What are the risks posed by climate change for the financial sector? It’s a complex subject and open to debate, especially when it comes to the tricky matter of calculating how new regulations surrounding extreme weather events may impact insurers and underwriters in the future.
The ClimateWise Insurance Advisory Council recently published two frameworks that provide practical open-source tools to address the primary risks posed by climate change to the financial sector: physical and transition risk. These frameworks enable finance sector firms to respond to the expectations of the BoE and recommendations of the Financial Stability Board Taskforce for Climate-related Financial Disclosure (TCFD).
The ClimateWise physical risk framework demonstrates the relevance of insurance industry modelling tools and expertise in understanding the longer-term climate impacts on real estate lending and investment portfolios. Crucially, the framework highlights the role of adaptation in managing these risks. The framework provides an illustrative analysis from 12 real estate portfolios with a total market value in excess of £2 trillion.
The ClimateWise transition risk framework supports investors and regulators to assess how the transition to a low-carbon economy will affect the financial performance of infrastructure investments – a significant asset class exposed to transition risk. The framework guides investors through three steps to assessing their asset types exposed to transition risk and opportunities, defining the potential impacts for their assets and incorporating transition impacts into their financial models.
These two reports highlight the ease and value for financial institutions to embed scenario analysis into routine decision-making and reporting.