Weather and climate disasters have cost the United States more than $600 billion over the past five years, impacting individuals, businesses and public sector coffers. For example, record weather-fueled rainfall from Hurricane Maria in 2017 significantly disrupted pharmaceutical manufacturing in Puerto Rico, which accounted for 25% of total US pharmaceutical exports and 72% of pharmaceutical exports. Puerto Rico in 2016, harming investors and people. who needed essential medical supplies like IV bags.
In response to increasingly extreme weather patterns, global policymakers and investors are keen to predict and better prepare for future climate change risks. Yet to reduce the damage caused by climate impacts and make informed political and financial decisions, they must accurately assess these risks.
Investors, companies and policy makers particularly need this type of information on climate risks. But despite large publicly available climate datasets, the connective tissue needed to apply this data to financial risk analyzes is not fully developed and requires better coordination between climate scientists and those trying to assess financial risk. Researchers are now increasingly thinking about how climate science can better inform business risk analysis.
Policymakers need transparency…easier said than done
Policymakers are now beginning to take the risks that climate impacts pose to the economy much more seriously. Last year, the Biden administration issued an Executive Order on Climate-Related Financial Risks, directing federal agencies to analyze and mitigate the risks that climate change poses to homeowners, consumers, businesses, workers, the financial system and the federal government. The U.S. Securities and Exchange Commission (SEC) recently proposed a mandate that, if adopted, would require all publicly traded companies to disclose climate-related impacts on their operations and report their emissions for the first time. greenhouse gases in a standardized way. And the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) is tasked with developing consistent climate-related financial risk disclosures for use by companies, banks and investors to provide information to stakeholders.
The task force developed a set of recommendations for the disclosure of information on climate risks and opportunities, and in October 2021, 1,069 financial institutions (responsible for $194 trillion in assets) pledged to support these recommendations. Broad public and bipartisan support backs these corporate climate risk disclosure mandates: 87% of Americans favor companies disclosing their climate-related risks, including nearly three-quarters of Republicans.
But assessing climate risks for businesses is easier said than done, as the researchers point out. People who prepare climate-related financial information face significant obstacles. In a recent survey, they said finding relevant data and applying appropriate risk assessment methodologies as their two biggest challenges, both of which are central to their work. Moreover, despite the wide availability of public climate data, the data does not match the geographic areas or timeframes used in most financial risk analyses.
Climate models do not easily predict local and specific climate risks
Existing climate models help climatologists better understand how greenhouse gases increase surface temperatures, thereby distorting weather patterns over large areas of the globe. Most model outputs are relevant to assessing climate change conditions globally and 50 to 100 years from now, so model outputs cannot easily answer the main question facing investors: what are the potential impacts on a specific project in the next few years? or a few decades?
Attempts to use current climate data to inform financial decisions vary widely and can be cumbersome. Compressing long-term, global-scale climate data into a model that produces short-term, region-specific financial risk projections without proper interpretation leads to artificial information at best. These misguided attempts can actually lead to poor adaptation and increased vulnerability to climate change, overconfidence in risk assessments, and misrepresentation or “greenwashing” of a company‘s climate response, the experts point out. authors of this study.
While using climate change data directly is not a magic bullet for assessing climate risk to businesses, an interdisciplinary team of Australian experts has charted the course for how climate science can better help. businesses and their investors, lenders and insurers to make informed business decisions. Recent research by Tanya Fiedler, University of Sydney Business School, and Andy Pitman, Center for Climate Change Research, UNSW, Sydney, explains the central problem in current attempts to assess risk : Climate research usually only goes in one direction, from researchers to companies trying to make informed decisions. This limitation does not allow companies to communicate their needs or questions to climate researchers, nor allow climate researchers to adapt the models and results to meet the needs of companies.
A new design for better risk assessments – and to help justify business action
As an alternative, Fielder and his colleagues propose strengthening intermediary groups of professionals focused on operational forecasting and climate services to encourage greater engagement among climate scientists and businesses and to bring more transparency about the value and limitations of climate model information. They emphasize that current barriers will not simply be solved by open access data or by climate service providers repackaging information. Instead, they call for an overhaul of the flow of information so that appropriate climate projections are developed, refined and communicated in consultation with key decision makers.
The weather forecasting industry has shown that a more engaged approach is possible, as Fielder and his colleagues have pointed out. Weather forecasting uses complex numerical models that are 1) continuously updated and improved and 2) supported by significant national and international investments in science and data systems. Additionally, meteorologists translate complex weather simulations into useful information for non-experts. Fielder and his colleagues say a similar level of investment in climate risk modeling is needed to understand and communicate climate risks to decision makers beyond just climate specialists, such as those in the financial sector.
With the help of these “climate translators” and dedicated modelling, businesses can build resilience so they can continue to operate safely and profitably in a changing and warming world. Without a better understanding and preparation for the new uncertainties of climate change, assets, supply chains, jobs and livelihoods will be disrupted more severely and more frequently as climate feedback loops accelerate. The weather will become more extreme, but with the right support, the financial system we rely on can be better prepared.
Increased and improved awareness of climate risks has already led some companies to commit to reducing emissions from their own operations to help slow unmanageable climate change. As more businesses become aware of the threat the climate poses to their businesses, so has increased climate leadership from the corporate sector – leadership desperately needed to reduce global greenhouse gas emissions.
Julie Vano, PhD, is research director at the Aspen Global Change Institute, and Lana Vali is senior philanthropy associate at Energy Innovation.