In this panel during AIST’s Superannuation Investment week, Founder & CEO, Emilie Mazzacurati, discusses the latest thinking on leveraging climate scenario analysis to inform investment decisions. She highlights the Network for Greening the Financial System’s climate scenarios and describes research underway to connect climate data to financial metrics such as probability of default.
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.
“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.
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.
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.
- 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.
- 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.
- 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.
This RCLCO Real Estate Advisor webinar focuses on integrating climate risk analytics into decision-making for real estate investors and opportunities to leverage this information to build resilience.
- Stephen Bishop, Senior Associate of RCLCO Real Estate Advisors, discusses the impacts of physical and transition climate risks on real estate.
- Emilie Mazzacurati, Founder & CEO of Four Twenty Seven, presents on opportunities to leverage climate data to inform an understanding of climate risk in real estate portfolios.
- Cyndi Thomas, Managing Director of RCLCO Real Estate Advisors, shares RCLCO’s framework for integrating climate risk mitigation practices.
- Moderator: Joshua A. Boren, Director, Business Development at RCLCO Real Estate Advisors