Mahesh Roy
Investor Strategies Programme Director
Investors that adopted the Physical Climate Risk Assessment Methodology (PCRAM) have seen improvements in how they integrate physical climate risks into their investment processes, leading to stronger and more resilient management of assets.
The implementation of the PCRAM – Physical Climate Risk Assessment Methodology – is showing promising results, potentially offering a more consistent, industry-wide approach to evaluating and managing investments in climate-resilient infrastructure.
Investors and infrastructure asset owners are increasingly aware and evaluating how physical climate risk (PCR) can impact their assets and ability to maximise long-term value. While both public and private finance companies are making genuine efforts to invest in climate-resilient infrastructure, the lack of a standardised approach has slowed progress.
That’s where PCRAM comes in.
PCRAM not only brings consistency to physical climate risk assessments, it also creates a common language between stakeholders to facilitate engagement, improving opportunities to redirect capital and strengthen often critical infrastructure with wider social benefits. This shared understanding enhances predictability, encourages comprehensive risk management, and ensures efficient resource allocation.
The methodology was conceptualised and developed by the Asset Design & Structuring working group of the Coalition for Climate Resilient Investment (CCRI), with instrumental support from Mott MacDonald along with 35 different institutions, ranging from banks, investors, engineering firms, climate risk data providers, lenders, credit rating agencies and academic institutions.
Its development passed to IIGCC in March 2023 when CCRI moved to a legacy programme.
Read our ‘PCRAM in Practice’ report.
Where current PCR processes fall short
Though public and private finance companies may share the same goal, they often use different practices and metrics to integrate climate-related risks and opportunities into their processes. Similarly, companies, governments and communities have their own perspectives on the resilience of infrastructure. These different perspectives, assessed and communicated in different ways can lead to inconsistent and sometimes ineffective risk management strategies for investors.
Many investors rely on climate ‘Value at Risk’ models, which are often complex, not always transparent in their methodology and inconsistent between vendors. These models can incentivise risk transfer and asset reallocation, without truly addressing the root issues in the physical world, which is the need to make all assets more resilient to the effects of temperature rise
What these conventional models also miss is the upside of investing to make assets more resilient – like more predictable cash flows, better credit quality and more efficient cost management over an asset’s life cycle.
PCRAM, on the other hand, offers the potential to expand the focus from just managing risk to uncovering opportunities. It provides a clearer framework for evaluation and highlights the value that comes with investing in resilience.
Quantifying long-term benefits
Adopting a clear process methodology is key to justifying investments in adaptation and resilience. PCRAM offers this by providing a consistent framework for assessing and quantifying the long-term benefits of resilience.
In this context resilience investment is an inherent component of project and operational costs, with the benefits often offsetting any increased costs or even improving the overall investment case.
These case studies show how PCRAM can capture and quantify the value of resilience throughout an asset’s life, leading to more reliable cash flows and cost savings. It also has the potential to make it easier to monetise resilience benefits and share investment costs among stakeholders.
By using specific KPIs and materiality thresholds, PCRAM allows for optimised resilience strategies, which can improve credit quality and lower the cost of capital for resilient assets.
A small but growing range of case studies shows that PCRAM can be applied broadly across different infrastructure assets, financing and ownership models and geographical locations – each facing different climate risks.
These positive results have paved the way for the second phase of this methodology –PCRAM 2.0 – which will offer broader coverage across infrastructure and real estate assets, with work already underway with IIGCC, investors and broader stakeholders in the PCRAM working group.
When can PCRAM be used?
PCRAM is a versatile methodology that can be employed throughout the investment lifecycle.
It can be used during due diligence, helping investors make informed decisions before acquisition.
PCRAM continues to be valuable in the post-acquisition phase, where it supports ongoing assessment and management to boost asset resilience and performance over time. Importantly, it facilitates clear communication between stakeholders and can form the basis of ongoing governance relating to physical climate risks.
Looking ahead, the upcoming PCRAM 2.0 work will expand its scope by incorporating a variety of resilience options, such as nature-based solutions, to provide more comprehensive strategies for managing climate risks. IIGCC will also be releasing a discussion paper on PCRAM for investors before the end of the year.
By systematically adopting PCRAM as a basis for a sound physical climate risk assessment, investors could develop assets with more predictable future cash flows and optimised life cycle costs. This approach helps build systemic resilience from the bottom up – not just within asset portfolios but also in the communities where they operate.
PCRAM offers valuable insights to not only manage physical climate risks but also uncovers investment opportunities that contribute to long-term financial and systemic resilience.
If you’d like to take part in our working groups and help to shape the outputs of our resources, why not speak to our investor relations manager today to find out more about becoming a part of IIGCC?