily Downscaled Projections statistically downscales climate model outputs to a ~25 kilometer resolution (see full details here) White areas are excluded because they lack potential for significant economic activity.
This new report, Demystifying Climate Scenario Analysis for Financial Stakeholders, explores which physical impacts are already locked in, identifies how Representative Concentration Pathway (RCP) scenarios apply, and describes an approach to setting up scenario analysis for near-term physical climate risks. Scenario analysis is often approached from the perspective of transition risk, where policy developments and greenhouse gas (GHG) emission targets are the key drivers of risk pathways over the near-term, in the next 10 to 30 years. Physical risk, however, requires a different approach. Impacts over the coming decades are largely locked in, making the emissions scenarios less relevant. Unlike transition risk, GHG emission pathways play a minimal role in the behavior of the near-term climate and GHG emission pathways only begin to meaningfully influence global temperatures near mid-century. The uncertainty in physical climate risks in the near-term is driven by uncertainty in physical processes, rather than in policy decisions.
For organizations looking to construct physical climate risk scenarios for risk management and strategy purposes, it is critical to understand the scientific phenomena driving our plausible climate futures. This report outlines an approach called percentile-based analysis, which allows users to explore the range of potential outcomes based on climate model outputs within a single RCP. This offers a flexible, data-driven approach, suitable for portfolio-level screenings, reporting, and in some cases, direct engagement with asset managers.
As climate change impacts worsen, the need for solutions to support adaptation grows. Founder & CEO, Emilie Mazzacurati, joined Molly Wood on Marketplace Tech to discuss climate risk analytics. The conversation covers the importance of understanding climate risk exposure and how companies leverage climate data to prepare for climate hazards. While recent findings on sea level rise and other climate impacts can be daunting, there is hope for adaptation that builds resilience across sectors.
For more on climate risk and resilience in the private sector, explore our climate risk analytics and read our reports on Climate Risk in Real Estate and Engaging with Corporates to Build Adaptive Capacity.
The Resilience Shift has announced that Four Twenty Seven will develop a primer on best-practices and opportunities for building climate resilience in the shipping sector. The Resilience Shift fosters global infrastructure resilience through projects, investments and events. Four Twenty Seven will support this effort by engaging with key stakeholders in the shipping sector to create industry-specific guidance on resilience strategies. Read the press release from the Resilience Shift:
The Resilience Shift today announces the appointment of a new grantee, Four Twenty Seven, for its programme to improve the resilience of critical infrastructure.
The team at Four Twenty Seven, led by Dr. Yoon Kim, has been commissioned to develop an industry-specific primer focused on the Shipping Sector that will help key players understand actionable ways to improve their resilience to climate change.
The shipping of material goods is critical to industries and livelihoods around the world. With stakeholders including shipping companies, terminal operators, and ports, this sector is exposed to extreme shocks or stresses in every country and disruptions have a direct impact on the safety and well-being of millions of people.
In developing this practical, industry specific primer, Four Twenty Seven and the Resilience Shift will identify 1) current best practices by leading organisations that embed resilience into their decision-making, 2) incentives that are available for driving resilience, but are not capitalised upon, and 3) approaches to scale and augment the menu of incentives over time.
Ultimately, the vision of the Resilience Shift is a more resilient world which understands the interconnected nature of modern life and the services on which we all depend.
The Resilience Shift believes that greater resilience across the shipping sector is an achievable goal and that knowledge sharing around key incentives and levers can shift major stakeholders towards adopting more resilient practices and technologies.
The Resilience Shift will be supporting the team at Four Twenty Seven in this effort and will be sharing their findings by publishing a resilience primer in 2019.
Other grantees announced today include Wood, TRL, and Resilient Organizations.
The initial expression of interest closed at the end of August 2018, but the Resilience Shift anticipates continuing this work into 2019. They will welcome future submissions from interested grantees at any time.
Yoon Kim, Director of Advisory Services, Four Twenty Seven, said:
“The Shipping Sector plays a critical role in connecting global economies and shipping companies face complex exposure to climate impacts based on both their commodities and countries of business. Leaders in the sector have the opportunity to build their own resilience and mitigate their losses while supporting resilient economies around the world.”
Ibrahim Almufti, Project Leader, Resilience Shift, said:
“Our aim is to shift the needle on resilience practice so that all organisations embed it into their decision-making. To achieve this, we must clearly articulate the value that resilience can bring.”
Jo da Silva, Acting Programme Director, Resilience Shift, said:
“We are engaging directly with industry stakeholders and with those responsible for incentivizing resilience for critical infrastructure. The Resilience Shift is a global initiative, we want to develop a common understanding across infrastructure systems globally, and our new grantees are diverse both geographically and in their target sector.”
Read more about resilient infrastructure in this Lenders’ Guide for Considering Climate Risk in Infrastructure Investments and explore Four Twenty Seven’s solutions for assessing physical climate risk and developing resilience strategies.
July 15, 2018 – 427 ANALYSIS: Record-setting rains in Japan led to floods and landslides that disrupted business operations of automobile manufacturers, electronic companies and others. Understanding the ownership and operations of facilities located in the damaged areas provides insight into what companies and industries may exhibit downturns in performance over the near term and be vulnerable to similar storms in the future.
Japan was the inundated by over 70 inches of rain in early July, an event that resulted in significant loss of life and business disruptions. The clouds have since receded, leaving economic damage with long-term implications yet to be understood. However, estimates expect industry losses to be in the billions USD. Destruction was centered in Okayama and Hiroshima, driven by flooding and landslides.
Typhoons Prapiroon and Maria contributed to this rainfall and climate scientists expect a warmer climate to increase the severity of these storms. Japan has fewer preparations in place for floods than it does for other extreme events, and understanding the various manifestations of risk caused by extreme rainfall is essential to mitigating damage in the future.
Much of Okayama sits immediately below mountains, which makes it particularly exposed to devastating landslides following significant rainfall events. Bursting pipes and power outages led over 250,000 homes in the Okayama and Hiroshima Prefectures to go without water for several days after the floods. Landslides destroyed homes and exacerbated infrastructure damage caused by flooding.
Many business operations were severely impacted by these events as well, and some facilities remain closed. Companies such as Panasonic experienced physical damage due to flooded facilities, and others were impacted by damaged infrastructure and communities, impacting their supply chains and workforce.
Okayama and Hiroshima are centers of economic activity for a number of key sectors in Japan, hosting production facilities for auto manufacturing, consumer electronics, retail trade and others. The figure below highlights the concentration of facilities of companies in the auto manufacturing industry by the sector of their operations. Companies that rely heavily on manufacturing operations are particularly vulnerable to flooding due in part to their utilization of expensive equipment that can easily incur water damage.
The heavy rainfalls showed no favorites in their disruption of manufacturing facilities across industries. For example, Mitsubishi and Mazda halted operations at some factories during the storms, due in part to supply chain disruptions. Many companies were also forced to pause operations because employees couldn’t get to work. While Mazda’s headquarters in Hiroshima Prefecture and a production facility in Yamaguchi Prefecture weren’t damaged themselves, they remained closed after the storms until employees could return to work safely. Likewise IHI Corp. closed its No. 2 Kure factory in Hiroshima because of water shortages and employees’ commute challenges.
The extent of long-term economic impacts that these companies will bear in the aftermath of last week’s storms is not yet known, but merits ongoing examination as the region recovers. Understanding the location of a corporation’s facilities and their exposure to extreme weather events is a key starting point for gauging exposure, and therefore can be instrumental in understanding company’s future performance.
Four Twenty Seven’s extensive facility level database can help investors proactively identify their portfolio companies’ exposures both to chronic climate effects and to individual extreme weather events such as the extreme rainfall that beset Okayama and Hiroshima. This deeper understanding can drive better risk-return tradeoffs, and importantly, shareholder engagement strategies that foster investments in resilience.
June 25, 2018 – 427 REPORT. Regulatory pressure and financial damage are necessitating an increase in physical climate risk disclosure in Australia. In exercising their own due diligence and assessing the exposure to physical climate risks in their portfolios, investors arm themselves with valuable information on corporate risk exposure which they can leverage to engage with companies around resilience. This report explores the connection between climate hazards and financial risks and shares examples of corporate adaptation and investor engagement to build resilience.
The global tide of interest in the Task Force on Climate-related Financial Disclosures (TCFD) has hit the shores of Australian financial markets, steered by regulators concerned about the systemic risk climate change poses to the economy. In 2017 Australian Prudential Regulation Authority’s Geoff Summerhayes was the first Australian regulator to formally endorse the TCFD. “Some climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now,” he said. This sentiment was echoed by John Price of the Australian Securities and Investments Commission in 2018 and reflects growing regulatory concern over climate risk disclosure internationally, as shown by Article 173 of France’s Law on Energy Transition and Green Growth and the 2018 European Commission Action Plan.
This Four Twenty Seven Report, Responding to Economic Climate Risk in Australia, explores the drivers of financial risk in Australia and discusses approaches to addressing this risk. The nation’s dominant industries are particularly threatened by the prevalent climate hazards. For investors, understanding a company’s risk to climate change is an essential first step to mitigating portfolio risk, but must be followed by corporate engagement to build resilience. Institutional investors are increasingly leveraging shareholder resolutions and direct engagement to prompt companies to disclose their climate risks and adapt.
This Four Twenty Seven webinar on emerging metrics and best practices for physical climate risks and opportunities disclosures covers recent developments in TCFD and Article 173 reporting, challenges to assessing climate risk exposure, strategies for investors to incorporate this information into decision-making and approaches to build corporate resilience.