Assessing climate physical risks for financial decision makers - Common methodologies,challenges and case studies

Climate change is happening, and its effects are already visible across the world. Human activities and businesses are being impacted in all sectors by extreme weather and climate events and chronic shifts in climate such as increasing temperature, changes in rainfall patterns and sea-level rise. These physical impacts of climate change are expected to worsen over the next few decades, threatening financial investments and activities. If the regulatory framework has evolved, with the set of recommendations issued by the Task Force on Climate-Related Financial Disclosures (TCFD) for a better climate risks reporting in the financial sector, the investors lack the tools and expertise to quantify the impacts of physical climate risks on their assets and investments. Moreover, the physical impacts of climate change are highly localized, and tailored, detailed information is needed, from climate variables to financial indicators. This report introduces the impact chain framework that can help decision makers understand risk assessment implementation issues, and build capacity for analyzing and managing risks. This framework is further detailed and illustrated through several case studies on assets and portfolios. This report presents both the methods and the tailored information generated for the finance sector, from the assessment of vulnerabilities to the creation of financial indicators. We describe commonalities and differences across sectors, type of portfolios and data availability context. We highlight the challenges and the opportunities of the project’s inter-disciplinary approach.