Engaging with companies on just resilience
Our toolkit highlights how investors can engage with investee companies to understand the implications of climate physical risks for people and portfolios.
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Schroders, in collaboration The Global Labor Institute at Cornell University, has been working to develop an investor guide and engage with investee companies on the topic of just resilience. The aim of this is to raise awareness of the social implications of physical climate risk and adaptation, and to identify good practice for action.
This document is intended to provide information to other investors wishing to engage on the topic and help build a common understanding of risks and solutions.
Why focus on climate physical risks?
Globalisation has meant that businesses of all sizes have become increasingly dependent on global value chains for imported intermediate goods and final goods for sale. These value chains are likely to suffer disruptions due to the physical impacts of climate change. This can lead to revenue losses and increased operational costs for many companies as the frequency and severity of extreme weather events such as floods, wildfires, and hurricanes are worsening due to climate change.
Addressing climate physical risk through engagement with companies should aim to protect portfolio value and align with client demand to develop sustainable, climate-resilient investments.
Just resilience refers to the equitable distribution of resources and opportunities to strengthen resilience against climate impacts, ensuring that vulnerable and marginalised communities are not disproportionately affected. It integrates principles of social justice with climate resilience efforts.
Identifying risk: where to prioritise engagement and action?
According to NGFS, droughts and heatwaves pose the largest overall risk to GDP, with impacts varying considerably across different regions, compared to other physical risks. Investors may therefore choose to particularly consider the impact of these risks on businesses and workers.
Equatorial countries in Africa, North and South America as well as part of Europe are at greater risk of extreme heat, drought, and wildfires. Coastal areas like Southeast Asia and the Gulf of Mexico face heightened risk from typhoons or hurricanes.
Certain sectors and supply chains face higher risk of disruption from physical risks than others. Industries that rely on natural resources, for example, mining, energy, and agriculture, face the highest supply chain risks from physical climate impacts.
Meanwhile, the textiles and apparel industry faces risks from floods and heatwaves, particularly in low-lying and developing regions where many suppliers are based.
Engaging on physical climate risk: questions to ask
We highlight questions investors may find useful when engaging with investee companies on physical climate risks, and what action they plan to take.
Identifying risks:
- What are the most significant physical climate risks that the company is seeing among its supplier base? Can the company share any examples of when and how it or its supply chain has been impacted by climatic events?
- Does the brand work with suppliers to understand and monitor local climate trends and prepare adaptive strategies?
- To what extent do you consider physical climate risk in supply chains within your climate scenario planning and supply chain modelling?
- Have you undertaken analysis of supply chains to understand potential value at risk of climate physical impacts as well as financial opportunities from climate adaptation measures?
- Have you identified which of your suppliers may be more exposed to physical climate risks and how do you assess supplier vulnerability and preparedness? Does this include key data to assess your suppliers’ human rights risks associated with climate change, such as working environment temperatures and injury or illness rates?
Action plans:
- Where a brand is taking action to adapt to the physical impacts of climate change, does it consider the impact such action may have on people in its supply chain?
- What are the biggest challenges or barriers to action on physical climate risk?
- Do you plan to support suppliers in their climate adaptation measures? How do you intend to do this, and does it include financial support?
- Does the company support and encourage supplier climate insurance, such as for property and casualty, as well as health insurance for workers?
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