The range of tools integrating physical and transition risks has expanded but these solutions are still being developed, which means many risk interaction effects and tipping points are not being captured by financial institutions (FIs).
These were the findings in the United Nations Environment Programme Finance Initiative’s (UNEP FI) 2023 Climate Risk Landscape report.
The report assists financial institutions in better understanding the diverse and dynamic landscape of climate risk tools.
It explores the major market trends in physical risk and transition risk tools and provides detailed analysis on dozens of individual tools.
The project has been supported by a group of 44 banks convened by UNEP FI as part of its Climate Risk and TCFD Programme.
The report noted that FIs are realising the importance of integrating climate-related risks, which they are dividing primarily into physical and transition risks.
Physical risks encompass those resulting from extreme weather events such as floods, wildfires, and landslides, while transition risks are related to policies, technologies, laws and similar actions designed to shift the economy toward lower fossil fuel consumption.
Previously these two categories have tended to be tackled separately, with the former receiving more attention than the latter.
UNEP FI suggests that this approach must be overhauled to better manage climate risks, with integration of physical and transition risk tools an essential part of addressing this issue.
The organisation also notes that climate risk tools can provide tailored analytics for FIs to understand where and to what extent their investments, operations, and downstream supply chains are likely to be exposed to climate impacts.
Some organisations are farther ahead of the curve than others. It pointed to Munich Re provides live event assessments during natural disasters or extreme weather events to help measure anticipated impacts as hazards evolve in real time.
Moody’s Climate Solutions, on the other hand, provides live-event quantification of the potential costs and damage impacts of such events through its climate risk models.
Meanwhile, MSCI’s Climate Lab Enterprise enables risk management and scenario analysis portfolio monitoring, scalable from small institutions to firms with millions of positions.
It incorporates organisation-wide visibility of investment strategies through dynamic dashboards.
©Markets Media Europe 2023
