Knowledge Hub
The Big Picture

On physical climate change, we cannot ignore the risks of our present course

Murray Birt •  Senior ESG Strategist


As an asset manager, our job is to responsibly invest our clients’ capital, enabling them to allocate capital in a sustainable future within their chosen risk and return parameters.

Part of the job is to be aware of the cognitive biases which affect us all, so that we can lean against them. One particularly pernicious bias is ‘status quo bias’: the irrational preference for sticking with present choices over a change of course. There are plenty of reasons people fall prey to it: sunk cost thinking, a need to avoid regret, the desire to remain in control. The trick to correcting it is to remember that even though your present course is the path of least resistance, it can still be a very risky one.

Lately I’ve been thinking about status quo bias in the context of our global path on climate change. Our current course is characterised by insufficiently granular and accessible information about the risk of physical climate change to individual companies and investments. The cost of continuing down this path is hard to discern. But it is very real.

At DWS we are pioneering the incorporation of physical climate risk data into investment solutions in partnership with Four Twenty Seven whose methodology is a significant step forward for investors to assess and manage risks. However, we need to be able to assess the financial value at risk for any given company. For example, we need to be able to see how important any given factory or warehouse is to an overall company’s profitability. We need to be able to get answers to questions such as ‘how exposed is any given particular factory or warehouse to sea level rise?’ That entails the ability to answer subsidiary questions such as: is the unit in question a key production facility? Is it one of many? Could the company easily shift production to other sites? Such information will only come with improved company disclosure.

Second, we need better information from companies about how easy the risk is to mitigate and how much it is likely to cost to

do so. Once that is available, we will start to be able to assess the measures any given company is taking to improve their resilience, and even advise on the most efficient ways to respond to the threat. A company might, for example, be able to shift production very easily, improve their insurance cover or confirm it will actually be paid out in the event of climate-related damage. Better information would enable us to make better decisions when looking at these options.

Continuing on our present trajectory, without adequate visibility on these physical climate change risks, is also risky because of a number of macro factors.

For instance, Bank of England Governor Mark Carney has advised about the possibility of a ‘climate Minsky moment’ - a moment when a large number of market actors together begin to price in physical climate risk, resulting in a shock to prices. If this were to occur it could potentially be a severely destabilising market event, with devastating real consequences for the valuations of investments across a number of asset classes. At the first conference for financial regulators on climate risk in April 2018, Carney said that the re-evaluation of climate-related risks “could destabilise markets, spark a pro-cyclical crystallisation of losses and lead to a persistent tightening of financial conditions”[1].

Another macro risk of our current trajectory is the possibility that climate risk could undermine economic growth and prosperity, pulling down overall returns for all investors as capital is diverted to dealing with the consequences of physical climate risk rather than mitigating it in a timely and efficient way. Money spent rebuilding, compensating, and dealing with the aftermath of disasters is money not invested elsewhere in the economy.

This is why the work of this conference is so vitally important. I am proud to be chairing one of the working groups that aims to provide a broad financial sector perspective to corporates on how to disclose their risks and opportunities relating to physical climate change.

Twenty years ago, leading companies worked with experts to establish the global rule book for how carbon emissions should be measured in different sectors – the GHG Protocol. I suggest that we now need Physical Climate Risk and Opportunity Protocols across all major sectors. Our report being published today could be the start of such a process.

Ultimately, we will have to build a grand coalition of academics, governments, private companies, investors, rating agencies, banks, and specialised data providers to improve resilience. It will take cooperation and investment in protective infrastructure, on reinforcing wetlands and coastal areas, both in terms of data, disclosure and in terms of physical resilience. I am confident that this can be done. We are proud to be making a start.


Issued in the UK by Deutsche Asset Management (UK) Limited of Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Asset Management (UK) Limited is authorised and regulated by the Financial Conduct Authority.

This document is a “non-retail communication” within the meaning of the FCA’s Rules and is directed only at persons satisfying the FCA’s client categorisation criteria for an eligible counterparty or a professional client. This document is not intended for and should not be relied upon by a retail client.

Any reference to “DWS”, “Deutsche Asset Management” or “Deutsche AM” shall, unless otherwise required by the context, be understood as a reference to Deutsche Asset Management (UK) Limited including any of its parent companies, any of its or its parents affiliates or subsidiaries and, as the case may be, any investment companies promoted or managed by any of those entities.

The views expressed constitute DWS or its affiliates’ judgment at the time of issue and are subject to change. Any forecasts provided herein are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Investments are subject to risks, including possible loss of principal amount invested. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results.

Copyright © 2018 Deutsche Asset Management (UK) Limited.

[1] Mark Carney, April 2018. https://www.bankofengland. transition-inthinking-and-action-speech-by-mark-carney.pdf