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ESG Data and Tech Summit Report: Coming to Terms with Climate Risks

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Quantifying risks to assets posed by changes in the climate and companies’ transitions to meeting net-zero carbon goals are being baked into organisations’ risk-management workflows.

What many had regarded as a conceptual risk has become an apparent one, as the increased occurrence of severe weather events caused by global warming have led to record levels of wind, flood and other weather-related damage to property and corporate operations. In response, financial institutions are seeking to incorporate climate factors into their risk models.

But the need to do so is presenting new challenges as they reconfigure their data, technology and operations to meet this new imperative. In an illuminating panel discussion at A-Team Group’s ESG Data and Tech Summit London, leading figures in climate risk management highlighted the toughest hurdles being faced by organisations that oversee or own potentially vulnerable assets.

Not Enough Data

The data challenge was highlighted as a key sticking point for financial institutions. That’s especially so given that there are so many gaps in the data record that modelling climate risks and their likely impacts on assets is prone to inaccuracies.

Monica Filkova, head of climate and nature investment risk for the chief investment office at Aviva, said that risk models begged for granular data that doesn’t yet exist. While forecasts can be made about high-level risks, the lack of fine data made it difficult to effectively translate those models into decision-making processes.

While new data sets, such as those gathered by geospatial information systems, and the emergence of forward-looking analyses through the use of artificial intelligence are helping to fill those gaps, the process of enriching forecast models has been slow. The panel agreed with Filkova’s comment that, with our current understanding of how climate change will play out in the real world and on the economy, we know that whatever estimates we make now will be wrong.

Enterprise-Wide Use

The data gap is a contributing factor to challenges that institutions face in making their risk assessments and insights useable across their organisations, argued Andy Ruocco, head of climate data and analytics at NatWest bank. To be of any use, climate risk data needs to be accessible in a “range of places” within an organisation, Ruocco said.

NatWest’s position is informed by the fact that it deals with lots of smaller corporations and private companies, many of which don’t disclose data pertinent to climate-risk assessments, he said.

The data challenge comes not only from the paucity of company-reported information, he added. The absence of long-term metrics on some climatic phenomena, like flooding, has made calculations of risk difficult. We know that flood risk will lead to property devaluations in the future, for instance, but without the relevant data, we can’t project when and how that will happen.

In the meantime, Ruocco said – citing real assets built on a prominent UK floodplain – property values continue to appreciate.

‘Radical Uncertainty’

The problem can be reduced to one principle, said David Carlin, climate risk and TCFD lead at the UNEP-FI: that institutions are confronting “radical uncertainty”. Nobody can tell with any precisions how climate change will play out. That makes it all the more important that organisations integrate climate impact risks into models now – if only to give a sense of direction to calculations.

Gianluca Cantalupi, global head of sustainability and climate risk at Credit Suisse, agreed, arguing that it was now foolhardy for organisations not to incorporate climate risks and broader ESG factors into every decision made by the C-suite.

To underline the point, Cantalupi said he knew of at least 50 large companies that had experienced censure of one form or other because they had failed in an area of ESG. They had suffered sanctions but were also still battling the public relations fallout.

Can’t Get the Staff

The future is looking relatively bright as companies begin to realise the importance of climate risk assessments. But there was still one more hurdle, the panel heard. Recruiting the talent needed to carry the project forward is going to be tough.

Few people are skilled in both banking and climate modelling, and universities are not teaching the necessary disciplines in combination. Filkova said that until that picture changes, the best that organisations could do is hire talent from a broad range of associated disciplines and encourage them to learn together.

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