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Understanding Climate Risk at the Asset Level: The Interplay of Transition and Physical Risks

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Understanding Climate Risk at the Asset Level: The Interplay of Transition and Physical Risks

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The future financial and social consequences of climate change are becoming increasingly apparent to companies, investors and policy makers. Strong action to reduce emissions and limit climate change may avoid the worst physical impacts of climate change but presents significant market, technology and regulatory transition risks for market participants. Conversely, failure to adequately reduce greenhouse gas emissions may limit transition risks but will result in increasing climate change and associated physical risks.

This paper explores the interplay between regulatory transitional risks and physical risks under alternative climate change scenarios, and how this may impact the performance of companies across sectors and geographies.

Key Findings

  • Almost 60% of companies in the S&P 500® (market capitalization of $18.0 trillion) and more than 40% of companies in the S&P Global 1200 (market capitalization $27.3 trillion) hold assets at high risk of physical climate change impacts.
  • Wildfires, water stress, heatwaves and hurricane (or typhoons) linked to increasing global average temperatures represent the greatest drivers of physical risk.
  • Regulatory transition risks, as represented by carbon pricing risk, is greatest in the Australia and US market benchmarks, linked in part to the high degree of action needed to shift comparatively weak carbon pricing policies to deliver on climate change goals.
  • Companies are exposed to a patchwork of climate change regulations such as carbon taxes, emissions trading schemes and other fossil fuel taxes.
  • Company exposure and resilience to both transition and physical risks does not conform to clear sectoral patterns, highlighting the need for in-depth analysis to evaluate climate risk at the asset and company level.
  • Companies and investors should seek to better understand their exposure to climate risks and offer greater disclosure and transparency on climate related risks, in line with the guidelines of the Taskforce on Climate-related Financial Disclosures (TCFD).
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Understanding Climate Risk at the Asset Level: The Interplay of Transition and Physical Risks

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