Industry-informed climate risk studies

𝗧𝗵𝗲 𝗡𝗚𝗙𝗦 𝗷𝘂𝘀𝘁 𝗿𝗲𝗹𝗲𝗮𝘀𝗲𝗱 𝘀𝗼𝗺𝗲𝘁𝗵𝗶𝗻𝗴 𝗯𝗶𝗴— for the first time, we now have 𝘴𝘩𝘰𝘳𝘵-𝘵𝘦𝘳𝘮 𝘤𝘭𝘪𝘮𝘢𝘵𝘦 𝘴𝘤𝘦𝘯𝘢𝘳𝘪𝘰𝘴 tailored for 𝘀𝘁𝗿𝗲𝘀𝘀 𝘁𝗲𝘀𝘁𝗶𝗻𝗴, 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝘀𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆, 𝗮𝗻𝗱 𝗻𝗲𝗮𝗿-𝘁𝗲𝗿𝗺 𝗺𝗮𝗰𝗿𝗼 𝗿𝗶𝘀𝗸. 🔸 This isn't about 2050. It's the next five years, i.e. 𝟮𝟬𝟮𝟱–𝟮𝟬𝟯𝟬. 🔸 This isn't abstract. It's 𝗚𝗗𝗣 𝘀𝗵𝗼𝗰𝗸𝘀, 𝗰𝗿𝗲𝗱𝗶𝘁 𝗿𝗶𝘀𝗸, 𝗶𝗻𝗳𝗹𝗮𝘁𝗶𝗼𝗻, 𝗮𝗻𝗱 𝘂𝗻𝗲𝗺𝗽𝗹𝗼𝘆𝗺𝗲𝗻𝘁. 𝗧𝗵𝗲𝘀𝗲 𝗮𝗿𝗲 𝘁𝗵𝗲 𝘀𝗵𝗼𝗿𝘁-𝘁𝗲𝗿𝗺 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀: 1.  A smooth transition ("Highway to Paris") 2.  A delayed, abrupt policy shift ("Sudden Wake-Up Call") 3.  Physical risk disasters without transition ("Disasters & Policy Stagnation") 4.  A fragmented world with climate chaos and policy misalignment ("Diverging Realities") These scenarios are a wake-up call for taking short-term climate risks seriously. ➤ Delaying climate action could increase global 𝗚𝗗𝗣 𝗹𝗼𝘀𝘀𝗲𝘀 𝗯𝘆 𝗼𝘃𝗲𝗿 𝟯𝘅, and unemployment spikes by 1.3 percentage points (Sudden Wake-Up Call vs Highway to Paris). ➤ Climate disasters aren’t just regional anymore. Floods, fires and droughts in Asia or Africa can cut European 𝗚𝗗𝗣 𝗯𝘆 𝟭.𝟳%, driven by supply chain exposure. ➤ Credit risk spreads explode in carbon-intensive sectors. In some cases, default probabilities jump by 20–30 percentage points, stressing banks and insurers alike. ➤ Green sectors could lose out if the transition is abrupt, fragmented, or disrupted by physical shocks. 𝗛𝗲𝗿𝗲 𝗶𝘀 𝘄𝗵𝘆 𝘁𝗵𝗲𝘀𝗲 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀 𝗮𝗿𝗲 𝗮 𝗴𝗮𝗺𝗲-𝗰𝗵𝗮𝗻𝗴𝗲𝗿 ➤ For the first time, compound hazards—droughts, floods, wildfires—are modelled together, showing how climate risk can become systemic through trade, finance, and supply chains. ➤ Monetary policy is now integrated, so climate shocks affect interest rate paths, inflation dynamics, and macroeconomic volatility. ➤ Financial contagion is now factored in. Using advanced modelling, the framework maps how climate-related losses feed into default risk, cost of capital, and sectoral investment flows. ➤ Sector-by-sector and region-by-region outcomes now include asset-level exposure, probability of default, and sovereign bond repricing, offering tools fit for risk management. 𝗠𝘆 𝘁𝗮𝗸𝗲 This release is a step-change in how we understand and model climate risk. These scenarios are critical because they model economic and financial impacts on business over the next five years. A timeline relevant for senior management, boards and shareholders. Because these scenarios capture dynamic feedback loops, sector-specific capital costs, and second-round effects that ripple through the financial system, the risk science is taken to a whole new level. These real-world complexities have been missing from science to date, which is why these scenarios are so critical. #NGFS #NetZero #ClimateRisk _____________ For updates, follow me on LinkedIn: Scott Kelly

Here is a strong example from Nestlé of how to assess and identify physical climate risks that are relevant for an industry with global operations. In its Non Financial Statement 2025, Nestlé presents a modeled analysis of projected crop yield changes by 2040 compared to 2024 under an intermediate emissions scenario. The visualization maps expected increases or decreases in yields across key raw materials and sourcing countries. It covers commodities such as coffee, cocoa, maize, wheat, dairy and palm oil, and links them to specific geographies. The analysis shows how changes in temperature, precipitation patterns and extreme weather events can alter growing conditions. As a result, certain regions may experience yield reductions, while others may see moderate increases. For a company that relies on agricultural inputs across multiple continents, these shifts translate directly into supply availability risks, cost volatility and sourcing complexity. This is not a generic climate narrative. It is a forward looking assessment of commodity exposure. By modeling yield impacts at country and crop level, the company can identify where supply chains are most vulnerable and where strategic adjustments may be required. Consequently, physical climate risk becomes a procurement and capital allocation issue. It affects long term contracting, supplier engagement, regenerative agriculture investments, water management and geographic diversification. In other words, climate resilience must be embedded in core business planning, not treated as a separate sustainability topic. This example illustrates how climate risk assessment can move from disclosure to decision making. Source: Nestlé, Non Financial Statement 2025 

𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗽𝗿𝗲𝘀𝘀𝘂𝗿𝗲 𝗶𝘀 𝗿𝗲𝘀𝗵𝗮𝗽𝗶𝗻𝗴 𝘁𝗵𝗲 𝗿𝗶𝘀𝗸 𝗽𝗿𝗼𝗳𝗶𝗹𝗲 𝗼𝗳 𝗮𝗴𝗿𝗶𝗰𝘂𝗹𝘁𝘂𝗿𝗮𝗹 𝘀𝘂𝗽𝗽𝗹𝘆 𝗰𝗵𝗮𝗶𝗻𝘀. Our newly published research examined farming communities in western Uganda - one of the most intensively farmed landscapes in E Africa. Here is what we found: Temperatures rise, rainfall patterns shift, crop suitability stays largely intact, and yields hold steady. Yet pest pressure intensifies. Farmers respond with heavier pesticide use to protect output. These findings have implications for companies sourcing from climate-exposed regions. Rising input requirements shift the operating risk profile, expanding exposure across financial, regulatory, and reputational dimensions. In business terms, that means: • Regulatory exposure tied to chemical use • Worker health and liability risk • Cost sensitivity tied to input markets • Water and biodiversity impacts • Reputational exposure across global value chains Climate pressure forces interventions, and those interventions carry tradeoffs: cost structure, compliance exposure, environmental impact, & reputational risk. Where do sourcing teams need to adapt as climate pressure reshapes the risk profile of production and local livelihoods are at stake? Link to the paper here: https://lnkd.in/grZ9svn2 Jeremy Diem, Karen Bailey, James Muleme, Vijay Ramprasad, Kathryn Sullivan, Richard Mutegeki, Marta Venier, Jessica Rothman, Shamilah Namusisi, Michael Wasserman

👉 Are we using the wrong tools to assess climate risk? A new expert-led assessment, drawing on the judgment of 60+ climate scientists, says that #climatechange introduces forms of risk that exceed the design assumptions of existing economic and financial frameworks. Here’s what that means in practice ⬇️ 🔹 Climate damages are structural, they reshape economies: where people live, what can be produced, how infrastructure functions, and which regions remain viable. 🔹 Extremes drive real-world risk: what actually destabilises societies and markets are heatwaves, floods, droughts, grid failures, food shocks. It’s the tails of the distribution that matter. 🔹 GDP misses mortality, inequality, displacement, ecosystem loss, and can even rise after disasters due to reconstruction. This creates a dangerous illusion of resilience. 🔹 Repeated shocks erode recovery capacity and propagate across supply chains, finance, migration, and geopolitics. 🔹 Beyond ~2°C, uncertainty widens sharply. Confidence in precise damage estimates falls even as consequences grow. 🔹 Tipping points expose the limits of economic modelling: At higher warming levels, model outputs can appear precise while resting on assumptions that no longer hold. At the same time, many models also underestimate positive tipping points in clean energy and innovation. The goal is to build resilience under deep uncertainty. For treasuries, central banks, regulators, and long-horizon investors, this means recalibrating governance toward: ➡️ precaution ➡️ robustness ➡️ transparency Because avoiding irreversible outcomes is always cheaper than trying to price them after the fact. read the report "Recalibrating Climate Risk" here 👇 https://lnkd.in/dx8wmRZ4 Green Futures Solutions (University of Exeter) Carbon Tracker @aurora trust

Investing in a Changing Climate: Climate change presents two major financial risks for #investors, transition and physical risks; together, these risks accelerate the devaluation of #assets, potentially rendering them stranded long before the end of their expected lifecycles. 🔹 Transition risks—driven by rapid policy shifts, evolving market behaviors, and technological innovations—impact industries beyond fossil fuels, including real estate, automotive, agriculture, and heavy industry. 🔹 Physical risks—such as extreme weather, rising sea levels, and prolonged heat stress—can disrupt supply chains, reduce worker productivity, and devalue assets. A delayed transition brings hidden risks—while some sectors (utilities, basic resources) may see short-term relief, they face sharper, more destabilizing corrections when policy action eventually accelerates. Using NGFS climate transition scenarios (Baseline, Net Zero 2050, and Delayed Transition) alongside Discounted Cash Flow (DCF) and Interest Coverage Ratio (ICR) valuation methods, we identify sector-specific vulnerabilities across the US and Europe. 📉 Sectors at risk under a Net Zero 2050 scenario: 🔹 Real estate (-40% in Europe) due to energy efficiency mandates and rising costs. 🔹 Telecommunications (-26.3%) and consumer staples (-24.8%) facing stricter carbon regulations. 🔹 Energy (declines of -6% to -7%) as fossil fuel operations become costlier. 🔹 Basic resources (-11.9%) and technology (-11.7%) showing relative resilience but still facing policy-driven adjustments. 📈 Sectors showing resilience across scenarios: 🔺Technology & Healthcare remain stable due to innovation and lower emissions intensity. 🔺Consumer discretionary in the US (-16%) sees moderate declines but adapts through renewables and supply chain shifts. A well-orchestrated transition is critical to minimizing financial shocks. Scenario-based risk assessments allow investors to safeguard portfolios, mitigate stranded asset risks, and capitalize on opportunities in the green economy. #ClimateRisk #NetZero #SustainableFinance #ESG #Investing #ClimateTransition #RiskManagement #AllianzTrade #Allianz

Physical climate risk data: the more we learn, the less we know? Khalid Azizuddin's recent piece in *Responsible Investor captures well what many practitioners are grappling with today: - asset-level data that remain incomplete or hard to interpret; - physical hazard exposure often disconnected from financial materiality; - little visibility on supply chains or customers; - adaptation and resilience efforts largely ignored; - and a risk of over-simplifying complex realities into a single “score.” Some three years ago, EDHEC Business School set out to address exactly these challenges, working to advance climate risk modelling and make decision-useful for investors, companies, and public authorities. In this work, we have developed: 🔹 a blueprint for a new generation of probabilistic climate scenarios; 🔹 high-resolution geospatial modeling capabilities to allow for geographic and sectoral downscaling, consistent with each scenario; 🔹 an open database of decarbonisation and resilience technologies through the #ClimaTech project, which officially launched this week. While the research is public, the new EDHEC Climate Institute has also been assisting a school-backed venture, Scientific Climate Ratings (SCR), which integrates this research to deliver forward-looking quantification of the #financialmateriality of climate risks for infrastructure companies and investors worldwide. While SCR provides a rating scale for comparability, it avoids the trap of over-simplification. Each rating is backed by probabilistic scenario modelling, analysis of physical and transition risk exposures, and explicit accounting for adaptation measures. The result is a synthesis that remains transparent, interpretable, and anchored in scientific rigour. Together, these initiatives aim to move the discussion from data abundance to decision relevance, equipping practitioners with tools that connect climate science, finance, and strategy.

🌍 Climate Change is Disrupting Global Supply Chains—What Does This Mean for Businesses? A recent study by Nora Pankratz, Ph.D. and Christoph Schiller, published in The Review of Financial Studies, offers a sobering insight into how climate hazards, particularly heat, are impacting firms and reshaping supply chains globally. 📉 Key Findings from the Study: 💥 Heat exposure reduces suppliers' operating income by 13.8% for a one-standard-deviation increase in heat days—and the effects ripple downstream, cutting customer operating income by 0.6% per quarter. 🚫 Firms are 7.4% more likely to terminate supplier relationships when heat exposure exceeds expectations, with this likelihood increasing for repeated or extreme deviations. 🌱 After terminating risky suppliers, businesses actively choose replacements with lower climate risk, reflecting proactive adaptation strategies. 🛠️ Customers also adjust by increasing inventories, cash holdings, and R&D investments to buffer against disruptions. 📊 A Broader Picture: The study highlights that firms in developing countries, often more vulnerable to climate change, are disproportionately impacted. Suppliers in countries with low climate adaptation readiness face higher termination risks, emphasizing the need for systemic solutions. 💡 My reflections: 🌩️ Climate risk isn’t just financial—it’s systemic. As businesses retreat from vulnerable regions, they risk exacerbating global inequality and isolating the areas most impacted by climate change. The true cost of climate risk might be the long-term instability created by economic withdrawal from these regions. 📉 Relying on short-term signals like observed heat days for long-term decisions is risky. Many firms act reactively, focusing on immediate climate disruptions rather than the underlying trajectory of climate projections. This approach could leave them exposed to larger, systemic risks in the future. 🤝 Resilience requires collaboration, not isolation. At a time when nations are becoming more protectionist and the dark clouds of trade wars loom large, businesses have a choice: sever ties with vulnerable suppliers or co-create resilience. The study reveals that many firms are opting to replace suppliers in climate-vulnerable regions, but imagine the alternative. What if businesses worked alongside suppliers to share technology, co-develop adaptive solutions, or finance localized climate resilience? This isn’t just a moral question—it’s a strategic one. Investing in mutual resilience could secure long-term supply-chain stability in an increasingly uncertain world. 🔗 https://lnkd.in/eBMv8GN9 How do you see businesses navigating these challenges? Can collaboration replace isolation as the default strategy for addressing climate risk? #ClimateChange #SupplyChain #Resilience #BusinessStrategy #Sustainability #PositiveScholarship

🌿🔍 How Corporate Climate Change Mitigation Actions Affect the Cost of Capital Climate change mitigation is becoming a pivotal factor in determining the financial health of businesses. A recent study led by Yizhou Wang, Siyu Shen, Jun Xie, Hidemichi Fujii, Alexander Ryota Keeley, and Managi Shunsuke, published earlier in May 2024 in Corporate Social Responsibility and Environmental Management, sheds light on a critical aspect of this dynamic: how corporate climate actions influence the cost of capital. Key Findings: - Higher Emissions, Higher Costs: The study, which analysed data from approximately 2,100 Japanese listed companies between 2017 and 2021, reveals a clear correlation between corporate emissions and the cost of capital. Companies with higher carbon intensity face increased costs of equity, debt, and weighted average cost of capital. - Benefits of Transparency: Companies adhering to the FSB Task Force on Climate-related Financial Disclosures (TCFD) guidelines and transparently sharing climate-related information benefit from lower overall capital costs. While such disclosure is linked to an increased cost of debt, it concurrently lowers the cost of equity and overall capital, underscoring the financial benefits of transparency and accountability in climate actions. - Commitment vs. Action: Importantly, the study found that mere corporate commitment to climate change, as opposed to tangible climate actions, showed no significant impact on the cost of capital. This highlights the significance of actionable strategies over symbolic commitments. - Industry-Specific Impact: The relationship between climate mitigation actions and the cost of capital was notably stronger in industries where climate change is recognised as a material issue. This suggests that industry context plays a crucial role in how climate actions influence financial outcomes. Strategic Recommendations: - Adopt TCFD Guidelines: Aligning with TCFD recommendations and prioritising actionable climate strategies can lower your company's cost of capital. - Industry Focus: For sectors where climate change is a material issue, such as energy, utilities, and manufacturing, the financial incentives for robust climate actions are even more pronounced. - Move Beyond Commitments: Implementing concrete climate actions rather than just commitments can significantly enhance your financial standing. It's also important to note that as of 2024, the Task Force on Climate-Related Financial Disclosures (TCFD) has transferred its monitoring responsibilities to the International Sustainability Standards Board (ISSB). Conclusion: Proactive climate actions and transparent disclosures are not just ethical imperatives but also smart financial strategies. Access the article here: https://lnkd.in/gb-ke9PP What are your thoughts on the impact of climate actions on the cost of capital? Professor John Cole OAM Brendan Mackey John Thwaites Jacqueline Peel

“𝘚𝘩𝘰𝘸 𝘮𝘦 𝘸𝘩𝘦𝘳𝘦 𝘤𝘭𝘪𝘮𝘢𝘵𝘦 𝘳𝘪𝘴𝘬 𝘤𝘩𝘢𝘯𝘨𝘦𝘥 𝘢 𝘥𝘦𝘤𝘪𝘴𝘪𝘰𝘯.” That is now the defining question for UK banks and insurers. Not because of theory. Because the evidence has shifted.  • The 𝗡𝗮𝘁𝗶𝗼𝗻𝗮𝗹 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗘𝗺𝗲𝗿𝗴𝗲𝗻𝗰𝘆 𝗕𝗿𝗶𝗲𝗳𝗶𝗻𝗴 makes clear the UK is already experiencing systemic physical risk.  • 𝗟𝗦𝗘𝗚 data shows UK-listed assets among the most exposed globally to 𝗳𝗹𝗼𝗼𝗱 𝗿𝗶𝘀𝗸.  • S&P Global now frames the world as tracking toward ~𝟮.𝟯°𝗖 𝗯𝘆 𝟮𝟬𝟰𝟬, not some distant horizon.   Markets don’t reprice climate risk smoothly; they reprice it when assumptions break. That context matters for the PRA’s Policy 𝗦𝘁𝗮𝘁𝗲𝗺𝗲𝗻𝘁 𝗣𝗦𝟮𝟱/𝟮𝟱, which updates and replaces SS3/19 with SS4/25. Under SS4/25, supervisors are not interested in your framework. Not your disclosures. Not the fact that you’ve run scenarios. They are interested in a decision.  • A loan repriced.  • A location exited.  • A risk limit tightened. An assumption has been adjusted because future risk no longer resembles historical loss data. PS25/25 does not invent new requirements. What it does is raise the bar on how firms evidence judgement. The PRA is clearer and more explicit about how climate risks should be integrated into governance, risk management, and scenario analysis and, critically, how that integration influences real outcomes. This is what principles-based regulation actually means in practice. There are no prescribed actions. But supervisors will expect firms to justify why their approaches are reasonable, proportionate and credible given their exposures, especially where data is imperfect, and uncertainty is unavoidable.  • 𝗙𝗼𝗿 𝗯𝗮𝗻𝗸𝘀, this scrutiny increasingly shows up through second-order effects: changes in insurance pricing or availability feeding directly into collateral values, credit assumptions and liquidity resilience.  • 𝗙𝗼𝗿 𝗶𝗻𝘀𝘂𝗿𝗲𝗿𝘀, it shows up when historic loss experience is no longer a sufficient guide for underwriting, reserving or capital planning. For both, it shows up when climate scenario analysis exists, but doesn’t change decisions. Supervisors are not asking for perfect models. They are asking whether leadership understands the limits of those models and has acted accordingly. By 2026, the question is whether your decisions and ultimately your balance sheet show you understood climate risks. 𝗣𝗥𝗔 𝗣𝗼𝗹𝗶𝗰𝘆 𝗦𝘁𝗮𝘁𝗲𝗺𝗲𝗻𝘁 𝗣𝗦𝟮𝟱/𝟮𝟱 (𝗗𝗲𝗰 𝟮𝟬𝟮𝟱): 👉 https://lnkd.in/eyS45KXP #ClimateRisk #RiskManagement #PRA #SS4_25 #Banking #Insurance #CRO

Physical climate risk is no longer a disclosure problem. It’s a revenue problem. We just published new research looking at how extreme weather is showing up in corporate operations and financial performance. A few numbers stood out: • In 2001, 32% of public companies identified physical climate risk as material in their 10-K filings. • In 2024, that number is 65%. • Weather-driven profit warnings have increased more than 6.5x since Hurricane Katrina. • When extreme weather hits, more than half of companies miss revenue growth expectations within a year. To understand what this means at the company level, we ran the 30 companies in the Dow Jones Industrial Average through First Street’s new Company Module. The results were striking: • ~$6B in expected annual losses from weather-related disruption • ~$90B in modeled losses in a 1-in-100-year event And this isn’t theoretical. The 2023 Maui wildfires provide a real-world example. Wind-driven fires swept across the island and quickly pushed Hawaiian Electric into a cascading operational and financial crisis. When you map utility assets to local hazard exposure, a pattern emerges: damage to a single critical asset can quickly turn into a multi-quarter revenue event. After the fires: • Revenues ran roughly 30% below the prior trend for two years • The stock experienced a -74% cumulative abnormal return in 30 days • It remained -57% after 120 days The takeaway is simple: Physical climate risk is already showing up in financial statements. The investors who navigate this best won’t be the ones reacting after the event. They’ll be the ones who understand asset concentration risk before it happens. Curious how exposed the world’s largest companies are? Read the full report: https://lnkd.in/g3NDW-bV