Industries

Climate change and natural disasters adversely impact the value of assets, creating instability in financial markets. When considering this risk, many asset managers and financial institutions focus solely on the characteristics of individual assets without considering ‘outside the fence’ risks like supporting infrastructure and community factors.

• Many firms have broad exposure across asset classes, sectors and geographies, but lack the ability to assess the physical risks that may impact valuations.
• Risk mitigation investments are often implemented imprecisely, lacking the necessary data to enable focused improvements for optimal ROI.
• Climate-related risk disclosure to shareholders and investors is difficult or nearly impossible to do accurately.
• Financial institutions are entrusted to assess and monetize risk, but often lack the tools to do so for climate change and natural disaster risk.
• Sustainable investing is often focused purely on ESG attributes, lacking a much-needed emphasis on climate resilience.

Financial firms need to evolve beyond just assessing individual asset risk, and move instead to measure holistic resilience, incorporating comprehensive climate analytics and statistics in order to accurately quantify these risks to portfolios and businesses.

Once the industry has an understanding of network risk, firms will be able to foster resilience throughout their portfolios. This resilience-based approach will include:

Climate Stress Testing: The financial industry can use resilience intelligence to determine what happens to the value of their assets and lending portfolios under extreme hazard conditions. Further, firms can perform reverse stress tests to determine which scenarios put their business models most at risk.

Risk Selection and Due Diligence: Asset managers and banks can properly assess the true vulnerability of a prospective asset prior to purchase, including forecasting the impacts of climate change on the property and the networks it depends on.

Precision Mitigation: With clear, actionable insights about which business lifelines (such as power or transportation) will fail first in the event of a disaster, and for how long, financial firms can prioritize how to effectively spend mitigation budgets. They will be able to mitigate the right risks and minimize losses.

Resilience Adjusted Valuation: Asset managers can understand the true value of an asset, inclusive of its resilience to climate change and extreme events.

Industry Benchmarking: Investors, analysts and asset managers are able to use benchmarking as a resilience yardstick to see how they measure up to their peers.

Private Equity: The financial industry can utilize resilience intelligence to integrate resilience into ESG reporting, valuation, and corporate action.

One Concern’s analytics provide an asset-level view of the resilience to a range of hazards including those exacerbated by climate change. Asset valuation and risk models can be supplemented by determining both the direct damage probability and the indirect downtime probability arising from disruption to network dependencies (such as calculating the probability that your power network will go out for seven days or more due to forecasted flood risk over a 30-year planning horizon). The One Concern Exceedance Probability (1CEP™) integrates the probability of possible hazards and the range of direct and indirect drivers of asset impairment while the One Concern Downtime Statistic (1CDS™) provides an estimate of property downtime conditional on a hazard impairing a property. The 1CDS™ can be transformed into a One Concern Expected Loss (1CEL™) to integrate directly into financial valuation and risk models.

For banking institutions, we see applications possible now in the following areas:

Resilient Risk Selection: Supplement risk selection efforts to incorporate resilience into screening tools (similar to how ESG indicators are incorporated; that is, Resilience (R) extends sustainability analyses facilitating ESG + R extension to risk selection);

Resilience Adjusted Valuation: Incorporate resilience adjustment into valuation and risk models related to commercial property;

Climate Modeling: Develop climate change-based scenario analyses to investigate the probability of impacts causing direct and indirect impairment of asset function;

Industry Benchmarking: Benchmark resilience analyses of asset portfolios; and

Precision Mitigation: Identify and assess (i.e., calculate a consistent, comparable return-on-investment) mitigation efforts to increase asset resilience as well as business resilience in the context of how a business depends on commercial property.

ESG +R Reporting: Disclose and publicize climate adaptation, focused mitigation, and screening

Portfolio Engagement: Enhance engagement with portfolio companies through business continuity planning and mitigation activities

With the development of relevant underlying covariances and suitable resilience indices, future analytics development will support resilience extension to risk factor models and thus, to portfolio steering. In this context, a bank can run resilience-adjusted portfolio capital estimation, portfolio scenario analyses, stress testing, and reverse stress testing. These analytics facilitate consistent comparison and benchmarking across properties, across geographies, and over time.