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The Big Picture

Better market information about physical climate change impacts will change everything

Craig Davies •  Head, Climate Resilience Investments


When you buy a train ticket online in the UK, a page pops up on your browser telling you how many kilogrammes of carbon dioxide youíve saved by catching a train instead of driving. But when you buy shares in a company or open a savings account, you get no information about how your money may be affected by physical climate change impacts. Why not?

The problem is not that we canít work out how climate change impacts affect businesses and investments. At the European Bank of Reconstruction and Development, we do this kind of assessment on dozens of investments every year. The problem is that we canít share this kind of information across the market in any standardised, systematised form. Even if a climateconscious company or investor chose to disclose how physical climate change impacts affected their operations, there is no common standard which would allow for a meaningful comparison with competitors.

That matters. The train ticket example demonstrates how standardised metrics and market information have enabled widespread market action on tackling greenhouse gas emissions. The consequences have been immense. These measurements are now widely used and widely understood. And if a company delivers greenhouse gas emission reductions, these can be measured and objectively reported. They can boast about it. Consumers on the other hand can make informed choices about how the products and services they purchase affect greenhouse gas emissions. So why canít we do this kind of thing when it comes to reporting how businesses are responding to physical climate change impacts?

The powerful message is that when reliable and consistent market information is available, the market starts to behave differently. We can see how sharper market awareness

of the risks associated with high greenhouse gas emissions means that investment is now pouring into clean energy technologies. It means that investors are asking tough questions such as whether they really want to invest in coal over a ten-year time horizon. The standardised tools that provide this market information are the result of almost two decades of work; an extraordinary achievement by thousands of people.

When it comes to physical climate risk, however, there is a long way to go. We are able to assess physical climate risks, but the process is still too expensive, complicated, and time consuming. Crucially, there is no agreed standard for how such assessments should be done, or for expressing the findings in a way that can inform the decisions made by consumers, businesses, investors, and regulators.

Our task is to turn that around.

Measuring physical climate risks is highly context-specific, so we cannot apply the same assumptions everywhere Ė and this makes the task more complex. For greenhouse gas emissions, it is relatively straightforward to rank sectors. The coal industry is a big emitter; electric cars, less so. Those generalisations and frameworks hold true pretty much anywhere in the world. Physical climate risk, however, is more complex. The risk level depends on the context, location and the specific circumstances of the business and its key assets.

At the EBRD, we have a number of tools which enable us to take a more

standardised approach, so that every banking team, country banking team, and sector banking team can identify, screen, and process physical climate risk in a common way. But we are one institution. The task of designing robust, standardised, systems, tools, and metrics which are understood across the wider market is much greater.

Which is why this initiative is so important.

The EBRD is very pleased to be able to support this work. These impacts matter to us institutionally. Naturally, we invest in many countries that are highly exposed to physical climate risks, such as Northern Africa, the Middle East and Central Asia. In these countries, physical climate change impacts are a fact of life. But the ability to assess and quantify these impacts and factor this information into thousands of business and investment decisions will change everything.

At a broader level, however, the possibilities opened up by standardised metrics for physical climate are immense. Imagine a world, in five or ten yearsí time, where investors can easily see where the physical climate risks are in their portfolios, or which asset classes entail greater physical climate risks, or climate resilience opportunities, than others. They might end up being priced differently, insured differently, or disinvested. But most importantly, these decisions would be made widely, by thousands of individual market actors, all with access to the same market information.

Our task is nothing less than to design the systems and standards that can enable financial markets to internalise the reality of a changing and more variable climate, to deliver the transformational change that is needed to build climate resilience into the global economy.