We must plan and invest today for a more volatile and uncertain future. Better modelling and reporting of physical climate risks can help investors chart the road ahead.
This paper reviews Impax’s pioneering physical climate risk (PCR) engagement since 2020 with companies in a range of industries, suggests what information is needed to improve physical risk assessment and pricing, and offers insights and lessons for future stewardship work in relation to climate resilience. Some key points:
- Compared to four years ago, companies are now more likely to understand that PCR can pose
material risks to their business, but there is still a significant gap between what investors need
to know in order to price those risks and what companies are doing to evaluate them. - Creating climate resilience starts with defining the specific physical climate risks which each
company faces. In addition, companies must model for multiple climate events at the same
time. They also need to imagine and build resilience for events they haven’t experienced yet, via
appropriate climate modeling. Most companies seem unable or unwilling to construct scenarios
for high impact, low-probability events. - Specific information that investors need from companies to assess physical risk includes
geolocation of key assets and value chain nodes; value-at-risk, and actions and capex needed to
build resilience. These should be publicly reported. - To address physical climate risk, we must plan and invest today for a more volatile and uncertain
future, where extreme weather events are not once-in-a-blue-moon “acts of God”, but rather
scenarios with estimated likelihoods, that affect physical assets in a predictable way.
References to specific securities are for illustrative purposes only and should not be considered as a recommendation to buy or sell. Nothing presented herein is intended to constitute investment advice and no investment decision should be made solely based on this information. Nothing presented should be construed as a recommendation to purchase or sell a particular type of security or follow any investment technique or strategy. Information presented herein reflects Impax Asset Management’s views at a particular time. Such views are subject to change at any point and Impax Asset Management shall not be obligated to provide any notice. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary. While Impax Asset Management has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third-party information presented herein. No guarantee of investment performance is being provided and no inference to the contrary should be made.