Market News

How will physical risks of climate change affect companies?

Our new analysis can quantify the physical impact climate change has on companies around the world. The costs could be considerable.

01/08/2018

Andrew Howard

Andrew Howard

Head of Sustainable Research, ESG

Schroders

Marc Hassler

Marc Hassler

Sustainable Investment Analyst

Schroders

The potential costs to some companies of insuring their assets against the impact of climate change could equate to more than 4% of their market values, according to our new physical risk assessment.

This new analysis – the latest addition to Schroders’ climate change investment capabilities – focuses on the often-overlooked risks posed to bricks and mortar.

It is based on the premise that – in theory – companies could insure themselves against the physical damage they may sustain from climate change-induced environmental changes, such as extreme weather events.

Our physical risk framework – which we have applied to over 10,000 companies globally – calculates what businesses would have to pay to insure their physical assets against hazards caused by rising global temperatures and weather disruption.

Comparing that implied cost to companies’ market values provides a systematic way to help measure, monitor and manage the risks companies face.

Which sectors are most affected?

We have identified oil & gas, utilities and basic resources as the sectors most exposed to the physical impact of climate change. The potential cost of insuring their physical assets equates to more than 3% of their market values.

The sectors least at risk are technology, personal & household goods and healthcare. 

Andrew Howard, Head of Sustainable Research, Schroders, said:

 “Disruption from the effects of changing weather patterns globally looks unavoidable – it seems inevitable that risks to physical assets and infrastructure will get bigger.

“However, most climate analysis focuses on the impacts of steps to limit temperature rises, such as carbon prices or clean energy investment. Physical risks, on the other hand, have received less attention.

“That oversight is remiss; the impacts are lower, but they are also more certain. Our proprietary framework assesses companies’ exposures to physical climate risks.

“The lag between greenhouse gas emissions and temperature rises means a further rise in global temperatures looks inevitable given the emissions we have already released.

 “Predictably, capital-intensive sectors operating in more vulnerable parts of the world face the biggest impacts, whereas those with asset-light business models are least exposed.”

This physical damage analysis will help inform the investment decisions of Schroders’ analysts and fund managers, as well as gauge the exposures facing the portfolios they oversee.

It follows the launch of Schroders’ Climate Progress Dashboard and Carbon Value at Risk model, which have also been designed to help investors more accurately assess the risks posed by climate change.   

More information and insights on Schroders’ Sustainability strategic capability can be found on the team’s website here.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

Contact Cazenove Charities

Achieving your charity's investment objectives takes time and thought. To find out how we can help you please contact:

Giles Neville

Giles Neville

Head of Charities giles.neville@cazenovecapital.com
John Clifton

John Clifton

Business Development Manager john.clifton@cazenovecapital.com