This company is an international cement and building materials producer, serving customers in numerous countries worldwide. Environmental, social and governance (ESG) targets have been established for 2025 and beyond. The targets focus on four pillars that are defined as material by stakeholders: (1) De-carbonization and digitalization, (2) a growth-enabling work environment, (3) positive local impact, and (4) responsible sourcing.
While taking these steps, the company’s sustainability team wanted to further investigate potential exposure to two types of climate risk:
- Physical risks due to chronic climate hazards, such as increased flooding, water stress, storm surges and wind damage from hurricanes.
- Transition risks due to costs associated with carbon pricing and related mechanisms that encourage a transition to a low-carbon economy.
Members of the team knew this deeper investigation would require the expertise of specialists who had developed proven methodologies to project the impact of such risks for different scenarios of temperature increase. A peer company recommended that the team reach out to The Climate Service (TCS). Based in North Carolina, TCS has received multiple awards for its approach to analyzing climate risks. Early in 2022, TCS was acquired by S&P Global and became part of the Sustainable1 division, which serves as the company’s single source of essential sustainability intelligence.
Members of the sustainability team spoke with Sustainable1 specialists about three specific challenges they were looking to address.
- Get assistance with implementing the framework recommended by the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommendations provide guidance on the disclosure of information on the financial implications of climate-related risks and opportunities, so that they can be integrated into business and investment decisions.
- Understand the company’s potential vulnerabilities with respect to both physical and transition risks in order to craft effective mitigation strategies.
- Estimate the financial impact of climate change on the company’s assets to assess future profitability.
As climate-related data and analysis continues to evolve, the sustainability team wanted to do more to understand risks, opportunities and potential mitigation strategies.
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The Sustainable1 specialists outlined an undertaking that would help:
- Identify a range of physical risks in different locations throughout the world, including extreme temperatures, drought, coastal flooding, fluvial flooding, water stress, tropical cyclones and wildfires.
- Evaluate how these risks could increase operational costs, result in damages that could require expenditures for repair or cause a loss of revenue.
- Consider transition risks from changes in carbon pricing and the potential financial implications.
- Conduct scenario analysis to align with the framework for TCFD reporting.
At the center of the engagement was S&P Global Climanomics platform that measures physical and transition risks in financial terms under different climate change scenarios. The assessment started with the sustainability team providing three details on each asset under consideration: (1) the specific type of asset (e.g., manufacturing facility), (2) the location, and (3) the value of the asset. The Climanomics platform evaluated the impact of the major physical hazards on each asset, in conjunction with a sophisticated analysis of each asset’s unique vulnerabilities to each hazard.
Climanomics maps expected costs and losses due to specific asset vulnerabilities to various physical hazards. For example, how would an increase in temperature impact cooling costs or a flood impact clean-up and repair costs? Of course, this will depend on the type of asset and if it is highly vulnerable or not.
All hazards and assessments of vulnerabilities were considered for each asset to model the average annual loss, which calculated the cost of damage and/or lost revenue over time as a percentage of the asset’s value. The total average annual loss was the sum of the financial impact of all hazards. This could be disaggregated by type of hazard and, within each hazard, by type of expense. The loss data was provided for each decade out to 2100 and for four greenhouse gas (GHG) concentration scenarios that align with the recommendations of the TCFD.
Transition risks were also evaluated, with particular focus on carbon price risk. For each asset, Scope 1 and Scope 2 GHG emissions were provided, and Climanomics calculated carbon price risk by asset and in aggregate for the firm.
In summary, Sustainable1 explained how this analysis would provide:
A rigorous screening of physical risks
Sustainable1 utilizes publicly available raw climate data from sources such as NASA, the Intergovernmental Panel on Climate Change (IPCC), the National Oceanic and Atmospheric Administration, the World Wildlife Fund HydroBASINS and much more. The data may include information on temperatures and precipitation, which specialist Sustainable1 scientists use to build and refine their own climate models. For example, while precipitation is important for flooding, so is topography, land use and basin area, variables that are included in Sustainable1's hazard models.
Sustainable1 has a growing library of proprietary impact functions that model the vulnerability of 270+ individual asset types to climate-related hazards based on a wide range of factors specific to each asset type. A specific impact function was developed for cement manufacturing.
A price on climate change
The Climanomics platform quantifies physical and transition risks in financial terms (average annual loss) that are aligned with the recommendations of the TCFD.
Assistance with TCFD reporting
The analysis helps model financial impacts of physical and transition risks for different atmospheric warming scenarios as far ahead as the year 2100. Sustainable1 incorporates four climate scenarios based on the Representative Concentration Pathways (RCPs). The pathways describe different climate futures, all of which are considered possible depending on the volume of GHGs emitted in the years to come.
A presentation of the results
The Climanomics platform delivered simple charts, graphs, narrative and data for export that provided insights into the location, severity and timing of climate-related risks.
Members of the sustainability team gained a better understanding of the major climate risks the company could face in the coming years by leveraging Climanomics. In particular, they have benefited from:
- Pinpointing the most material physical risks for different company assets.
- Prioritizing financial risks of the company’s CO2 emissions under different scenarios for transition to a low-carbon economy.
- Disclosing and reporting according to TCFD recommendations with results in actionable financial terms.
- Having a backdrop to consider potential mitigation strategies that could help minimize risks.
- Working with responsive and efficient specialists at Sustainable1.
For the first time, the sustainability team was able to incorporate climate risk measures in its assessment of enterprise risk. The company also continues to evaluate innovative technologies. This has included a number of novel decarbonization and carbon capture and utilization technologies
“By combining the Climanomics outcomes with phenomena we are already witnessing, such as flooding in certain regions, we have signals that these are the areas where we need to do a deep dive as we look forward.”