How will physical risks of climate change affect companies?
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.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.