Introduction

Climate change is raising the profile of physical risk as an environmental, social, and governance (ESG) issue affecting lenders and investors. The report stresses that organisations must understand risks in order to manage them. The report’s risk assessment methods are intended to help asset owners and managers evaluate the exposure to physical risks of their investments.

Insurer-based catastrophe models

The report recommends assessing physical risks by using natural catastrophe models, which offer insurers the best available projections. The methodology discourages the use of models specific to a single region, limiting investment data. The report advises investors and borrowers to examine the information to guide decisions.

Risk assessment methodology

The report outlines a four-step process for incorporating physical risk into financial decision-making. The four steps include identification of exposure, selection of natural catastrophe models, analysis of results, and consideration of adaptation measures. The report stresses that those with access to property-specific data can generate more precise projections.

Conclusion

This report encourages financial decision-makers to incorporate insurer catastrophe models into risk assessments when responding to climate change adaptation measures. The report provides lenders and investors a detailed guide for assessing climate-induced physical risks to assets. It offers the analysis methods of natural catastrophe modelling and highlights the importance of understanding exposure to physical risks.