Climate Risk Modeling for a Sustainable Future

Climate risk modeling is a crucial tool in predicting and preparing for the impacts of climate change. It helps businesses and governments make informed decisions about investments, policies, and infrastructure.

By analyzing historical climate data and future projections, climate risk models can identify areas prone to extreme weather events, sea-level rise, and other climate-related hazards. This information can be used to develop effective strategies for mitigating and adapting to these risks.

According to the Intergovernmental Panel on Climate Change (IPCC), climate-related disasters have increased by 15% over the past decade, resulting in significant economic losses and human suffering.

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Climate risk modeling is a crucial tool for understanding the potential impacts of climate change on various sectors. GCMs (Global Climate Models) improve long-term understanding and prediction of the major climate system components, including the atmosphere, land surface, ocean, and climate behavior.

These models can be customized at a specific regional level with granular detail, providing a global view of climate. Climate risk models blend a version of the GCM model and the CAT model to provide a robust view of climate risk scenarios.

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Climate risk models also include a financial component to help companies determine future climate risk planning from multiple angles, including socio-economic factors. This is particularly important for companies that need to assess and manage their exposure to climate-related risks.

A key aspect of climate risk modeling is incorporating the trajectory for carbon prices, which can have a significant impact on inflation rates and central banks' reaction functions. This is reflected in the forecasts produced by the Global Macroeconomic Model.

To better understand the potential impacts of climate change, it's essential to consider various scenarios, including those related to extreme temperatures, flooding, and heavy precipitation. ClimateSight has projected daily maximum temperatures at midcentury around Portland, Oregon, to determine heat-related risks that increasingly threaten electrical infrastructure.

Here are some examples of how climate risk models can be applied in different regions:

By using climate risk models, companies and organizations can better understand the potential impacts of climate change and develop strategies to mitigate these risks.

Acute physical risks like extreme weather events can manifest as business risks for organizations, depending on transmission channels, which can be microeconomic or macroeconomic.

Extreme weather events can cause damage to a data storage center owned by a business, leading to operational losses associated with system downtime or lost data.

Microeconomic risks can also lead to issues around reduction in economic output, price adjustment due to supply shocks or policy changes, or even capital depreciation.

Banks are particularly vulnerable to credit risk, which is arguably the most important consideration within the banking sector.

Understanding the impacts of climate risk on credit, market, liquidity, and underwriting risk has been a focus for financial institutions.

While both transition risk and physical risk may manifest as credit risk across a bank's lending book, many banking organizations have taken initial steps to focus efforts on transition risk around commercial and industrial (C&I) and commercial real estate (CRE) portfolios, and physical risk on CRE and mortgage portfolios.

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Chemicals companies can assess climate change risks and opportunities across their global operations, using physical risk scenario analysis to model how climate change affects the frequency and severity of perils under different climate scenarios and time horizons.

In the insurance industry, companies can use risk scores to evaluate the exposure of their investment portfolios to climate change risk, giving them a view of the risks and opportunities in their portfolio.

Climate risk management is an integral component of strategy, culture, and business operations in the communications industry, where companies can perform deep-dive analyses to review their short- and long-term business risks and opportunities related to climate change.

Energy companies can model the impact of a carbon price on their portfolios of generation assets and strategic growth platforms to demonstrate the strength of their transition plans to investors.

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Insurance companies can benefit from assessing their investment portfolios for climate change risk. PwC takes into account various levers of climate risk under different scenarios to create a risk score for each asset.

This analysis provides a comprehensive view of the risks and opportunities in the portfolio across different business areas and regions. By understanding these risks, insurance companies can make informed decisions to mitigate potential losses.

Climate risk modeling can help insurance companies use their resources more efficiently and reduce costs. It can also accelerate mission accomplishments and enable better decision-making in uncertain situations.

Insurance companies can use climate risk modeling to create actionable plans to meet resiliency goals. By doing so, they can stay ahead of the curve and adapt to changing climate conditions.

A global energy company was able to model the impact of a carbon price on a portfolio of close to 100 generation assets across the globe.

This helped the company demonstrate the strength of its transition plan to investors, which is crucial for navigating the shift to a low-carbon economy.

The company also simulated a portfolio of future assets against variations in the effects of climate change around the world, taking into account its strategic approach in selecting future asset locations.

This kind of analysis is essential for energy companies that want to stay ahead of the curve in the face of climate change.

The company's efforts to model climate risk show that it's possible to make informed decisions about the future of energy production.

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The Communications Industry is no stranger to climate-related risks and opportunities. A global telecommunications company has successfully integrated climate risk management into its strategy, culture, and business operations.

This company's goal was to be transparent about climate-related risks and opportunities, and they achieved this by publishing a TCFD report. We helped them with this initiative by performing a deep-dive into their governance, risk management, strategy, metrics, and targets.

A key part of this initiative was a pilot physical risk modeling assessment for a sample of the company's strategic assets. This modeling helped the company understand how climate-related perils may intensify at these locations over time and under different future climate scenarios.

The analysis also examined the impact of climate perils like hurricanes, wildfires, and floods on these locations.

The chemicals industry is not immune to the effects of climate change. A global fertilizer company, for example, assessed the impacts of climate change risk and opportunities across its global operations.

Climate change can affect the frequency and severity of perils, such as natural disasters, which can have a significant impact on business operations. Our physical risk scenario analysis modeled how climate change could affect the frequency and severity of perils under different climate scenarios and time horizons.

Companies in the chemicals industry can also be impacted by transition risks, such as direct carbon taxes. We helped a global fertilizer company quantify the impact of direct carbon taxes on its GHG emissions under defined climate scenarios and time horizons.

Reducing GHG emissions can lead to significant savings for companies in the chemicals industry. Our analysis for the global fertilizer company quantified potential savings associated with reducing GHG emissions and its impact on overall business strategy.

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We're working with companies to help them model climate risk, and it's a crucial step in building a more resilient future. Our team at PwC US has helped a global fertilizer company assess the impacts of climate change risk and opportunities across its global operations.

A global energy company is also modeling climate risk to support disclosure under the TCFD framework. We've modeled the impact of a carbon price on a portfolio of close to 100 generation assets across the globe.

Companies are awaiting new climate reporting rules from the Securities and Exchange Commission (SEC), which is drafting climate-related financial disclosures. Over 2,500 organizations, with a combined market capitalization of over $25.1 trillion, support the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

We're helping companies position themselves for a low-carbon future, which has become an operational necessity. More frequent and severe wildfires, floods, and heat waves underscore the need for businesses to become more resilient to physical risks of climate change.

Companies can choose from a growing array of tools to help model climate risks and opportunities. These tools can help companies quantify the economic and financial impact of climate change and identify new avenues for growth.

The Pacific Northwest is in for a rough ride when it comes to heat waves. Future heat waves and heat-related deaths are projected to increase in the region.

The extreme temperatures at the end of June 2021 were a stark reminder of what's to come. For many, the heat was miserable at best and deadly at worst.

We can expect more of the same in the future, unfortunately. The analysis suggests that the heatwave was not just a one-time event, but a harbinger of things to come.

Climate risk modeling offers numerous benefits for organizations looking to prepare for the impacts of climate change. By using climate models, you can translate your resilience goals into actionable plans and programs.

One of the key benefits of climate modeling is its ability to prepare your agency or company for "what if" scenarios, with data informed by science. This helps you maintain infrastructure against catastrophic changes.

Climate modeling also includes adaptation benefits and co-benefits. Adaptation benefits incorporate reversibility and robustness of solutions to support flexible resilience strategies. Co-benefits factor in important features like safety, customer financial benefits, reputational benefits, equity, and infrastructure upgrades.

To earn stakeholder buy-in, capturing the full range of such benefits can help build mutual support for a resilience strategy. This means identifying climate risks and addressing them through adaptation can both increase an organization's operations while also upgrading infrastructure in underserved communities.

Here are five steps every business can take to leverage climate risk modeling as a strategic advantage:

By following these steps, you can start to develop a comprehensive plan to address climate change risks and opportunities, ultimately positioning your organization for success in a low-carbon future.