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Climate Risk Climbs Up Executives Worry List but Data Gaps Remain a Challenge

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Financial services firms and corporates are increasingly incorporating climate risk into their risk management frameworks, but a lack of data is hampering the process.

A survey by Bloomberg found that almost nine in 10 senior executives polled said they had begun aligning their risk management processes with climate change. Nevertheless, only 5 per cent of the people questioned said they were at an advanced stage; the rest were almost equally split between setting out on their transition and mid-way through it. Also of concern, the survey found that climate risks were lowest on managers’ list of worries about potential impacts to their credit risks.

The survey was the first of its kind by Bloomberg. Zane Van Dusen, Head of Risk and Investment Analytics Products, said the signs are that executives are taking the matter more seriously than last year.

“The message is getting out there that this is an important risk that needs to go mainstream now and can’t just live in the ESG tower of a company,” Van Dusen told ESG Insight. “It needs to go to the actual day-to-day risk managers who are looking at credit, the traders who are looking at trades and doing that kind of analysis – it needs to be baked into everything they do along with the stuff that they already look at.”

Risk Emphasis

The survey comes as data providers, including Bloomberg, place greater emphasis on climate risk data and products. That has happened in lockstep with growing concern among scientists that the world is nearing a climate tipping point after which violent and unpredictable weather events, such as hurricanes and rising sea levels, and their impacts, including property damage and flooding, will begin to be reflected in corporate profitability.

Bloomberg provides a combination of as-reported and carbon emission estimates on more than 50,000 companies globally along with supply chain and geolocation datasets to help firms triangulate climate risks. Zurich-based SIX recently began offering clients a carbon emissions and risk analysis service in collaboration with Urgentem. Also, Moody’s created its ESG360 scores and models product to help clients understand their climate risk exposures. The importance of getting to grips with the issue was highlighted in a European Central Bank study that estimated around US$71 billion could be wiped from the value of investments this year by rising carbon prices, floods and droughts.

“It’s really a story of good and bad news – the good news is firms are taking this seriously, the bad news is they’re taking it seriously because it is a real risk,” said Van Dusen.

The Bloomberg survey found that the biggest driver for beefing up climate risk considerations in firms’ investment processes was to meet regulatory and disclosure requirements; a quarter of respondents identified that as their main reason for action. The next most pressing reason was to calculate the value of their assets exposed to climate risks. Financial performance and reputational risk were cited by a little more than one in 10.

More Haste

While the increase in activity is encouraging, it may not be happening fast enough. Van Dusen said that from his conversations with Bloomberg customers it is clear that a lack of data is placing a hurdle in the way of companies getting their climate risk management processes in place.

A key reason for that, he said, was the inability to obtain data from the large number of smaller firms that make up global supply chains. Regulators, particularly in Europe, will soon be demanding scope three emissions figures from reporting financial institutions, which include the carbon data from all companies in their portfolios and the companies that supply them. In the absence of that data, they are having to make estimates, which may not always be based on the most accurate information.

“I’m sure many firms are learning now that a much larger percentage of their portfolio is something they’re having to proxy for instead of having direct data and that’s a problem,” he said.

“That’s why we’re having more and more conversations around what we can do to fill those data gaps, what models can they build to estimate what will be the greenhouse gas emissions of a company, or what is the physical risk of a company that they don’t have the data for today?”

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