New guidance enables investors to act on physical risks of climate change
The Institutional Investors Group on Climate Change (IIGCC) is today launching new guidance for investors, setting out how they can integrate the risks and opportunities presented by the physical impacts of climate change into their investment processes. Leading investors have contributed to the work from IIGCC, developed with specialist consultants Acclimatise and Chronos Sustainability, and support of the Universities Superannuation Scheme.
Many asset owners recognise climate change as one of the largest systemic risks to their investment portfolios. To date, however, relatively little attention has been paid to how institutional investors might assess and report on the physical risks and opportunities arising from climate change. This is despite a growing evidence base demonstrating the economic consequences of increasingly severe climate change.
Research from Cambridge University shows an additional $100 billion of global costs linked to extreme weather events – such as floods, heatwaves and droughts – can be expected through to 2040 alone1. The ripple effect of physical impacts of climate change already with us is also clear. The high-profile bankruptcy of US utility PG&E – directly linked to the worst wildfires in California’s history – exemplifies the knock-on impacts of a changing climate, which companies and investors can expect to become more common2.
As the severity of climate change grows, the urgency for investors to address physical risks becomes more acute. With over 230 members, representing over €30 trillion in assets, IIGCC is looking to ensure the issue receives the attention it deserves.
The newly published guidance will help investors to:
- Better understand the investment implications – both risks and opportunities – resulting from the physical impacts of climate change.
- Take practical steps to identify, assess and manage climate-related physical risks across their portfolios, through the approaches covered in the guidance.
- Identify ways to invest in solutions that support greater resilience to climate change as well protecting investments from physical-climate related risks. Both approaches are key to strengthening broader societal adaptation to climate change.
- Draw on additional available tools and data sources in identifying and assessing specific risks, and opportunities, across different asset classes.
“Investors have no time to lose in understanding and acting on exposure to the physical risks of climate change. The impacts of the climate crisis are already being felt and set to become far more severe,” explains Stephanie Pfeifer, CEO, Institutional Investors Group on Climate Change. “A focus on resilience can help protect portfolios and strengthen returns, while enabling communities and the economy as a whole to better adapt to climate change.”
A benefit of pursuing adaptation-related investments can be better protection from losses that investors would otherwise face through a greater exposure to physical climate-related risks and associated volatility. Such an approach may also offer attractive rates of return and high benefit to cost ratios. Research from the Global Commission on Adaptation has shown that investing $1.8 trillion globally over the next decade across five types of investment project – covering infrastructure to crop production – could generate $7.1 trillion in total net benefits3. Assessing investment opportunities is covered in the guidance.
“As a changing climate alters the fabric of economies, societies and environments across the world, it pays to be prepared,” adds John Firth, CEO, Acclimatise. “The investors that can act now to both manage physical climate risks and grasp the opportunities to invest in resilience stand to be in the most secure position in the long-term. This guidance acts as a first step to achieving this.”
“Investors should manage the physical impacts of climate change in the same way they manage any other investment risk. They need to assess the financial implications for their portfolios”, explains Dr Rory Sullivan, CEO, Chronos Sustainability. “They need to take these assessments into account in their investment decision-making, encourage companies and assets to strengthen their governance and management of physical climate risks, and support effective public policy on mitigation and on adaptation.”
The Earth’s climate has already warmed by approximately 1.0°C of warming above pre-industrial levels4, with current trajectories showing temperatures are expected to rise by 3.2°C by the end of the century, even if all current unconditional commitments under the Paris Agreement are implemented5.
The broader economic damage resulting from the physical impacts of climate change is highly significant. A study by academics and cited by Schroders among others, shows that the global economy will face estimated losses in income of over $9.5 trillion a year with 3°C of warming, and over $23 trillion at 4°C6. By the academic’s own admission, this is a conservative analysis, given the model used only accounts for some of the impacts of climate change – loss in agricultural productivity, sea level changes, human health and productivity effects. This doesn’t cover losses from extreme weather events or the increased frequency of fire damage.
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Notes to Editors
The two guidance documents issued are:
– Understanding Physical Climate Risks and Opportunities: comprehensive and practically focused full guidance on the topic.
– Addressing Physical Climate Risks, Key Steps for Asset Owners & Asset Managers: a shorter form practical summary of steps for investors to take, which complements the core guidance report.
1. Press release, Cambridge University, 2020 (see link).
2. See p13 of IIGCC’s Understanding Physical Climate Risks and Opportunities guidance for a supporting case study on PG&E (see link).
3. Adapt Now: a Global Call For Leadership On Climate Resilience, Global Commission on Adaptation, 2019 (see link). The five project types in question are: strengthening early warning systems, making new infrastructure resilient, improving dryland agriculture crop production, protecting mangroves and making water resources management more resilient.
4. Summary for Policymakers. In: Global warming of 1.5°C, Intergovernmental Panel on Climate Change, 2018 (see link).
5. Emissions Gap Report 2019, UN Environment Programme, 2019 (see link).
6. The Effects of Climate Change on GDP by Country and the Global Economic Gains From Complying With the Paris Climate Accord, Earths Future, 2018 (link).
About IIGCC: The Institutional Investors Group on Climate Change (IIGCC) is the European forum for investor collaboration on climate change and the voice of investors taking action for a prosperous, low-carbon future. IIGCC has over 230 members, mainly pension funds and asset managers, across 16 countries, with over €30 trillion assets under management. IIGCC’s mission is to mobilise capital for the low carbon transition and to ensure resilience to the impacts of a changing climate by collaborating with business, policy makers and fellow investors.
About Acclimatise: Established in 2004, Acclimatise is a specialist advisory and analytics company providing world-class expertise in physical climate risk assessment and climate change adaptation. We are leading providers of advisory services and analytical tools that help financial institutions, corporates and governments to identify, quantify, manage and disclose physical climate risks and opportunities.
About Chronos Sustainability: Chronos Sustainability is an international team of professionals with a track record of delivering transformative, systemic change in the social and environmental performance of key industry sectors. Chronos works in partnership with institutional investors, industry networks, companies, governments, regulators and civil society organisations on issues as diverse as climate change, responsible investment, oceans management, and wildlife.