Deutsche Asset Management and California-based climate intelligence and advisory firm Four Twenty Seven have developed an innovative approach to climate risk management.
Four Twenty Seven has classified the locations of more than one million corporate facilities globally, and using scientific climate models to assess the likelihood that they are affected by climate hazards such as heatwaves, floods and cyclones. This means that it is now possible to calculate the exposure of individual companies to catastrophic events.
This is the first time the physical location of corporate facilities and their exposure to catastrophic events have been mapped for investment purposes. Deutsche Asset Management will now be able to include a company's climate physical risk score as part of new investment products and assess the implications of climate events for individual companies in its portfolios.
The methodology for assigning scores identifies and classifies the location, the activity carried out and the commercial sensitivity of plants or companies towards climate risks.
Scientific climate models are then applied to assess geographical exposure to climate risks, measuring their impact on the business from an operational, supply chain and market risk point of view.
The data can be analyzed to assess, for example, how rising sea levels can affect coastal and offshore oil and gas infrastructure, how flooding could disrupt supply chains, or whether extreme heat waves are impacting labor productivity in the agricultural and construction sectors.
“The availability of this new data on climate-related physical risk represents an important step forward in addressing a serious and growing threat to investors. Today climate risk takes center stage, however we believe the investment services industry should still invite companies to disclose on an annual and one-off basis the list of climate risks to which they are exposed. We have a duty to understand how other hurricanes or new heatwaves may affect valuations and investment returns,” says Nicolas Moreau, Head of Deutsche Asset Management.
This new approach, and the climate-related physical threat to investment portfolios, is the subject of research presented by Four Twenty Seven and Deutsche AM in conjunction with the COP23 climate conference in Bonn.
The research directly addresses physical risk, with reliable data on the vulnerability of corporate production and physical sites to climate change. Factors such as rising sea levels, droughts, floods and cyclones pose an immediate and measurable threat to investment portfolios.
While no place is immune to the risks associated with climate change, research points to Asia as particularly vulnerable. Among the people who occupy the areas most exposed to climate risks worldwide, five out of six live in Asia, while 145 million Chinese live in areas threatened by rising sea levels.
