
Climate risk management is crucial for navigating the changing world we live in. The Intergovernmental Panel on Climate Change (IPCC) warns that global temperatures are likely to rise by 1.5°C above pre-industrial levels by 2030, causing more frequent and severe weather events.
This level of warming will have devastating consequences, including more frequent and intense heatwaves, droughts, and storms. Rising sea levels will also lead to more frequent and severe coastal flooding.
To mitigate these risks, businesses and governments must adopt a proactive approach to climate risk management. This involves identifying and assessing potential climate-related risks, developing strategies to mitigate them, and implementing measures to adapt to a changing climate.
Effective climate risk management requires a combination of technological innovation, policy changes, and behavioral shifts.
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Understanding Climate Risk
Climate risk refers to the potential financial impacts of climate-related transition risks and associated changes in energy and carbon prices around the globe.
Businesses need robust tools to quantify these risks, and using climate scenarios and integrated climate-economic assessment models can help strategically map out risks and opportunities.
For another approach, see: Climate Risk Modeling
The Task Force on Climate-Related Financial Disclosures (TCFD) guidelines outline the principles and methods for assessing climate risks, which can help businesses meet internationally-accepted criteria.
Investors also need to consider climate risk, as financial institutions must reckon with new and changing risks to assets and the broader financial system due to climate change.
The 5th National Climate Assessment report identifies climate risks to humans and natural systems in the United States, now and in the future, highlighting the need for businesses and investors to understand and manage climate risk.
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Collaborate with Expert Teams
Collaborating with expert teams is crucial in understanding climate risk. This involves working with integrated teams of experts who bring their unique perspectives and knowledge to the table.
The National Climate Assessment report highlights the importance of collaboration in addressing climate change. The report identifies climate risks to humans and natural systems in the United States, now and in the future.
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A holistic approach to understanding climate risks is essential. This approach combines scientific expertise with a deep understanding of the region, its climate, and its vulnerabilities.
Technical training and assistance (TTA) is a partnership that relies on robust industry knowledge. This knowledge is used to create targeted assessments and solutions, prepare and execute climate action plans, and promote sustainable urban development.
Regions, provinces, and cities can benefit from a collaborative approach to understanding climate risks. By working together, they can cultivate a realistic path to maturity and reduce their vulnerability to climate hazards.
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Thinking
Businesses need robust tools to quantify their climate-related transition risks and associated potential financial impacts. Using a variety of climate scenarios and integrated climate-economic assessment models, we help our clients strategically map out risks and opportunities.
The Task Force on Climate-Related Financial Disclosures (TCFD) guidelines outline the principles and methods for this tool, helping our clients meet internationally-accepted criteria.
Climate change is warming the planet, and actions to reduce emissions are creating new and changing risks to assets and the broader financial system.
Financial institutions must reckon with these risks to accurately account for them and manage financial risk effectively.
The 5th National Climate Assessment report identifies climate risks to humans and natural systems in the United States, now and in the future, highlighting the impacts of climate change in every region.
Investors must consider the trade-off between risk and return in any investment, and climate change poses new and changing risks to financial systems and stakeholders.
Climate IQ is approved by and delivered in collaboration with KPMG UK, helping our clients explore potential risks and opportunities in the short- and long-term, focusing on transition risk as they move towards a low-carbon emission future.
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Financial Impacts of Change
Climate risk can have significant financial impacts on businesses, investors, and governments. The Task Force on Climate-Related Financial Disclosures (TCFD) recommends that companies assess their climate risk exposure and develop a plan to address it.
Financial analysts use tools like the KPMG Climate IQ to quantify the potential financial impact of climate-related risks and opportunities. This helps businesses make informed decisions about strategic capital planning.
Climate change can lead to physical risks such as property damage and business interruption, which can be quantified using data-backed climate analysis. KPMG partners with third parties to help organizations assess these risks and identify areas for mitigation.
Systemic risk, on the other hand, refers to the broad risk of failure across the financial system. Climate change has the potential to trigger such failures, as recognized by the Financial Stability Oversight Council (FSOC) and the US Commodity Futures Trading Commission (CFTC).
Implementing federal carbon pricing and similar climate policies can help lower transition and physical risks. However, firms and investors still need to properly assess their exposure to these risks to manage them effectively.
Uncertainty shouldn't be a barrier to action, and data-backed climate analysis can help bring a sense of clarity to climate impact assessment and risk analysis. This approach involves using analytical rigor, state-of-the-science approaches, and technical integrity.
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A higher cost of capital can result from climate-related impacts, such as infrastructure damage from natural disasters or profit losses in the energy transition. This can lead to increased default risks and higher yields on bonds or stocks.
Here are some examples of how climate-related impacts can affect the cost of capital:
Risk Assessment and Modeling
Assessing potential climate-related risks is a critical element of a sustainable decarbonization plan. KPMG partners with third parties to help quantify financial impacts of property damage and business interruption on a site-level basis.
Climate risk modeling is the process of using the latest climate science and data to project changes in future extreme weather, including heat, droughts, flooding, and storms, and the potential impacts of that weather. This process is essential in predicting future climate scenarios and making informed decisions.
Climate risk models take a variety of forms, each synthesizing the complexity of surrounding variable data to provide clear, visual, and actionable data. With proven science-based processes, each model type serves a particular purpose, but all provide organizations with a visualization of scenarios that inform future risk assumptions and resiliency decisions.
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Some key uses of climate risk modeling include:
- Targeting national expenditure and regional program development
- Assessing vulnerability to inform long-term energy infrastructure and resilience planning
- Projecting crop yield, growing-season changes, and adaptation for long-term agricultural planning
- Screening potential investments for risks and opportunities
Climate risk modeling provides agencies and organizations with the opportunity to make informed cases for forward-looking action, achieve resilience goals, and reveal potential actions. This process also delivers the data necessary to create short- and long-term solution plans that reinforce and enhance industry and consumer confidence.
Climate stress testing is a standard tool used by financial institutions and regulators to assess financial resilience in adverse scenarios, such as a recession. This approach is recognized as an essential tool to analyze exposure to climate-related financial risks.
The accuracy of climate stress tests is limited by the availability and quality of firm-level data on physical risk factors and carbon intensity. Further research is needed to refine modeling over a long time horizon and to improve the plausibility and relevance of the scenarios.
Climate Change Impacts
Climate change impacts are far-reaching and varied, affecting different regions in distinct ways. The United States is experiencing the impacts of climate change in every region, from fires in the west to hurricane-related flooding in the east.
Climate risk analysis often requires considering two broad categories of risk: physical risks and transition risks. Physical risks result from natural, climatic events like floods or wildfires, which are increasing in frequency due to climate change.
The Pacific Northwest is projected to experience future heat waves and heat-related deaths, with temperatures becoming increasingly deadly. Acute physical risks are just one aspect of climate risk, and it's essential to model the trajectory of longer-term physical risks like rising sea temperatures.
Here are some key climate risks to consider:
- Floods and wildfires
- Rising sea temperatures
- Heat-related deaths
Transition risks take into account large-scale transformation of systems, policies, and economies directly tied to large-scale decarbonization efforts. This includes changing behaviors and business models based on such transformations, which can provide opportunity for analysis of climate strategy investments.
Assessing Physical
Assessing Physical Climate Risks is a crucial step in understanding the impacts of climate change. It involves evaluating the potential damage and disruption caused by natural disasters such as floods, wildfires, and rising sea temperatures.
Physical risks are becoming more frequent due to climate change, making it essential to model their trajectory. This includes acute physical risks like floods and wildfires, as well as longer-term risks like rising sea temperatures.
Assessing physical risks can help identify areas of high risk concentration, allowing for targeted risk mitigation plans. KPMG partners with third parties to help quantify financial impacts of property damage and business interruption on a site-level basis.
According to KPMG, their tools are supported by over $5 million of climate data, providing a comprehensive view of future projections. This data can be used to identify major risks by type and magnitude.
Here's a breakdown of the types of physical risks to consider:
Assessing physical risks is not a one-time task, but rather an ongoing process that requires regular monitoring and adaptation. By staying on top of physical risks, organizations can better prepare for and respond to climate-related disasters.
Public Burden
Climate change has a significant impact on the public, and it's not just about the environment. Investments from pension funds and retirement savings are subject to the same risks as other investors.
Taxpayer dollars are at stake through the federal government's role as the main provider of mortgage guarantees, flood insurance, crop insurance, disaster aid, and other social programs.
The government also acts as the insurer of last resort to the financial sector in extreme events, as seen in the 2008 financial crisis.
If climate-related financial risks lead to a general economic downturn, millions will suffer from significant welfare losses and economic hardship.
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Change and Mental Health
Climate change is having a profound impact on our mental health, and it's essential we understand the connection. Warming temperatures play a role in negatively impacting mental health with an increased risk of suicide.
The good news is that climate risk analytics can help tackle both crises by creating projections that inform the development of effective mental health interventions.
Sources
- https://kpmg.com/us/en/capabilities-services/kpmg-sustainability/kpmg-impact-strategy/climate-risk-resilience.html
- https://www.rff.org/publications/explainers/climate-financial-risks-101/
- https://www.icf.com/insights/climate-risk-modeling
- https://www.munichre.com/rmp/en/products/location-risk-intelligence/climate-change-edition.html
- https://www.ibm.com/resources/business-operations/manage-climate-risk
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