Data Gaps Hinder Investor Action on Physical Climate Risks
Recent report sets four asks to improve risk disclosure and analytics in portfolios targeting data providers and companies.
Investors are being prevented from effectively integrating physical climate risk analysis into their portfolios by shortcomings in data, methodologies, and company disclosures, according to an asset owner and asset manager-led report.
The report – compiled by UBS Asset Management, UK-based workplace pension scheme Nest and Oxford University’s Oxford Sustainable Finance Group – calls for enhanced physical risk disclosure and analytics for listed equity portfolios.
It highlights how climate risk models should help investors assess and identify the prevalence of physical risk for investment portfolios and inform decision-making. “However, current models do not provide a complete picture of risk and are severely hindered by the lack of consistent, accurate and standardised data,” the report read.
“The objective of the paper is to activate and advance the industry on physical risk data, because we still see limitations and we want things to be moving faster,” Lucy Thomas, Head of Sustainable Investing at UBS, told ESG Investor. “It’s a risk we recognise in portfolios, and we want to address and mitigate it.
“We believe better investment decisions and capital allocation will really help address this risk for society and planet, because there’s plenty of evidence and research to show that money capital spent on adaptation can be far less than the cost of damage,” she added.
Significant data shortfalls
Physical risks from climate change will persist and are likely to worsen over time, making them increasingly critical to investment strategies, according to the report. The world economy is already on track to see income reduced by 19% until 2050 due to climate change, while global annual damages are estimated reach US$38 trillion in the next 25 years.
To support investors in addressing physical climate risks within their portfolios, the report calls for changes within four sets of market participants – capital markets and regulators, companies, data providers, and investors.
Specifically, it requests data providers enhance the clarity and consistency of analytical models and data, companies quantify and disclose risks in a granular, location-specific manner, capital markets and regulators adopt a standardised approach to integrating physical climate risk, and investor expand engagement on physical risk.
The report called on data providers to increase transparency by clearly articulating methodologies, underlying assumptions and inherent limitations, as well as promoting standardisation by working pre-competitively to improve the consistency and comparability of model outcomes.
It noted that data providers have a key role to play in helping investors accurately assess physical climate risk, but that data is not transparent enough and is heavily reliant on estimations.
“The greatest risk to investors is not knowing where material physical risks are across their portfolio and whether companies are manging these risks and building resilience across their operations to protect from climate impacts,” said Diandra Soobiah, Director of Responsible Investment at Nest.
“Investors need better data to understand location specific risk exposures,” she added. “An investor like Nest needs consistent and reliable data to be able to draw meaningful conclusions from financial modelling. We saw this particularly in companies disclosing their carbon emissions – initially the data wasn’t provided in a uniform way, making it hard to draw comparisons between companies.”
The report asks companies to provide detailed, location-specific information on physical assets and infrastructure, including the availability and affordability of insurance. This enables investors to accurately assess the potential impact of climate risks on their portfolios.
“From companies we’ve observed, much of climate disclosure has been around transition-related risk and not as much related to physical risk,” said Thomas. “We see more chronic and acute physical risk being experienced, so it’s no surprise that companies are looking at it, but we’d still like to see more disclosure around it [and] quantitative disclosure where that’s possible.”
UBS stated its analysis of company disclosures revealed “significant variability and a lack of standardisation” in reporting on the impacts and preparedness for physical risk events.
The report noted the need for expanded investor engagement on physical risk, addressing the limitations of existing climate datasets by leveraging engagement and stewardship programs to improve disclosure and management of physical risk, while incentivising adaptation and resilience.
“Physical risk from climate change presents an unprecedented and non-linear challenge that can affect portfolios across asset classes both idiosyncratically and systemically,” the report read. “Enhancing transparency and standardisation can empower investors to confidently integrate these risks and collaborate with their portfolio companies to manage them effectively, thereby minimizing potential impacts on portfolio value.”
A worldwide problem
Patrick O’Hara, Head of Responsible Investment & Stewardship at UK local government pension pool LGPS Central, said that the organisation is “supportive” of the report’s four asks.
“ESG integration is often hindered by the lack of financially material and granular data,” he said. “Enhanced disclosure—particularly at a more detailed level—would enable investors to better assess and quantify both transitional and physical climate risks. This, in turn, would support more accurate valuations of climate-related risks at the corporate level.”
He added that a lack of supply chain transparency hinders peer comparisons and broader climate risk analysis. “Improving disclosure standards would allow investors to engage more effectively with companies, targeting areas of material risk or weak ESG performance,” said O’Hara.
A report from the Asia Investor Group on Climate Change’s (AIGCC) Physical Risk and Resilience Working Group released earlier this month highlighted similar issues facing investors in the region.
It noted that there was a lack of accessible information on physical climate risks and impacts to sectors, adding that existing data and methods to quantify physical risks and impacts of adaptation measures – including hazard, exposure and vulnerability metrics – remain “nascent and insufficiently credible, granular or consistent for decision-making”.
AIGCC suggested that governments should invest in creating a database that consolidates granular, consistent physical climate risk information that is accessible to public and private stakeholders, with access to “credible and granular” data to support comprehensive assessment and targeted adaptation strategies.
The report also urged asset owners and asset managers to advocate for stronger regulatory and mandatory corporate disclosure frameworks on physical risks and a clearer view of climate risk information at a national level.
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