Morningstar Sustainalytics: Physical climate risk assessments to be enhanced

Morningstar Sustainalytics: Physical climate risk assessments to be enhanced

June 22, 2023

Climate Change Risk Management Energy Transition
Klimaat (13) duurzaam energietransitie grondstoffen

Morningstar Sustainalytics announces enhancements to its Physical Climate Risk Metrics product, including the addition of two new reports offering deeper views into companies' exposure, loss, and financial resiliency as it relates to physical climate risk.

Within these reports, new indirect risk metrics have been added to better meet the Task Force on Climate-related Financial Disclosures (TCFD) recommendations of disclosing on both direct and indirect physical risk and providing insight across the entire business value chain.

In a hot house world scenario where climate policy efforts are insufficient to stop global warming, leading to irreversible climate change and severe consequences from related physical risks, companies with average physical climate risk exposure within Physical Climate Risk Metrics universe may lose an equivalent of $0.45 for every $1 of cumulative operating cash, between now and 2050.

As part of Morningstar Sustainalytics' evolving set of climate-focused solutions for investors, the comprehensive Physical Climate Risk Metrics dataset provides visibility into the financial impacts of physical climate risks, considering a company's revenue, physical asset value, and operating cash flow.

'With the increasing global adoption of climate-related regulation to accelerate decarbonization and within the limited time to mitigate the effects of global warming, investors need data and insights to understand their exposure to financial risks stemming from the increasingly frequent and devastating climate events', said Azadeh Sabour, senior vice president of Climate Solutions at Morningstar Sustainalytics.

'With net-zero insights from our recently launched Low Carbon Transition Ratings coupled with asset-level data-based insights from our Physical Climate Risk Metrics, we empower investors with a suite of climate solutions that align with the TCFD's guidance.'

The Physical Climate Risk Metrics are a bottom-up assessment of climate change-related adverse impacts from physical hazards, including major storms, wildfires, floods, and others. The dataset can support investor alignment with the TCFD recommendations and provides transparency into a company's expected financial losses between now and 2050. Developed in collaboration with XDI (Cross Dependency Initiative), an award-winning physical climate risk analysis leader, these metrics cover over 12,000 companies, spanning 12 million assets, 135 sectors, and 235 countries.

Collecting and parsing large amounts of asset-level and climate data requires vast technological resources unavailable to many investors. Additionally, the asset-level data to define exposure has been historically limited in its availability. With the Physical Climate Risk Metrics, investors can quantify the physical climate risks facing their portfolio companies and have access to multiple assessment views, including specific hazards, countries, estimated asset damage, estimated revenue losses, time series, and climate scenarios.

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