Economics
Extreme weather can harm businesses. Can this tool help investors adapt?
Market participants do not have a clear way of assessing how extreme weather could hurt a business they are looking to invest in – but researchers at an Ontario university have proposed a new tool to fill that gap.
A report published this week by the Intact Centre on Climate Adaptation at the University of Waterloo made the case for the use of “climate risk matrices” (CRMs), an industry specific tool that identifies the level of climate risk a business faces and offers solutions for investors and regulators to make better calculated decisions and mitigate future risk.
According to the report, several climate change-related risks have now become irreversible, such as intensified flooding, droughts and wildfires.
The researchers said institutional investors in particular should have an obligation to factor these impacts into their portfolio management, and suggested CRMs as a practical means to account for physical climate risk.
HOW DOES IT WORK?
Climate Risk Matrices from the researchers took into account several intense weather events that six major industries face and their respected sub-sectors.
The sectors explored in the report were electricity transmission and distribution, commercial real estate, property and casualty insurance, banking in the form of residential mortgage providers, hydroelectricity generation and wind electricity generation.
When an investor is looking to buy into commercial real estate, for example, either as a stock purchase or as a business, one major risk the CRM looked at was extreme heat. The risk mitigation measures it offered were the instalment of an HVAC system designed to deal with extreme heat conditions, an emergency management plan for staff and tenants as well as an emergency backup for potential power outages.
In an alternate banking example, flooding was used as one of the varied weather risks. The CRM suggested risk measures including up-to-date flood risk maps to assist insurers and encouraging homeowners in high-risk flood zones to install flood mitigation. Potential investors were also encouraged to ask what percentage of housing stock falls within extreme weather risk zones and what percentage of customers receive guidance how to reduce the extreme weather risk profile of their home.
Dr. Blair Feltmate, head of the Intact Centre and co-author of the report, said investors should develop the tool “not just for six sectors, but for twenty-six.”
“The financial community should lead the way in developing CRMs,” Feltmate said in a news release.
“There is no point in talking about TCFD (the Task Force on Climate-related Financial Disclosures), Sustainability Accounting Standards Board (SASB), ESG (environmental, social, and corporate governance investing), or any other combination of letters, if at the end of the day this stuff doesn’t translate into action that lowers the risk profile of the investable universe.”
A report published this week by the Intact Centre on Climate Adaptation at the University of Waterloo made the case for the use of “climate risk matrices” (CRMs), an industry specific tool that identifies the level of climate risk a business faces and offers solutions for investors and regulators to make better calculated decisions and mitigate future risk.
According to the report, several climate change-related risks have now become irreversible, such as intensified flooding, droughts and wildfires.
The researchers said institutional investors in particular should have an obligation to factor these impacts into their portfolio management, and suggested CRMs as a practical means to account for physical climate risk.
HOW DOES IT WORK?
Climate Risk Matrices from the researchers took into account several intense weather events that six major industries face and their respected sub-sectors.
The sectors explored in the report were electricity transmission and distribution, commercial real estate, property and casualty insurance, banking in the form of residential mortgage providers, hydroelectricity generation and wind electricity generation.
When an investor is looking to buy into commercial real estate, for example, either as a stock purchase or as a business, one major risk the CRM looked at was extreme heat. The risk mitigation measures it offered were the instalment of an HVAC system designed to deal with extreme heat conditions, an emergency management plan for staff and tenants as well as an emergency backup for potential power outages.
In an alternate banking example, flooding was used as one of the varied weather risks. The CRM suggested risk measures including up-to-date flood risk maps to assist insurers and encouraging homeowners in high-risk flood zones to install flood mitigation. Potential investors were also encouraged to ask what percentage of housing stock falls within extreme weather risk zones and what percentage of customers receive guidance how to reduce the extreme weather risk profile of their home.
Dr. Blair Feltmate, head of the Intact Centre and co-author of the report, said investors should develop the tool “not just for six sectors, but for twenty-six.”
“The financial community should lead the way in developing CRMs,” Feltmate said in a news release.
“There is no point in talking about TCFD (the Task Force on Climate-related Financial Disclosures), Sustainability Accounting Standards Board (SASB), ESG (environmental, social, and corporate governance investing), or any other combination of letters, if at the end of the day this stuff doesn’t translate into action that lowers the risk profile of the investable universe.”
