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New Frontiers in Climate-Risk Analytics

There currently is no perfect solution for assessing the financial effects of physical climate change, but this should not be an excuse for inaction. Enhanced climate-risk analytics can provide a clearer idea of how bad – or expensive – global warming could become for businesses.

LONDON – In recent years, record-breaking temperatures and extreme weather events have highlighted the overwhelming impact of greenhouse-gas (GHG) emissions on the global climate. Moreover, the costs of such events are mounting. For example, five of the worst natural disasters in US history have occurred since 2005, causing economic damage totaling $523 billion in inflation-adjusted terms. And America has suffered 22 major natural disasters in the last year alone.

But translating the outputs of climate-change models into specific potential impacts, and gauging the financial materiality of climate hazards, presents challenges for both businesses and investors. The rapid uptake of model-driven climate data has fueled concerns about unintended misuse in the context of financial decision-making and disclosures, as well as about material misstatements in financial reports and greenwashing. These risks are particularly problematic in the case of long-term capital investments in public infrastructure, which often have a multi-decade operational lifespan.

Financial market participants’ need for climate information varies, in terms of both granularity of assessment (regarding specific assets or asset classes, regions, and sectors) and time horizons. But it is difficult to assess measures to mitigate climate exposures without specific data on entities’ past performance. This may include how businesses have been affected by historic events such as flooding, the timing and geographic scale of hazards and their impact, and the effectiveness of adaptation.

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