Leading global investors set out their expectations of companies in identifying and responding to physical climate risks and opportunities
Investors focus on corporate climate resilience strategies that define materiality of risks, establish actions and costs to address risks, and invest in adaptation solutions
In first wave of engagement, fifty highly exposed companies asked to implement expectations, including planning for multiple climate scenarios, integrating adaptation into strategic business decisions, and providing enhanced TCFD reporting
More than 50 leading global investors representing USD 10 trillion in collective assets support a clear set of expectations setting out how companies should demonstrate that they are adequately addressing physical climate risks and opportunities. Research by the Institutional Investors Group on Climate Change (IIGCC) and using data fromFour Twenty Seven, part of Moody’s ESG Solutions, has also identified 50 highly exposed companies, including Kerry Group, Swatch, Valaris, Centrica, Nestle, FirstGroup, Logitech International, Clorox, Campbell Soup, Delta Air Lines, Nan Ya Plastics, Nippon Express and Nissin Foods Holdings, who have been asked to properly identify and respond to physical events such as flooding, droughts and heat stress.
This comes after the IPCC’sSixth Assessment Report on Climate Changehighlighted that global warming is expected to exceed 1.5°C within 20 years and that we must increase planning for the physical impacts of a changing climate. Even if global warming is limited to 1.5°C, there would still be a tangible impact felt globally, with an average temperature increase of 2.3°C in Asia and average drought length increasing by two months. For every additional degree, acute and chronic risks rise significantly – for example, a 3°C scenario comes with a 100% probability of at least one ice-free Arctic summer before hitting the temperature limit. The floods and wildfires that have taken place across Europe, the US and Australia over the last few months are also highlighting the urgency of understanding physical risks and assessing the direct and indirect impacts on companies and investment portfolios.
Investors, including AustralianSuper, the Environment Agency Pension Fund, Impax Asset Management and Lombard Odier, want companies identified as highly exposed to climate impacts to implement the expectations and publish enhanced physical risk and opportunity disclosures. These expectations complement and reinforce existing frameworks, such as TCFD and EU sustainable finance regulation in relation to climate change adaptation.
“Companies cannot afford to ignore the impact that climate change could have on their businesses. It is more important than ever that investors are able to understand the risks and associated financial impacts that companies are facing when it comes to the physical effects of global warming. This means that they can effectively identify sectors and individual businesses that are resilient or well-placed to adapt, and increase engagement with those that don’t have an effective risk management strategy in place.” explainsStephanie Pfeifer, CEO, IIGCC.“This set of investor expectations is intended to provide a framework to facilitate effective engagement with companies and support them in adapting accordingly.”
The investor expectations lay out clear areas for company action including:
establishing a climate governance framework which considers physical risks and opportunities alongside transition risk, underpinned by clear responsibility and a commitment to greater disclosure;
undertaking physical climate risk and opportunity assessments based on two or more climate scenarios, disclosing outputs from analysis and details of how this is integrated into strategic business decisions;
developing and implementing a strategy for building climate resilience, which includes management of material risks and financial implications for the company, and identifying opportunities to provide adaptation solutions; and
identify and report against risk, opportunity and impact metrics to demonstrate progress over time.
In addition to providing robust guidance on the specific expectations of companies when addressing their exposure, the report also provides a framework to guide investor engagement with companies. It details primary and detailed questions that investors can use to gain a better understanding of a company’s strategy and risk management processes as well as supporting them in adapting and building resilience within their business.
“Both companies and investors are increasingly required to disclose climate-related information through TCFD reporting. However, there has been a gap in the guidance available for how material physical climate risks and opportunities should be assessed and what the key components of a climate resilience strategy look like. These investor expectations aim to fill that gap. As major institutional investors we ned to continue to work with the companies to ensure that they continue to identify and incorporate considerations of physical risks and opportunities around climate change and engage with investors on this.. . All companies should implement the minimum expectations set out in the guide to show investors that they are serious about managing the physical risks from a changing and more variable climate.” addsAndrew Gray, Director ofESG & Stewardship, AustralianSuper.
“In a world where temperature rises are becoming unavoidable, investors are faced with the reality that we cannot insulate our investments from the effects of climate change. Instead, we need to be able to understand the material risks that companies are facing, so that we can engage with them appropriately and build resilient portfolios, in line with investors’ fiduciary duty. By setting out our expectations of companies, we can support companies in improving their governance, management and disclosure in this area.” addsMarion Maloney, Head of Responsible Investment & Governance, Environment Agency Pension Fund.
“Impax has focused on physical climate risk as one of our key engagement areas for the last two years. Our experience is that surprisingly few companies provide specific detail on the location of their assets, let alone have thought about how to adapt to or mitigate risks related to extreme weather events. As this report makes clear, the very act of measuring and reporting physical risk data is the first step to managing and mitigating those risks, which will ultimately make businesses more resilient.” addsJulie Gorte, Senior Vice President, Sustainable Investing, Impax Asset Management.
“Lombard Odier welcomes these expectations as part of its efforts to align portfolios and activities with the goals of the Paris Agreement. We have a dual focus on mitigation, through reductions of greenhouse gas emissions, and adaptation to the physical consequences of climate change. To achieve this, we will continue to engage with companies on this issue, emphasising more strongly the need for enhanced disclosure of asset-level data. Physical risks are highly context-specific, requiring localised action to improve resilience. As investors, we also require new assessment capabilities – such as geospatial analysis – in order to identify such risks in investment portfolios.” addsRebeca Coriat, Head of Stewardship, Lombard Odier Investment Managers.
As part of the analysis undertaken in partnership with Four Twenty Seven, six sectorshave been identified as vulnerable to physical climate impacts, with all of the 50 companies listed included within these sectors. A number of these are also considered to be crucial in supporting society’s adaption to a changing and more variable climate. It is also recognised that certain regions, including areas in East and South Asia, and North America, are more exposed to climate hazards than other parts of the world. In order to reflect the greater portfolio exposure of IIGCC investor members to companies based in Europe and North America and support effective engagement, the analysis has been categorised and weighted accordingly.
For more information or further comment contact: Kat Sutton, Director of Communications, IIGCC Tel: +44 (0) 7747 164 283 |firstname.lastname@example.org
The Institutional Investors Group on Climate Change (IIGCC) is the leading European membership body enabling the European investment community in driving significant and real progress by 2030 towards a net zero and resilient future. IIGCC’s 300 members representing €37 trillion AUM are in a position to catalyse real world change through their capital allocation decisions and engagement with companies and the wider market as well as through their policy advocacy. IIGCC has three clear areas of focus: policy, investor practices and corporate engagement reflecting the key investor levers for change. The programme teams work in strategic partnership with investors supporting, enabling and showcasing their role in the realisation of the transition to net zero in support of the goals of the Paris Agreement. For more information visit www.iigcc.org and @iigccnews.
About Four Twenty Seven
Four Twenty Seven, an affiliate of Moody’s, is a leading publisher and provider of data, market intelligence and analysis related to physical climate and environmental risks. We tackle physical risk head on with analytics that identify the exposure of any location in the world to climate change hazards such as floods, heat stress, hurricanes and typhoons, sea level rise, water stress and wildfires, which pose an immediate threat to investment and loan portfolios.
Four Twenty Seven provides on-demand analytics and subscription data products to access this unique offering. Our physical climate risk application allows users to explore the climate risk drivers for a single asset or a portfolio of assets, scoring thousands of locations in minutes. We also offer forward-looking climate risk scores for equities, based on an ever-growing database that now includes over one million corporate sites and covers over 2,000 publicly-traded companies globally. Additionally datasets include climate risk scores for sovereigns and US municipalities.
Energy and mining, food manufacturing, pharmaceuticals manufacturing, technology manufacturing, transportation and utilities.