Precisely quantifying climate risk is essential to comply with evolving climate reporting requirements, but more importantly, to make informed decisions towards building resilience in a warming world that’s transitioning to a lower-carbon economy.
However, you could face obstacles in securing robust climate risk quantification insight that helps you manage climate risk effectively and drives enduring success. Below, we explore three climate risk quantification challenges and provide practical ways you can address them.
While quantifying carbon emissions is important in terms of meeting certain climate disclosure requirements, it doesn’t provide you with a comprehensive view of climate risk.
A 2023 joint report from WTW and the Institute of International Finance highlights how emissions quantification tends to be backward-looking and may not accurately capture how your profitability is likely to be affected into the future. There’s also a low correlation between financial risk and carbon intensity.
“Quantifying carbon emissions is important to meet climate disclosure requirements, but it doesn’t provide you with a comprehensive view of climate risk.”
Peter Carter | Head of Climate Practice
This means your organization needs to find additional climate risk quantification techniques. These methods should be capable of measuring the consequences of physical climate change on your assets and the secondary effects resulting from changes in business models and supply chains as they adapt to a lower carbon economy. This kind of approach will help you better understand the financial impacts of climate risks.
If we think about managing climate transition risks – and opportunities – these relate to the business uncertainties around net-zero transition, such as policy, legal and market changes. These shifts could see some organizations face significant moves in asset values, cashflows and higher costs of doing business. Analytical techniques can let you quantify transition risk as a financial impact.
Using this type of approach, you can define transition risk as the difference in future value between a business-as-usual scenario and a given number of transition scenarios. You can then feed these outputs into your transition plan disclosures and, more crucially, into strategic decision-making more likely to support resilience and growth.
Quantifying climate risk takes time and effort. In terms of efficiency, it’s better if your climate reporting outputs are useful for more than simply ticking climate-reporting boxes. Ideally, you need information that also guides your ability to meet climate and sustainability commitments while allocating capital in the right places to protect against climate-driven uncertainty and volatility.
Once you use techniques that let you measure the financial impact of your specific physical and transition risks, you can better justify the need for proactive measures and achieve a stronger return on investment.
Analytical modeling can also enable you to explore multiple scenarios, pressure test your assumptions around strategic decisions, anticipate and respond to changing first risks and adapt your strategies accordingly. When robust climate analytics is embedded in your organisation, you can improve your risk transfer and adaptation strategy to reduce your physical risks and make business decisions more likely to outperform your peers in the transition.
“With robust climate analytics embedded in your organisation, you can improve your risk transfer, reduce physical risks and make business decisions more likely to outperform your peers in the transition.”
Peter Carter | Head of Climate Practice
This proactive climate risk quantification approach can support your climate reporting requirements while generating the insight you need to inform resilience against physical or transition-risk related events or losses.
Climate risks are complex and inter-related. It’s understandable why your organization may turn to more traditional qualitative methods, such as scenario analysis workshops, to provide a high-level understanding of potential future outcomes.
However, these processes are resource-intensive and rely on being able to get business leaders together regularly to build consensus on identifying and quantifying the risks the business needs to prioritize. Overall, the process may also lack the precision and repeatability necessary for effective climate risk governance.
Dynamic physical and transition risk models and algorithms provide a more objective, repeatable and auditable approach to climate risk quantification. These models allow you to create a perspective you can track through time, verifying the assumptions and causality behind the insight you generate.
These perspectives can complement climate risk governance forums like senior stakeholder workshops or risk committees, enabling the business to validate and test climate risk management strategies.
With robust, repeatable and transparent climate risk quantification, it’s easier to demonstrate to auditors or compliance officers how the business arrived at key decisions and be confident you’re allocating resources in optimal ways to support resilience and growth in the face of complex climate risks.
Dynamic climate risk quantification models can also give decision-makers real-time feedback on the financial impacts of complex changes resulting from climate risks. This feedback helps prioritize actions and focus on acute problems that could challenge the viability of operations in the future.
By having tools you can engage with frequently over a year, or even over a decade, you can explore the changing landscape as part of a continuous process, generating auditable feedback on what's driving your progress to reaching a climate-resilient future.
Discover how Climate QuantifiedTM can help you quantify the impacts of both physical and transition risks all in one place, using the latest climate datasets and your own business data to put you in the driving seat of your climate risk quantification.
