New climate risk report will help businesses assess the effects of global warming

A new framework for classifying climate risks to firms is available today, called the “taxonomy of climate risk”.

Created by the Centre for Climate Finance & Investment (CCFI) at the Business School, the New taxonomyThis will enable investors, lenders, and regulators better assess the climate risks and natural capital risks that may impact their organizations.

This report is the first to codify natural capital risk, which are not usually included in traditional credit or risk analysis, into an organized taxonomy. It also represents the first attempt at capturing a wide range of transitional and physical climate risks that could affect a company’s financial profile.

The report combines the three most common climate risks that companies face with an additional category:

• Acute and chronic risks to physical health, such as water and heat stresses and rising sea levels.
• Transition risks related to adaptation—how to adapt coastal infrastructure to physical risk impacts
• Transition risks that can be mitigated, including regulatory compliance risks and reputational and litigation risk
• Natural capital risks—those that reflect depletion of both renewable and non-renewable resources that are themselves affected by climate risk factors

These are traditional approaches to climate change. risk assessmentThe report attempts to analyze these financial impacts at the firm level. This includes the potential impact on margins and cash flows as well as the impact on asset valuations.

The fourth category represents a new risk assessment category– the first attempt to codify such risks into an organized framework. This includes natural events that can be accelerated by disruptions or depletion of natural capital, particularly in the water supply area.

The four major indicators chosen—subsidy loss risks, depletion risks, boundary condition risks and geopolitical risks, are becoming an increasingly important policy goal for both the public and private sectors.

Bob Buhr, honorary research fellow at the Centre for Climate Finance & Investment at Imperial College Business School and lead author of the report said: “Climate change is certain to have broad impacts on companies in affected industries, not least on their credit profiles and share prices. Investors and lenders will not be able to use this information unless they can further understand the financial risks and their potential timing and impact.

The taxonomy is a framework that will assist stakeholders in identifying climate risks before they have an impact on asset utilization, stranded assets or reduced income and margins.

Mr. Buhr said that it was impossible to assess the financial impact of climate change on a specific firm or sector of corporations if we don’t speak directly to investors or lenders.

Michael Wilkins, executive director and professor of practice at the Centre for Climate Finance & Investment at Imperial College Business School, added: “A climate risk taxonomy should be organized according to increasing granulation of different types of risks and levels of potential materiality at the firm level. As an investment opportunity set, the EU’s Green Taxonomy can be a useful tool. Its potential utility as a risk monitor is limited by its focus on the industrial sectors and the fact that it doesn’t evaluate the costs associated to the transition it aims to encourage.

Increased concerns from investors, lenders, and regulators about climate risks have led to the Business School creating a comprehensive taxonomy, which goes beyond any other research.

“This taxonomy is meant to complement, not replace traditional financial analysis which is useful in situations with more defined horizons,” said Mr. Buhr. “At the exact same time, this TaxonomyAs the financial consequences of climate change become more apparent and more systemic, integral considerations should be taken into account.

The complete report, “What is it?” Climate financial risk? A Field guide“For investors, lenders, or regulators” is available. DownloadFrom the Imperial College Business School website.