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S&P Sustainable1 Physical Risk Scores Offer Social Impact Window

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E, S and G is generally regarded in aggregation, but data products and services usually measure each individually.

S&P Global Sustainable1 business, however, believes the geolocated company and climate data combined in its new physical risks metrics are providing a means of measuring the conjunction of the first two of ESG’s pillars.

The global rating and data company’s latest offering enables investors to test the vulnerability of their portfolios to climate-linked risks such as heatwaves and floods, and then obtain an estimated financial cost of that risk.

Steve Bullock, UK-based head of Sustainable1’s innovation and solutions team, says that the product has the capability of also indicating social risk factors that may result from climate change.

“The intersection of climate and social issues is incredibly important,” Bullock tells ESG Insight. “And this data can help shine a light on specific impacts and specific locations.

“Being able to have that visibility and transparency globally of where these risks will be most material can help the social agenda. It can ensure that organisations, companies and investors are thinking about where these impacts are happening and how to approach mitigation and adaptation with regards to some of these social issues.”

UN SDGs

The United Nations recognises the impact of climate change on society in its Sustainable Development Goals. While many studies have identified real-time changes to human populations that already exist as a result of desertification, flooding and increasing heat, investor-focused metrics have tended to concentrate on climate- or social-linked risks and opportunities for financial institutions.

Mapping that data geospatially, however, is helping to bring clarity. By linking companies and their assets to locations in which climate risks have been carefully calculated, investors have an opportunity to identify where mitigation-focused capital might have the greatest human impact. As well, it will give a better picture of where their climate-impacted capital would also face social likely risks.

As debate has raged recently over the value of ESG reporting, some voices have said that the agglomeration of environment, social and governance factors into scores and ratings have led to greenwashing. For instance, the inclusion of some fossil fuel producers within sustainable indexes because of their strong social and governance commitments, have given critics ammunition and led to calls for scoring to be conducted separately on each of ESG’s pillars.

Increasingly sophisticated data and modelling, however, is making it possible to gauge the interaction between the factors more accurately. That’s been seen, for instance, in energy transition models, of which S&P and Bloomberg are among developers. These generally attempt to reflect a company’s progress towards meeting net-zero targets through their introduction of renewable energy sources.

“You can’t talk about one without the other really,” Bullock says. “That’s really important.”

IPCC Model

Sustainab1e’s physical risk scores are ostensibly targeted at highlighting what climate-linked risk companies and assets face in any part of the world. It maps corporate data and forward-looking climate assessments to physical locations around the world.

The climate data is based on models created and constantly updated by the Intergovernmental Panel on Climate Change (IPCC). That is then combined valuation calculations for 250 different assets and asset types.

Sustainable1 offers clients physical risk exposure scores of between one and 100 on all the 850,000-plus assets on which S&P keeps data. For bonds, Sustainable1 presents a score on the issuer and the project that the instrument is funding.

“The result is a dataset that not only provides clients with an understanding of their exposure to these types of issues, but also the financial impacts associated with those risks around the world,” Bullock explains.

Bullock said the product is not a static one. As the IPCC updates its forecasts for the impact of climate change on all parts of the world, Sustianble1’s physical risk model will be updated. Also, the company is looking to see how it can incorporate satellite data to increase the resolution of its models.

Bullock said that improving the model was vital to helping the 30 per cent of companies who face serious physical risks by 2050 if the world fails to reach the Paris agreement temperature target.

“Under a scenario that’s aligned with a low-carbon transition, aligned with the goals of the Paris agreement, 40 per cent of those companies would still have assets at risk by the 2090s,” he says. “What that says to me is that there’s a residual risk already embedded in all of these scenarios – that’s a call to action for companies to understand quantify, manage, mitigate and adapt.”

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