PHYSICAL CLIMATE RISK APPROACH
Physical risk scenario analysis is a complex area that is not yet fully developed and Impax is working on a methodology to assess our investee companies’ physical risks and opportunities through a multi-faceted approach below. Existing climate scenario tools such as PACTA are not relevant for the types of companies Impax invests in.
The approach is qualitative, analysing companies following a climate scenario approach by the IPCC. The IPPC pathways include carbon concentration scenarios leading to physical climate conditions (incl. different temperatures and distributions of extreme weather events) under different economical and societal circumstances (Storyline).
The goal is to understand the risks and opportunities that each company may face in a 1.5D and a 5.5D world. We will focus on the impact on company physical assets due to Mitigation(Transition) and Adaptation(Physical).
Indicators for physical climate risks used:
Key exogenous indicators (external vulnerability, can not be controlled):
- Water risks (drought, flooding, sea level rise)
- Heat risks (wild fires, land degradation, human health issues, heat-related)
- Extreme weather event risks (storms, hurricanes, typhoons)
Key endogenous indicators (internal exposure, can be controlled to an extent):
- Geographic location of plants, facilities, operations (direct assets)
- Geographic location of and dependency on supply chains (indirect exposures)
- Land and resource risks (agricultural and natural raw materials, crop yield exposures)
An important consideration and one of the data gaps is related to geographic locations of companies’ facilities, operations, plants and supply chains. This is data we are seeking from our companies through engagement.
The physical asset location data provided by companies such as 427.com, are not directly applicable to our investee companies.
Climate scenarios used, IPCC:
In order to understand the overall physical risks and to better understand its connection to other assumptions, we will use the “B2” IPCC scenario as a framework (brief below).
The B2 scenarios are of a world that is more divided, but more ecologically attuned, with better data availability. The B2 scenarios are characterised by:
- Continuously increasing population, but at a slower rate than in A2.
- Emphasis on local rather than global solutions to economic, social and environmental stability.
- Intermediate levels of economic development.
- Less rapid and more fragmented technological change than in A1 and B1.
Full details: http://www.ipcc.ch/ipccreports/sres/emission/095.htm
The aim is to understand and be able to express the levels of physical climate risks and opportunities across portfolios, under different climate scenarios. The approach requires qualitative analysis and company engagement.