In this second installment of our blog series of scenario analysis, we focus on how investors can start exploring impacts on portfolios of listed equities/fixed income with existing climate risk analytics. The series provides our current reflections on how corporations and financial institutions can integrate physical climate risk into scenario analysis. The first installment, on foundations, focuses on important characteristics of climate science that affect how climate data can be used to inform scenario analysis for economic and financial risk. A forthcoming post will discuss scenario analysis at the asset level for real asset investments and corporate facilities.
Scenario Analysis Serves Different Purposes
Scenario analysis serves different purposes for real asset investors and for equity or fixed income investors. When looking at a single real asset, scenario analysis can be used to inform very concrete decisions regarding the asset, working directly with the asset operator: whether and what flood protections to put in place, insurance requirements, anticipated impacts on operational costs from water and energy consumption, etc.
In contrast, for an equity or fixed income portfolio, investors’ influence on the resilience of the underlying asset (e.g. a corporation or a sovereign entity) is much more limited. In a previous publication we discussed the importance of shareholder engagement with corporations as a key channel for investors to help raise awareness of rising risks from climate change, and encourage companies to invest in responsible corporate adaptation measures. Investors, however, would be hard pressed to run scenario analysis on individual portfolio companies themselves, and disclosures from corporations on scenario analysis remain weak and fragmented.
Meanwhile, prudential authorities in Europe have been signalling expectations that insurers and banks perform scenario analysis on their portfolio to examine potential impacts of climate change, to understand how different climate-driven outcomes might prevent the insurers and lenders from meeting their financial obligations. Most recently, in April, the Bank of England Prudential Regulatory Authority (PRA) released a proposed set of specifications for scenario analysis that includes some simplified assumptions on climate impacts on financial portfolios.
In this piece we examine how available climate risk analytics can be leveraged to inform early attempts at developing stress test assumptions and simulate potential outcomes on investment portfolios aligned with the relative exposure of corporations by sectors and by regions.
Climate Risk Analytics for Equities/Fixed Income
We leverage our data on corporate physical risk exposure to determine what assumptions can be made in this type of early stress test. In this piece, we analyze the climate risk scores for 1730 of the largest companies in MSCI All Country World Index (ACWI). This physical risk assessment is based on the exposure of the underlying database of about a million facilities globally.
We score each company on three components of physical climate risk: Operations Risk, Supply Chain Risk and Market Risk.
Scores are normalized, with 0 being the least exposed and 100 being the most exposed. (For more details, please refer to our previous report Physical Climate Risk in Equity Portfolios as well as our Solutions page)
In line with considerations of relevant time horizons and of impacts being locked in over the climatic short term (detailed in Part 1), our standard equity risk score data considers projected climate impacts in the 2030-2040 time period under a single RCP scenario, RCP 8.5 (the worst case scenario, also known as business as usual), but leverages several climate models.
From Climate Hazard Exposure to Financial Impacts
Studies of how physical climate hazards translate into financial impacts at the company level are scarce. While a growing body of research explores the complex relationships between climate hazards and economic impacts, which vary by sector and by region, academic research on the relationship between climate events and corporate/stock performance, at scale, is still limited. Our approach focuses on leveraging what can be estimated in a robust, data-driven way: relative exposure of companies to climate hazards.
Our analysis of global corporations shows the relative exposure of industries to climate related risks across all three dimensions: operations risk, market risk and supply chain risk (Table 1). This table shows the sectors with the highest exposure, including manufacturing, infrastructure (utility, energy, transportation), and industries with high dependency on natural resources (food, apparel).
Table 1. Industries most exposed to physical climate risks . Source: Four Twenty Seven.
Services, not shown in the table, are not only less exposed, they’re also far less sensitive to changes in climatic conditions, with the exception of the financial sector, which holds the risk of all the other sectors in its investment, lending or insurance portfolios. Note that real estate is not included in this analysis, but data on regional exposure in that sector can be found in our white paper on climate risk in real estate.
These differentiated impacts by sectors can lay the foundations for a stress test, as industry risk levels can be used to set initial assumptions on sector-wide impacts. Following the example set out by the Bank of England’s PRA, for example, investors could assume that sectors with high exposure might see a 10% or 20% drop in value, whereas sectors with medium exposure would see half of that impact. These assumptions are not intended to substitute for financial impact modeling, but provide a shortcut to test how a portfolio might perform under climate-driven duress.
Drivers of Exposure to Physical Climate Risk
While some sectors overlap with those examined in scenario analysis exercises for transition risk, such as utilities and energy, other sectors with high exposure are not typically included in scenario analysis, like tech manufacturing or pharmaceuticals. Understanding the nuances of the risk pathways in each sector and their relative exposure to different hazards is critical to refining assumptions and developing models that can quantify value-at-risk by sector with some accuracy.
Manufacturing companies in the tech sector rely on complex value chains that can be interrupted by extreme weather events, particularly in Asia, which is a region highly exposed to typhoons and extreme precipitation. They also often produce expensive and water sensitive products using costly machinery and can incur costs and damages from extreme events on site. Pharmaceuticals are particularly exposed because of the prevalence of their manufacturing in water-stressed regions (India, California) and regions highly exposed to hurricanes & typhoons. For example, damaged manufacturing sites in Puerto Rico had rippling impacts on pharmaceutical operations globally during Hurricane Maria in 2017. Pharmaceuticals is also one of the groups with the most weight in the MSCI ACWI, making this exposure particularly significant (Fig 2).
Figure 2. The average company risk score by GICS Industry Group, with Operations Risk on the y-axis and Market & Supply Chain Risk on the x-axis. Red represents those industries with the highest exposure, green represents those with the lowest exposure and the size of the bubble signifies an industry’s weight in the MSCI ACWI. Source: Four Twenty Seven.
In the utility sector, the nature of the exposure is very different from that observed in transition risk analysis: carbon neutral power generation can be as exposed as thermal generation – for example due to water stress or floods for hydro facilities. In addition, utilities rely on expensive equipment, such as cables, poles, fuel storage and pipes that are often exposed to severe weather and sensitive to extreme conditions. Their operations are also resource-intensive, relying heavily on energy and water for cooling. They can experience operations disruptions during peak energy demands or due to equipment damage during storms.
The exposure of the automobiles & components sector has been illustrated by recent flooding in Japan. Automobile companies rely on manufacturing processes and machinery that can be interrupted due to flooding or hurricane damage, but their reliance on employee labor also makes these companies vulnerable to the wider regional impacts of extreme events. For example, during Japan’s extreme flooding in July 2018, Mazda was forced to halt operations at some of its facilities that were not physically damaged themselves, because its employees could not travel safely to work.
Climate change calls for a better understanding of impacts of physical hazards on financial markets, which remains a topic largely unexplored. Yet as regulators push insurers and banks towards the integration of climate scenarios into stress testing, robust, data-driven views on the relative exposure of sectors or regions provide a helpful foundation from which to explore the potential impacts on equity and fixed income portfolios.
Over time, better data will become available as academic and industry providers develop models that capture the nuances of climate impacts on different industries and geographies, but also as companies make a concerted effort to disclose better data on their past and anticipated financial exposure to extreme weather and climate-related events.
Four Twenty Seven’s data products and portfolio analytics support risk reporting and enable investors and businesses to understand their exposure to physical climate risks across asset classes.
The TCFD Status Report published early June 2019 reiterates the need for corporations and financial institutions to perform scenario analysis in a context of uncertainty over climate risk. It notes that while about 56% of companies use scenario analysis, only 33% perform scenario analysis for physical risk. Even fewer firms (43% of those using scenario analysis) disclose their assumptions and findings. The report contains useful case studies, but most focus on transition risk.
Yet a growing number of corporations and financial institutions recognize the need to integrate physical risk into scenario analysis and to develop resilience strategies that address imminent challenges from climate impacts. For example, the most recent IPCC report illustrating the impact of 1.5˚C increase in global temperatures on mean temperatures, extreme temperatures, extreme precipitation and sea levels shows that there will be significant implications for economies even with a 1.5˚C increase in global temperatures. This is still a best case scenario compared to impacts of 2˚C or 2.5˚C warming.
Scenario analysis for physical risk is fundamentally different from transition risk in its challenges and assumptions. This blog series provides our current reflections on how corporations and financial institutions can integrate physical climate risk into scenario analysis. This first blog presents the Foundations, focusing on important characteristics of climate science that affect how climate data can be used to inform scenario analysis for economic and financial risk. The next blog focuses on Equity Markets, with concrete examples of how available data can inform financial stakeholders ready to start putting scenario analysis into action. A forthcoming post will discuss scenario analysis at the asset level for real asset investments and corporate facilities.
The physical impacts of climate change encompass a range of direct and indirect hazards caused or exacerbated by the concentration of greenhouse gases in the atmosphere. Previous publications such as Advancing TFCD Guidance for Physical Risks and Opportunities, for which Four Twenty Seven was a lead author, provide background on these hazards as they pertain to corporate value chains and economic activities. Further information is also available in Cicero’s excellent report, Shades of Climate Risk. Categorizing climate risk for investors.
Rapid developments in atmospheric and climate science over the past 30 years enable us to understand how these physical hazards will evolve over time due to climate change. Sophisticated global climate models project expected changes in key physical phenomena affected by greenhouse gas (GHG) concentration: heat, humidity, precipitation, ocean temperature, ocean acidification, etc. Like any other models, climate models have limitations in their accuracy and ability to correctly simulate complex and interrelated phenomena. However, it is worth noting that since 1973 models have been consistently successful in projecting within the range of warming that we have experienced in the past twenty years. More details on climate data and uncertainties from global climate models can be found in our report, Using Climate Data.
The Bad News: Impacts Are Locked In
Global climate models project different possible outcomes using scenarios called Representative Concentration Pathways (RCPs). RCP scenarios capture differing GHG emissions trajectories based on a representation of plausible global policy outcomes, without specifying the details of the underlying policies that could generate this outcome. These scenarios show that GHG emissions generated over the coming decades will influence the severity of impacts in the long-term, but also that we are already committed to some impacts through 2100 and beyond.
This is particularly noticeable over the “short term.” When looking at the next 10 to 20 years, projections for temperature and other physical hazards do not present significant differences under different emissions scenarios (Fig 1). This is due to the massive inertia of the Earth’s systems, and the life expectancy of the stock of greenhouse gases already in the atmosphere. To put it simply, significantly reducing GHG emissions is akin to applying the brakes on a rapidly moving truck. It won’t stop instantaneously. Even if we were to stop emitting GHG altogether, climate change would persist. In the words of the Intergovernmental Panel On Climate Change (IPCC), climate change “represents a substantial multi-century commitment created by the past, present, and future emissions of CO2.”
This is by no mean an invitation to give up on reducing GHG emissions. Quite the opposite. Emission reductions are critical to curbing long term impacts and avoiding irreversible effects to our environment (Fig. 2). But for organizations looking at climate data and scenario analysis for risk management and strategy, with a focus on the coming decade(s), this is a critical fact to understand.
Aside from RCP-driven scenarios, there is, of course, a broad range of possible increases in temperature (and other climate hazards) even when looking at the 2030-2040 time frame. These plausible differences are not so much policy-driven as science-driven, demonstrating the different possible responses from the Earth’s systems to the existing stock of GHG.
These differences have significant implications for businesses and investors. For example, a model of sea level rise developed in 2018 incorporates accelerated rates of melting and recent advancements in modelling ice-cliff dynamics to capture extreme risk of coastal flooding. The model shows the Atlantic rising by 1.2m (3.9ft) by 2060 on the Florida coastline, which would equate to widespread flooding of coastal properties with potential domino effects on real estate prices across the state (Fig 3). The ‘intermediate’ scenario, however, most often used for planning, predicts only a 55cm (1.8ft) rise in water levels. While reducing GHG emissions does reduce the risk of more extreme sea level rise millennia into the future, year after year, scientists find that the Antarctic is warming faster than anybody predicted, and there is increasing concern that the process of ice sheet melt may be too far advanced to be stopped.
Thus, performing scenario analysis where the key variable is GHG emission reduction targets may not be an accurate representation of the range of possible outcomes for the near future. Rather, looking at high and low warming projections across a large set of models to understand the range of potential outcomes (independent of the underlying RCP scenario) is a better way to understand potential risk. In other words, physical risks over the next 10-20 years are largely independent from policy decisions and emission pathways, and a rapid, orderly, effective transition to a low-carbon economy could still come with massive physical impacts as these processes are already under way, fueled by the past 150 years of GHG emissions.
The Worse News: Tipping Points
Another challenge is that climate scientists are not currently able to model certain possible impacts from climate change, commonly known as “tipping points.” Tipping points is a catch-all term for a wide range of phenomena that may accelerate feedbacks due to climate change, though the timing or probability of their manifestation is currently not well understood. The phenomena are known as tipping points because past a certain threshold, they may not be reversible, even with a dramatic reduction in GHG emissions. Tipping points of most concern to the scientific community are presented in this report from the Environmental Defense Fund.
Some tipping points catalyze “feedback loops” which can worsen and dramatically accelerate climate change beyond human control. Such is the case, for example, with melting ice sheets, which would not only lead to catastrophic sea level rise, but would also further heat up the planet as the poles’ albedo (reflectivity) is reduced after the ice disappears. Thawing permafrost could lead to massive amounts of methane, a particularly powerful GHG, to be released from the frozen tundra into the atmosphere (in addition to many direct impacts for local communities, infrastructure and ecosystems in the region) (Fig. 4).
Tipping points further reinforce uncertainty about severity and timing of these extreme impacts and the limitations of using RCP scenarios to understand the range of outcomes for physical risk.
Another source of uncertainty for physical climate impacts are knock-on effects, or ‘indirect hazards,’ from the primary expression of global warming (rising temperature and humidity), ranging from biodiversity losses and ecosystem collapses, human health impacts, impacts on crop yields, pests and soil, impacts on human society, increased violence, and rates of war and migration, etc. (Fig 5)
These indirect or second-order hazards are as relevant as first-order impacts to understand the implications of physical climate change on economic outcomes, but they’re not captured by RCP scenarios and many require stand-alone models that cannot easily be integrated into one clean set of scenarios.
Scenario analysis is often approached from the perspective of transition risk, where policy developments and GHG emission targets are the key drivers of risk pathways over the next 10 to 30 years. Physical risk, however, requires a different approach. Impacts over the coming decades are largely locked-in and are only marginally influenced by GHG emission pathways. In contrast, uncertainty looms large regarding how severe these physical hazards will be, and exploring a range of possible outcomes for physical risk, including looking at tail-risks, provides important insights for risk management and financial analysis. In summary, the current state of scientific knowledge and the nature of the Earth’s atmospheric systems call for the developments of scenarios that are decoupled from transition/policy scenarios and instead focused on key scientific drivers of uncertainty and risks that may be experienced regardless of policy decisions over the short to medium term (2020-2040).
While efforts to develop easy-to-use tools for physical risk analysis are nascent, organizations can still extract important insights from climate data and leverage estimates of risk exposure across portfolios. Our next blog in this series provides examples of how financial institutions can leverage data on physical risk exposure in equities to inform some early scenario analysis in equity markets.
Four Twenty Seven’s data products and portfolio analytics support risk reporting and enable investors and businesses to understand their exposure to physical climate risks across asset classes.
What does the future hold?
New research on sea level rise emphasizes the potential for dire changes over the course of the century. Recent satellite data suggests that warming water is causing East Antarctica to melt more quickly than previously thought and a study released in early May found that almost a quarter of West Antarctica’s ice is thinning, with its largest glaciers shrinking five times faster than in 1992. A study based on expert opinion found that there is the possibility of sea levels rising by 2 meters (6.5ft) under an extreme scenario of 5˚C global temperature increase. This would mean an area of land as big as Libya would be lost, and up to 2.5% of the population globally could be displaced.
Extreme scenarios of sea level rise will have severe impacts on our cities and economies. Sea level rise is happening today to a lesser extent; however it is already having tangible impacts on real estate values. This means increasing costs for property owners and tenants, but it also has far-reaching market impacts on access to and cost of insurance, fluctuations in market values and potential increase in local taxes to fund adaptation efforts.
Of all U.S. states, Florida is expected to experience the greatest consequences of sea level rise. Between 1960 and 2015, sea levels along the Florida coast rose by 10-15 cm (4-6 in), and the range of projections vary wide looking a few decades out, with projections ranging from 33 to 122cm (13-48 in) by 2060.
Widespread flooding risk in Florida
65,000 homes in Florida worth $35 billion are expected to be underwater or impacted daily by high tides in 2040. From soaring insurance premiums and increasing risk of disclosure to declining property value and diminishing tax revenue, sea level rise is already challenging property owners, investors and banks. Among other impacts, the value of single-family homes in Miami-Dade County that are exposed to sea level rise declined by about $465 million between 2005 and 2016.
Furthermore, climate change is predicted to increase the number of strong hurricanes in the region. These stronger storms will combine with sea level rise to exacerbate the impacts of extreme floods. Storm surge flooding damages buildings and landscaping, destroys merchandise, and can also have wide-reaching economic impacts due to damaged power and transportation infrastructure.
Last but not least, tidal flooding, also called “nuisance” or “sunny day” flooding increased from 1.3 to 3 days per year in the Southeast from 2000-2015. By the end of the century tidal flooding could happen daily. Even with no rainfall, these floods have significant impacts – halting traffic, overburdening drainage systems and damaging infrastructure.
Investors and businesses have a responsibility to understand these risks: using best available science to measure exposure to sea level rise and other flood risks, getting informed on adaptation efforts by local governments, and engaging with local industry associations or other groups to promote further investments in resilience.
Four Twenty Seven works with investors to provide portfolio hotpot screenings and real time due diligence with site-specific data on sea level rise and other climate risks. Contact us for more detailed analysis and site-specific data on sea level rise exposure and detailed analysis of local jurisdictions’ response.
January 15, 2019 – 427 REPORT. Building resilient communities and financial systems requires an understanding of climate risk exposure, but also of how prepared communities are to manage that risk. Understanding the adaptive capacity, or ability to prepare for change and leverage opportunities, of the surrounding area can help businesses and investors determine how exposure to climate risk is likely to impact their assets and what the most strategic responses may be. This report outlines Four Twenty Seven’s framework for creating location-specific actionable assessments of adaptive capacity to inform business and investment decisions and catalyze resilience-building.
Every investment, from real assets to corporate initiatives, is inextricably connected to its surrounding community. From flooded or damaged public infrastructure hindering employee and customer commutes to competition for water resources threatening business operations and urban heat reducing public health, the impacts of climate change on a community will impact the businesses and real estate investors based in that community. Thus, evaluating how acute and chronic physical climate hazards will affect local communities and communities’ responses enables investors and corporations to assess the full extent of the risks they face.
This report, Assessing Local Adaptive Capacity to Understand Corporate and Financial Climate Risks, outlines Four Twenty Seven’s framework for capturing a city’s adaptive capacity in a way that’s actionable for corporations seeking to understand the risk and resilience of their own facilities and for investors assessing risk in their portfolios or screening potential investments. The framework focuses on three main pillars: 1) awareness, 2) economic and financial characteristics, and 3) the quality of adaptation planning and implementation. It is informed by social sciences research, recent work by credit rating agencies, and our experience working directly with cities and investors.
While a city’s adaptive capacity plays a key role in determining whether or not exposure to climate hazards will lead to damage and loss, cities are also likely to find that their resilience to climate impacts is an increasingly important factor in attracting business and financing, as adaptive capacity is more frequently integrated into credit ratings and screening processes. It is valuable for both cities to understand how investors are interpreting adaptive capacity and for investors to understand which factors of local adaptive capacity translate into increased resilience and reduced financial loss for their assets.
This webinar on climate risk in real estate presents Four Twenty Seven and GeoPhy’s analysis of exposure to physical climate hazards in global real estate investment trusts (REITs). The presentations includes key findings from the white paper, Climate Risk, Real Estate, and the Bottom Line and a discussion of how physical climate data is leveraged in financial risk reporting for the real estate sector.
Download the slides, including links to resources discussed during the presentations and additional Q&A slides based on the webinar.
OCTOBER 11, 2018 – BOSTON, MA – Four Twenty Seven & GeoPhy Release First Global Dataset on Real Estate Investment Trusts’ Exposure to Climate Change.
Four Twenty Seven and real estate technology company GeoPhy today announce the release of a data product that provides granular projections of the impacts of climate change on real estate investment trusts (REITs). REITs represent an increasingly important asset class that provides investors with a vehicle for gaining exposure to portfolios of real estate. The data was launched at the Urban Land Institute Fall Event in Boston, MA, accompanied by a white paper that lays out the implications of climate risk for the real estate sector.
Four Twenty Seven applied its scoring model of asset-level climate risk exposure to GeoPhy’s database of listed real estate investment trusts’ (REITs) holdings, to create the first global, scientific assessment of REITs’ exposure to climate risk. The dataset includes detailed, contextualized projections of climate impacts from floods due to extreme precipitation and sea level rise, exposure to hurricane-force winds, water stress and heat stress for over 73,500 properties owned by 321 listed REITs.
“Real estate is on the frontline of exposure to climate change” said Emilie Mazzacurati, founder and CEO of Four Twenty Seven. “Many valuable locations and markets are often coastal or near bodies of water, and therefore are going to experience increases in flood occurrences due to increases in extreme rainfall and to sea level rise.” she noted. “These risks can now be assessed with great precision — the availability of this data provides investors with an opportunity to perform comprehensive due diligence which reflects all dimensions of emerging risks.” she concluded.
“The market has begun to price in the potential impacts of fat-tail climate events” noted Dr. Nils Kok, Chief Economist of GeoPhy. “Properties exposed to sea level rise in some parts of the United States are selling at a 7% discount to those with less exposure, and the value of commercial real estate is expected to equally reflect these risks. Leveraging forward-looking data on risk exposure can allow REIT investors to anticipate changes in market valuations and react accordingly.”
Read the report: Climate Risk, Real Estate, and the Bottom Line.
Key findings include:
Read the report Climate Risk, Real Estate, and the Bottom Line.
Download the Press Release.
*Erratum: A previous version of this blog post mentioned in error that CapitaLand is one of the U.S. REITs most exposed to sea level rise. CapitaLand is a Singapore-based REIT with some exposure to sea level rise but it is not among the most exposed.
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.