Climate change, for a long time perceived as a problem of the future, has transformed into a current affair and is affecting all of us, more and more. The Earth is heating up and 2021 was the 6th warmest year on record, with a temperature that was 0.84°C (1.51°F) above the 20th century average. 2021 is not an exception: The years 2013–2021 all rank among the ten warmest years on record (since 1880). This year was the 45th consecutive year with global temperatures above the 20th century average. 1
We at the PTC are seeing, in our network, an ever growing institutional demand for climate tech solutions. Not necessarily with the objective to invest, but to deploy "tomorrow" into (real estate) assets. It's not about talking, but about implementation. At scale.
Climate change is one of the biggest opportunities for businesses and will most likely continue to be a differentiator for companies. The latest report from the UN on Climate Change states that greenhouse gas emissions (GHGs) must not peak later than 2025 to avoid irreversible effects. Governments and companies across the globe are ramping up decarbonization commitments, but often times companies are not (fully) aware of the physical and transitional risks climate change could affect their business.2 Physical risks are already costing the economy billions each year. This is expected to rise to US$27 trillion by 2050 if no additional action is taken.
Here's a few examples of the impact of climate change on the economy; i) chip and solar panel factories in one of China's key manufacturing regions had to shut down in the summer because the country tried to ration power during a 60-year record heat wave, ii) drought has driven up the prices for dairy and meat in Europe and has obstructed cotton harvest in the US and iii) there is the increasing (recovery) expenses of destruction after historic rain and floods.
Climate-risk assessments are more important than ever to minimize the impact on the economy. The Federal Reserve Board has announced that six of the largest US banks are going to participate in a pilot that is designed to enhance the ability of supervisors and firms to measure and manage climate-related financial risks (in different scenarios). This pilot will be starting early next year and will be finalized ultimo 2023.
At the beginning of this pilot details of climate, economic, and financial data will be published. Over the course of the year, the participating firms will analyze the impact of different scenarios on specific portfolios and business strategies. The Board will then review the outcomes and engage with the financial institutions to build the capacity to manage climate-related financial risks.
Afterwards, insights will be published without releasing firm-specific information. It is exciting to see the results of this extensive research...
Much more data is needed and needs to be available for companies to understand physical AND transitional risks. If companies understand risk, they can implement necessary changes and adapt as efficiently as possible to the new situation. The impact will likely continue to grow and more companies will embed climate impact into their (core) strategy.
We at the PTC have seen a few examples where companies made changes in their products or processes. As an example, one of the largest global retail companies realized that dozens of its critical facilities are at elevated risk of extreme weather. A function of the global transition to a low-carbon economy could in this case increase the company’s transportation costs twofold by 2030.
We also noticed that some tech companies are re-appraising sustainable energy sources after their low-cost hydroelectric power sources in (Western) US have been threatened by drought and declining snowpack levels.
Physical risks of climate change come in a large variety: Surface flooding, river flooding, coastal flooding/sea level rise, subsidence, landslide/coastal erosion, wind/storms, extreme heat, drought, wildfires, and hurricanes are all on the rise.
Fortunately, more and more data is becoming available through smart new technology companies, collecting data worldwide, calculating the appertaining risks and making this accessible with actionable insights
There is a number of companies who deliver location specific risk ratings for extreme weather events linked to climate change. Trillions of data points are collected worldwide to calculate risks + potential financial losses for real estate assets: such as physical damage from climate hazards and transition costs linked to energy efficiency ratings. All emission pathways can be covered in the scenario analysis and projections can be made all the way until 2100.
How? We are seeing in market companies that extract remote sensing data from multiple satellites, aircraft and other sensors. Physically realistic digital models of countries are being made and used to simulate how a range of climate hazards will impact certain areas.
After this, climate pathways can be mapped to modelled outputs for scenario analysis. Based on the probability and severity for each location, a risk rating will be assigned, and subsequently financial impacts can be calculated.
Limiting climate change is a priority, but we better know what’s coming at us! We are all for more + reliable data!
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