5 Physical climate risk | An investor playbook THE PHYSICAL CLIMATE RISK EQUATION PROVIDES THE FRAMEWORK TO ASSESS PHYSICAL CLIMATE RISKS The physical climate risk to a counterparty is a function of its dynamic exposure and vulnerability to climate-related hazards, either individual hazards or a combination of hazards. [...] INTEGRATING PHYSICAL CLIMATE RISK ASSESSMENT AND MANAGEMENT IN THE INVESTMENT CYCLE INTEGRATING PHYSICAL CLIMATE RISK ASSESSMENT AND MANAGEMENT IN THE INVESTMENT CYCLE The representative investment cycle below demonstrates how to integrate physical climate risk and A&R at each stage of the investment process in a proportional and risk-based manner. [...] Output Inherent physical climate risk rating 14 IN-DEPTH DUE DILIGENCE Performing a physical climate risk and vulnerability assessment to (i) determine the materiality of physical climate risk drivers on the counterparty’s performance, and (ii) identify the A&R solutions required to reduce the identified physical climate risk. [...] In these instances, investors may prioritise the assessment of the capacity of the counterparty to identify, assess and manage physical climate risk drivers, as this is the most meaningful and practical means of assessing physical climate risk and vulnerability. [...] stage Monitoring & Reporting Objective Evaluate performance in the implementation of the Adaptation Action Plan ◾ The investor performs a climate risk and vulnerability assessment at two levels to determine risk materiality and identify the required A&R solutions to formalise in the Adaptation Action Plan, that could form part of the ESAP.
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Table of Contents
- CONTENTS 3
- PLAYBOOK INTRODUCTION 4
- PHYSICAL CLIMATE RISK REFERS TO THE FINANCIAL RISKS AND LOSSES THAT CAN ARISE FROM THE ADVERSE EFFECTS OF CURRENT OR FUTURE CLIMATE CONDITIONS 5
- 1. AN INTRODUCTION TO PHYSICAL CLIMATE RISK 5
- THE PHYSICAL CLIMATE RISK EQUATION PROVIDES THE FRAMEWORK TO ASSESS PHYSICAL CLIMATE RISKS 6
- A STEPWISE APPROACH TO INTEGRATE PHYSICAL CLIMATE RISK ASSESSMENT AND MANAGEMENT IN THE INVESTMENT PROCESS 7
- PHYSICAL CLIMATE RISK PATHWAYS FOR INVESTORS AND THEIR COUNTERPARTIES 8
- PHYSICAL CLIMATE RISK MANAGEMENT BRINGS VALUE TO BOTH SHAREHOLDERS AND WIDER STAKEHOLDERS ACROSS AND BEYOND THE INVESTMENT LIFETIME 9
- INTEGRATING PHYSICAL CLIMATE RISK ASSESSMENT AND MANAGEMENT IN THE INVESTMENT CYCLE 10
- 2. INTEGRATING PHYSICAL CLIMATE RISK ASSESSMENT AND MANAGEMENT IN THE INVESTMENT CYCLE 10
- HIGH-LEVEL PHYSICAL CLIMATE RISK ASSESSMENT AND MANAGEMENT ACTIVITIES THROUGH THE INVESTMENT CYCLE 11
- THE SCOPE AND DEPTH OF THE PHYSICAL CLIMATE RISK ASSESSMENT IS PROPORTIONAL TO THE STAGE OF THE INVESTMENT CYCLE AND THE SEVERITY OF THE RISK FACED 12
- APPLYING A RISK BASED AND PROPORTIONATE APPROACH TO PHYSICAL CLIMATE RISK ASSESSMENT AND MANAGEMENT 13
- 3. STEP-BY-STEP PHYSICAL CLIMATE RISK ASSESSMENT AND MANAGEMENT 14
- SCREENING DUE DILIGENCE 14
- IN-DEPTH DUE DILIGENCE 15
- INVESTMENT LEGAL AGREEMENT 16
- MONITORING REPORTING 17
- EXIT WITH VALUE-ADD 18
- 4. WORKED EXAMPLE 19
- PHYSICAL CLIMATE RISK ASSESSMENT AND MANAGEMENT IN PRACTICE 19
- WORKED EXAMPLE ETHIOPIAN AGRIBUSINESS 19
- ILLUSTRATIVE INVESTMENT CONTEXT 19
- WORKED EXAMPLE ETHIOPIAN AGRIBUSINESSSCREENING DUE DILIGENCE 20
- WORKED EXAMPLE ETHIOPIAN AGRIBUSINESSIN-DEPTH DUE DILIGENCE 21
- WORKED EXAMPLE ETHIOPIAN AGRIBUSINESS - INVESTMENT LEGAL AGREEMENT 22
- WORKED EXAMPLE ETHIOPIAN AGRIBUSINESSMONITORING REPORTING 23
- WORKED EXAMPLE ETHIOPIAN AGRIBUSINESSEXIT WITH VALUE-ADD 24
- DISCLAIMER 25
- SUPPLEMENTAL GUIDANCE 27
- HAZARDS 27
- UNDERSTANDING CLIMATE-RELATED HAZARDS 27
- THE USE OF PHYSICAL CLIMATE HAZARD INDICATORS VARIES DEPENDING ON THE INVESTMENT CONTEXT AND INVESTOR PREFERENCE 28
- CLIMATE SCENARIOS AN OVERVIEW OF THE INTEGRATED SHARED SOCIECONOMIC PATHWAYS SSP AND REPRESENTATIVE CONCENTRATION PATHWAYS RCP SCENARIOS 29
- THE SSP X-Y SCENARIOS 29
- SSP1-1.9 SUSTAINABILITYTAKING THE GREEN ROAD 29
- SSP1-2.6MIDDLE OF THE ROAD 29
- SSP3-7.0 A ROCKY ROAD 29
- SSP2-4.5A ROAD DIVIDED 29
- SSP5-8.5 FOSSIL-FUELLED DEVELOPMENTTAKING THE HIGHWAY 29
- PUBLICLY-AVAILABLE DATA SOURCES FOR CLIMATE HAZARD INDICATORS AND SCENARIO MODELLING 30
- SUPPLEMENTAL GUIDANCE 31
- EXPOSURE 31
- UNDERSTANDING EXPOSURE TO CLIMATE-RELATED HAZARDS 31
- ILLUSTRATIVE SECTOR VALUE CHAIN AND ASSET EXPOSURE SCOPING 31
- SUPPLEMENTAL GUIDANCE 32
- VULNERABILITY 32
- UNDERSTANDING A COMPANYS VULNERABILITY PROFILE 32
- PHYSICAL CLIMATE RISK ASSESSMENT RESOURCES 33
- SECTOR GUIDANCE RESOURCES 33
- PHYSICAL CLIMATE RISK SCREENING TOOLS 33
- ADDITIONAL RESOURCES AND REFERENCES 33
- GLOSSARY 34
