New frontiers in climate-risk analytics in 2021

New frontiers in climate-risk analytics:

Currently, there is no perfect solution for estimating the financial impact of physical climate change, but that should not be an excuse to do anything. Advanced climate risk analysis can provide a clearer picture of how serious (or expensive) global warming can be for businesses

In recent years, record temperatures and extreme weather conditions have highlighted the enormous impact of greenhouse gas emissions on the world climate. Furthermore, the cost of these opportunities is increasing. For example, five of the worst natural disasters in US history have occurred since 2005, causing a total of $ 523 billion in economic damage due to inflation. And America had only 22 major natural disasters last year.

Translating the results of climate models into specific potential impacts and measuring the financial importance of climate risk presents challenges for companies and investors. The rapid adoption of model-based climate data has raised concerns about occasional misconduct in the context of financial decision-making and disclosure, as well as administrative errors in financial reporting and greenwashing. These risks are particularly problematic with long-term capital investments in public infrastructure, which often have an operating maturity of several decades.

The need for meteorological information for financial market participants differs in terms :

depreciation (related to specific assets or asset classes, regions, and sectors) and time horizons. But it is difficult to evaluate measures to reduce climate exposure without specific data on the performance of institutions in the past. This may include how companies have been affected by historical events such as floods, the time and geographical scale of the hazards, and the impact and effectiveness of adaptation.

Although there is no solution that assesses the climate-related risks and opportunities, some processes become very important. Standardization can, for example, help prevent differences between climate change, ensure consistent application of datasets and taxonomies, and reduce dependence on climate model findings and conclusions. Standardized and geographically specific information on credit risk will also enable comparable assessments of climate-related risks and opportunities and their potential impact.

Another approach, advanced climate risk analysis, involves integrating climate model results with entity-specific data, including asset-level data and financial information. A clear overview of the company’s operations makes it much easier to understand the potential financial impact of the physical consequences of climate change. This analysis can also facilitate dialogue with decision-makers to understand their view of the acute and chronic climate risks they face, and how they manage, monitor, and mitigate them.

Finally, the use of different climate scenarios allows decision-makers to consider a wider range of possible outcomes.

 It helps them build organizational resilience and identify risks and opportunities before they arise, which in turn enables more productive decisions about necessary interventions.

While climate risk analysis, dialogue with entities, and expert opinions can enhance the analysis, next-generation climate models will need to be more sophisticated to better account for the complexities of global warming. Climate risks are not isolated and do not take into account sectoral and geographical boundaries. And the further progress of climate change could lead to new and complex interdependencies and interactions that data providers cannot resolve due to the isolated nature of existing models.

Non-equilibrium models, which assume more complex relationships between climate variables

 maybe a valid alternative. Similarly, Integrated Assessment Models (IAMs) provide the opportunity to bring different models together to understand the impact chains associated with environmental, socio-economic, and climate systems. IAMs can also assess the impact of greenhouse gas reduction and adaptation efforts on the climate system and in turn, measure the effectiveness of associated strategies.

But non-equilibrium models and IAMs are not a panacea. IAMs, for example, cannot calculate or calculate the economic damage of certain events, such as severe storms.

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