Risks of climate change impacts to corporations: A few thoughts on the new EBRD paper
A new paper from the European Bank of Reconstruction & Development will likely be very influential on shaping thinking about understanding and disclosing impacts of climate change for companies and asset owners/managers.
I’m very much on board with the paper’s assertion that “physical risk” is an under-examined aspect of the FSB’s Task force on Climate-related Financial Disclosures, and made this point in a Centre for Policy Development paper last November.
Corporate sustainability professionals abhor a vaccuum, so this EBRD paper (which is jointly published with the Global Centre of Excellence on Climate Adaptation) is important. It’s probably the most detailed and authoritative treatment of how corporates should think about the impacts of climate change and will therefore have quite an influence on how people think about this challenging topic.
Some of the recommendations below:
(There are 18 recommendations in total — they are here in the full paper.)
First impressions: Maybe not for newbies
This might not be the best introduction for corporates and intermediaries coming cold to the whole topic of climate impacts. I suspect a bit of familiarity with underlying principles of climate change impacts would be required to get the most out of this, and that knowledge is still fairly sparse in many parts of TCFD-land. A small research project I’ve been working recently has found that some professionals whose roles designate them as the internal ‘climate change’ person from a financial/business perspective are prone to either confusing mitigation and impact, or — perhaps worse — to lumping them in together. So some people may need a slightly “higher-level” introduction than this report; they may find it off-cuttingly detailed, despite it being clearly written.
The paper isn’t authored by EBRD or GCECA; the lead authors are from Acclimatise and 427. While it would be great to have all academic or not-for-profit institutions write it, I am well aware that there’s not a lot of academic expertise in this rapidly emerging area. Having Acclimatise and 427 is a nice combination as the two companies are quite different: Acclimatise has been around for well over a decade and has expertise in more traditional, bottom-up adaptation consulting which acknowledges the very location- and situation-specific nature of preparing for climate impacts, while 427 is a much newer US-based company that is one of a small handful of proponents of a top-down approach, overlaying climate projections to commercial entities based on locations of their key assets, markets, and supply chains.
The recommendations are sensible and I like that at least in a few cases, it proposes actual values as well as parameters (e.g. Recommendation #6, specifies loss projections in 1-in-100 or 1-in-200 years). Even if these values are incorrect, For many corporates and financial institutions that are just getting to grips with time frames, which pathways to use, and first-order and second-order effects, this will be a start.
Location, location, location…but how specific?
A critical recommendation of this paper is around disclosure of locations that are critical to supply chains. It recommendations that corporations “provide more detailed information on the location of their critical operations, suppliers and market, at least at the country level, as part of segment reporting and thereby enable investors and creditors to conduct analysis on exposure to risk in their portfolio.”
It would be quite amazing if more companies started disclosing geographical locations of their assets, supply chains, markets and other locations with relevant dependencies. This information allows for the sort of external analysis by outsiders — sometimes more scarily called “hostile analytics” approach. For example, if you know the locations of a company’s key assets then you, the investor or stakeholder, are no longer completely dependent on the company’s conducting and disclosing its own assessment of its risk — you can conduct your own assessment.
This is aligned with the concept behind 427 and other companies and initiatives such as the Asset Level Data Initiative (although this is to date mitigation-focused) setup by 2 Degrees Investing Initiative, and the approach used by Australian company Climate Risk Pty Ltd.
Unfortunately the recommendations are fairly vague as to *how* specific the locations should be; in most cases they say “country or city” or just “country”. Those of us in large-ish countries with exposoure diverse range of climate risks (such as Australia, the US, China, or India) will appreciate that just knowing the country location is not especially helpful. Cities are certainly more so, but even then, exposure can vary greatly especially for impacts such as various types of floods, sea-level rise, and wildfires.
However, it has a lot of helpful guidance for anyone trying to figure out where to start
The EBRD paper gives sector-specific recommendations as to damages to look for, which is very useful (many TCFD disclosers have no idea where to start, nor do their stakeholders understand what to begin asking for).
The authors are very careful to say that this is not exhaustive or definitive:
Medium-term versus long-term and probabilistic versus scenarios
One of the most frequent misconceptions I come across in climate-finance/corporate intersection is that a Paris Agreement scenario means “no impacts” or “no physical risk”. In fact, we are experiencing climate impacts already and they will continue to worsen over the next couple of decades, even if human-related GHG emissions ceased tomorrow. So I’m glad that the EBRD/GCECA paper makes this clear:
Which emissions scenarios for physical impact?
It specifically recommends that for longer term impacts should look at both “current policy” scenario, and a Paris-consistent scenario/s, which the authors define as 80% probability of being >2C in the 21st century, or ~50% probability of 1.5C by the end of this century.
A word on “current policies” impacts
The paper points out that a current policy scenario (which is not the NDCs under the Paris Agreement as these are not necessarily mapped out in policies yet) take us to above 3°C of warming. While there are some economic estimates of what this might look like at a macro level, these are extremely problematic (if you want to know why, Pyndick’s explanation is one of my favourites.) I believe most climate scientists would say that is difficult, if not impossible, to plan for >3°C warming as there are too many uncertainties over things like tipping points, feedback effects and, from a “bottom-up” perspective, the vulnerabilities in our society.
Key take aways:
This is only a first read of the paper; I will need to reflect on it a bit more and I haven’t yet discussed it in detail with either the authors, contributors, or experts who weren’t involved with it. Nor have I asked people in the target audience what they think.
It’s a little more vague on recommending specific climate models, downscaling and spatial resolution than some would like, but I can understand that is difficult.
I am very curious to see what kind of response it gets.
[NB: This paper is distinct from the banks’ TCFD pilot project with UNEP-FI — for that project, only the first part has been released which is about mitigation/transition. However, UK-based consultancy Acclimatise is involved in both. ]