Assessment and disclosure of physical climate risk is an evolving and growing challenge for companies of all sizes - One Concern provides the insights needed to measure both and direct and indirect damage in terms of downtime and cash flow impairment.
Today, many enterprises voluntarily disclose their progress toward ESG goals but aren’t required to quantify their physical climate risks. If global proposed regulations are implemented, companies will face a reporting requirement to provide greater transparency in climate-related financial reporting. Recently, the U.S. Securities Exchange Commission, Japan Exchange Group (JPX), European Commission and standards organizations have implemented, promoted or proposed rules to bring transparency on climate vulnerability into financial systems.
Global landscape on physical climate risk disclosures.
U.S. regulators' draft proposal would ask companies to disclose the following:
1. The process by which a company detects, evaluates and manages climate-related risks;
2. The scenario analysis used for business resilience and climate-related risks, descriptions of scenarios, assumptions, and projected financial impacts;
3. The impact severe weather events have on financial line items, such as impairment charges or increased loss reserves, if the amount is material to the business. Materiality is defined as the cost exceeding 1% of the related line item;
4. The expenditures and capitalized costs related to mitigating the risk of severe weather events if such amount exceeds 1% of the related line item.
In Japan, the Japan Exchange Group (JPX) encourages voluntary disclosures of companies listed on the Prime Market segment of the Tokyo Stock Exchange. Companies' disclosures should be based on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) or an equivalent framework based on the revision of the Corporate Governance Code in June 2021. Additionally, the Japan Financial Services has discussed climate change disclosure requirements in its Financial System Council and concluded that listed companies need to disclose TCFD-based requirements from the financial year of 2023 in the earliest case.
In Europe, the European Commission issued a draft proposal that would ask companies to disclose the financial effects of physical risks and targets for climate change mitigation and adaptation. Additionally, in the European Union, the European Sustainability Reporting Standards proposed new standards that would require companies to disclose the financial effects of physical climate risk and targets for climate change mitigation and adaptation. Similarly, the International Sustainability Standards Board (ISSB) and European Financial Reporting Advisory Group would require granular disclosures to identify climate hazards, report physical climate risk and its impact on business operations and value chain, as well as its financial effects.
Companies will require expertise, curated data, and software to understand degrading financial performance and increasing costs due to severe weather. For example, the economic effects of climate-related risk on infrastructure and its impact on business operations are becoming top of mind for enterprises and regulators. In a CDP Global Supply Chain Report, suppliers reported in 2020 that climate change potentially cost them $1.21 trillion.
Additionally, on average, flooding in the U.S. causes $19 billion of losses yearly, of which 74% stems from uninsured losses. As climate change intensifies, flooding-related losses in the U.S. are expected to spike 26% by 2050 under the RCP 4.5 scenario, according to a Nature Climate Change journal article.
Companies will need to review weather and climate change’s direct and indirect impact on property, equipment and operations to determine materiality. Consulting firms that currently offer ESG reporting services lack dependency-level analysis of operational infrastructure risk and can provide only general qualitative analysis. As enterprises look to provide clear and robust disclosures on their climate-related risks and their financial impacts, companies may need to consider the following:
1. Developing or enhancing existing frameworks for evaluating physical climate risk;
2. Purchasing climate models to help address qualitative and quantitative materiality;
3. Using analytics and AI/ML to process a company's voluminous data sets.
One Concern offers a cost-effective solution to transform physical climate risk reporting from a qualitative approach to quantitative analysis.
Unlike bespoke consulting firms, which rely on lengthy qualitative processes, One Concern can provide users with the insights they need to disclose their climate risk in moments. At a fraction of the cost of bespoke consulting firms, One Concern offers more accurate, replicable and actionable metrics that enterprises can extract themselves without relying on expensive external expertise.
One Concern has two products, One Concern Domino™ and One Concern DNA™, which can support companies’ regulatory responses concerning:
1. How the material impact of physical climate risk may impact business and consolidated financial statements;
2. How climate-related risks likely affect an enterprise's business model and outlook;
3. Climate scenario analysis and climate stress testing;
4. The financial impact extreme weather and climate-exacerbated events have on the line items of a consolidated financial statement.
One Concern products allow users to project their asset-level operational downtime against perils and climate scenarios across customizable return periods, planning horizons, and risk thresholds. Users can then translate direct and indirect damage into cash flow impairment. This impairment is calculated through our One Concern Downtime Statistic™ (1CDS™). One Concern’s downtime statistic estimates the time a commercial property may not support normal business operations. The downtime statistic is a function of indirect impairment from damage to supporting lifeline networks (e.g., power, transportation, and communities). This statistic can be used alongside custom analysis to estimate a company’s financial losses due to operational downtime.
An enterprise can project cash-flow impairment to business operations by quantifying and disclosing the impact of operational downtime emanating from physical climate risk and climate-related dependency risks.