Climate Risk Taxonomy cover CCFI

What Is Climate Risk? A Field Guide for Investors, Lenders and Regulators 

 

The Centre for Climate Finance & Investment at Imperial College Business School has developed what it believes to be a first-of-its-kind toolkit to help investors, lenders and regulators identify and assess the potential scope and impact of a wide range of climate risks. The climate risk taxonomy published today is intended to supplement, rather than replace, traditional financial analysis. The latter is useful for situations with more determinate horizons but not necessarily for potential risks with uncertain scope and horizons.

Climate change is a medium- to long-term trend that is sure to have broad impacts on companies in affected industries, including on their credit profiles and/or share prices. However, this knowledge is not particularly helpful for lenders, investors, or regulators unless these risks can be further granulated in terms of their scope and, more importantly, their timing and likelihood. It is imperative to identify potential climate risks to firms and industries before they cause reductions in asset utilization, stranded assets, reduced income and margins, or other financial impacts—changes that translate into credit risk and influence lenders’ decisions about financial profiles. Without speaking directly to the risks arising from climate change from an investor’s or lender’s perspective, we cannot assess the extent to which a particular firm or corporate sector is exposed to climate impacts.

Accordingly, we have developed a model for classifying potential climate risks at the firm level, a “climate risk taxonomy” that captures a broad range of physical and transition risks that may affect a firm’s financial profile. This granular taxonomy encapsulates climate risks in terms of the three traditional climate risk categories and also includes an additional category, natural capital, as follows:

1. Physical risks, acute and chronic;
2. Transition risks related to adaptation;
3. Transition risks related to mitigation, ranging from regulatory compliance risks to reputational and litigation risks; and
4. Natural capital risks, which reflect mainly depletion of both renewable and non-renewable resources that are themselves affected by climate risk factors.

This taxonomy should not be treated as simply supplemental; rather, this sort of assessment is increasingly integral, as the financial impacts of climate change become less idiosyncratic and increasingly systemic.

 

View the Webinar recording "Financial Impacts of Climate Risk"  below

As well as outlining the key findings of the report, the webinar focuses on the practical implications of these findings for industry leaders. Presented by Bob Buhr and Michael Wilkins from the CCFI, with responses from Carmen Nuzzo, Head of Fixed Income at PRI and Stella Mirzoyan, ESG Analyst at Unigestion.

This webinar is the first in a series of three climate finance webinars hosted by the Centre for Climate Finance & Investment and sponsored by asset-manager Unigestion.