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S&P Global releases data tool for physical climate risk assessment

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Quantifying climate change risk and financial impact could benefit public at large, by enabling the identification and quantification of risk from climate change.

  • S&P Global’s new physical risk exposure scores and financial impact dataset aims to help clients manage risks from the physical impacts of climate change.
  • Research conducted by S&P shows that 70% of utilities, energy and materials sector companies have at least one asset at risk, jeopardising 20% of its value. 
  • The solution may eventually benefit the public at large by accelerating infrastructure investment to manage risks from floods, droughts and forest fires.

It is hoped that that ability to do this will push companies and investors to identify adaptation and mitigation measures. The hope is that it may drive a corresponding push in policy to invest in the requisite infrastructure.

S&P Global’s (NYQ:SPGI) new solution will allow companies and investors’ to quantify physical risks and financial impacts from climate change via physical risk exposure scores and a financial impact dataset. The solution combines the capabilities of S&P’s Sustainable 1 and Trucost businesses, while The Climate Service brought its climate risk analytics capabilities.

Reporting on physical climate risks is becoming mandatory

Climate risk reporting will soon become mandatory in a number of jurisdictions, placing companies and investment managers under increasing pressure to have satisfactory reporting methodologies in place.

The Taskforce on Climate-related Financial Disclosures’ (TFCD) recommendations have emerged as the dominant framework through which compliance with these new mandates will be assessed.

New Zealand, for example, has already set strict “comply or explain” disclosure rules for its financial institutions, based on the TFCD’s guidelines. In April 2022, the UK followed suit in making  TFCD-aligned disclosures mandatory for some 1,300 of the country’s largest registered companies and financial service providers.

Hong Kong, Switzerland and Canada are expected to be next on the bandwagon, while the EU follows its own framework – the sustainable finance disclosure regulation (SFDR) – to similar effect.

An attractive aspect of driving mandatory reporting via TCFD across multiple jurisdictions, is the prospect of reducing divergence on risk assessment. The investment community has a low tolerance for risk divergence, which is borne out by a 93% correlation between credit risk ratings.

S&P solution backed by credit rating, index capabilities

The Physical Risk Exposure Scores and Financial Impact Dataset launched by Sustainable1 leverages its credit rating and indexing capabilities to offer climate risk data for more than 20,000 companies and over 870,000 asset locations.

The dataset cover exposure to eight different climate hazards, including extreme heat, extreme cold, wildfires, water stress, drought, coastal flooding, fluvial flooding and tropical cyclones.

The physical risk exposure scores help companies quantify their exposure to climate risks, while the financial impact dataset helps companies calculate the cost of adaptation and mitigation, as a proportion of the value of the exposed asset.

S&P’s new dataset integrates drought as a climate hazard for the first time, which could serve to quantify opportunities as well as risks. Analysis from CDP and Planet Tracker have shown that listed companies could face up to $225 billion in losses related to water shortage.

Research conducted by the company using the new datasets show that 92% of the S&P 1,200 companies have at least one asset at high risk to physical climate change by 2050. Companies in the utilities, energy and materials sectors have the liability, with physical risk endangering 20% or more of that one asset’s value.

Infrastructure investments needed to mitigate physical climate risk

While efforts to quantify the problem are progressing, and there appears to be interest among investors to act, policy support to help upgrade infrastructure is also going to be critical in tackling many of the physical risks from climate change, and their impacts.

The addition of drought as a physical risk from climate change by S&P is not only timely, based on recent events, and is also relevant to other categories of risk, like wildfires and flooding.

According to the UN, 2.3 billion people live in water-stressed countries, which has prompted the investment community to find a solution. And only 2% of the world’s water is fresh, or sweet, with only 0.05% in the atmosphere (clouds) at any given point.

Water is being recognised as a critical investment risk

Further, the CDP report shows that $15.5 billion in assets are at risk or could be stranded due to the water crisis. The report uses four case studies to identify sectors with the highest levels of water usage — oil and gas, electric utilities, coal, and metals mining, the same sectors that S&P identified as having assets with the greatest single-asset liability.

In August 2022, Ceres launched the Valuing Water Finance Initiative, aimed at moving companies and investors to act on the global water crisis. The initiative included 64 signatories with $9.8 trillion in assets under management.

Investing in the water industry remains challenging, as investing in water rights is highly regulated and localised. The number of listed water pure-plays is minimal, leaving companies that have businesses exposed to water through water desalination or smart irrigation projects as the only option for many.

Investments to digitise water infrastructure, for example, can be a useful tool to track and mitigate water losses. Thames Water reported losing 24% of its supply to leakages in its most recent report (2021-2022), equal to 605 million litres a day.

Government mandates to report climate change related risks, be they aligned with TCFD or SFDR-compliant, may be an important first step in quantifying the risk, and the related financial impact. But that would be meaningless if not followed-up with policies to invest in mitigation and adaptation measures.


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