This case study outlines the application of the Physical Climate Risk Appraisal Methodology for equity investments in two leveraged investment platforms: three operational solar assets across Italy, and a mini hydro power plant. Provided by Stafford Capital Partners, Theia Investments and Howden.
PCRAM aims to help investors better understand and manage the threat that physical climate risks pose to real assets, their potential adaptation options. and how these link back to asset values.
Detailed in the document below, the methodology's four-stage process was applied to the solar and wind assets:
- Scoping and data gathering
- Materiality assessment
- Resilience building
- Value enhancement
Included in the process was a physical risk materiality assessment for solar PV heat-stress and hailstorm hazards, mapping and using available data to identify potential resilience measures, estimated costs and benefits.
The analysis showed that resilience measures would add value to the projects by enhancing the cash flow profile, but that climate risk must be considered during the risk assessment phase to adequality reflect the value of investing in resilience.
Risk-adjusted returns, rather than returns in the absolute sense, should be the primary consideration in this context. Doing so would better show if the short-term impact to the overall return by the resilience measure is sufficiently compensated through a reduction in climate risk.
Systematic, objective, replicable guidelines
The Physical Climate Risk Appraisal Methodology (PCRAM), formerly known
as the Physical Climate Risk Assessment Methodology, provides systematic, objective, and replicable guidelines for integrating physical climate risks into investment decision-making.
PCRAM 2.0 combines climate science, engineering, and finance to present a robust approach, adaptable to individual contexts.
This updated version can help investors, asset managers, and developers make better decisions by factoring in physical climate risks, such as floods, heatwaves and storms. Looking beyond risk, it can support investors to identify resilience investment opportunities according to financial materiality.
With climate change already affecting real assets, PCRAM 2.0 gives investors and asset owners a clear way to assess these risks and make more resilient, future-proof investments.