Generating the Precision Intelligence Needed to Respond to Physical Climate Risks and Opportunities

Bitvore blog header (9)Researchers worldwide agree that industrial pollution is causing climate change, and an increase of 1.5°C within the next 20 years is anticipated without immediate action. Institutional and private investors are vested in directing business activity that adequately responds to emerging climate risks while targeting investments to harness new opportunities.

There has never been a better moment to utilize the power and potential of precision intelligence to drive environmental, social, and governance (ESG) policies. Bitvore's 24/7 global surveillance ensures proactive decision-making about changes happening anywhere, at any time. Develop customizable growth, risk, sentiment scoring, and other deep insights by identifying and quantifying material business events in unstructured data. Bitvore delivers the precision intelligence your organization needs to respond to physical climate change risks and realize new and more sustainable opportunities.

 

Building Resilience to Climate Change: Setting ESG Priorities in Alignment with Evidence-Based Research

The Institutional Investors Group on Climate Change (IIGCC) is a leading European organization driving investor collaboration on addressing climate change. The IIGCC has over 330 members, mainly pension funds and asset managers, from 22 nations, representing more than €39 trillion in management assets to pursue a more sustainable, profitable, and low-carbon future.

On September 23rd, 2021, researchers from the IIGCC released Building Resilience to a Changing Climate: Investor Expectations of Companies on Physical Climate Risks and Opportunities, an executive report outlining investor expectations towards identifying and responding to physical climate risks and opportunities. This document underscores the necessity for global enterprise organizations to develop corporate climate resilience strategies to define the materiality and costs of risks. In addition, it includes actions and investments needed to mitigate impacts by implementing innovative solutions.

"Companies cannot afford to ignore the impact that climate change could have on their businesses. It is more important than ever that investors are able to understand the risks and associated financial impacts that companies are facing when it comes to the physical effects of global warming. This means that they can effectively identify sectors and individual businesses that are resilient or well-placed to adapt, and increase engagement with those that don't have an effective risk management strategy in place," explains Stephanie Pfeifer, CEO, IIGCC. "This set of investor expectations is intended to provide a framework to facilitate effective engagement with companies and support them in adapting accordingly."

Alongside the ESG recommendations set forth by the IGCC, the organization identified more than 50 highly exposed global companies, including: Kerry Group, Swatch, Valaris, Centrica, Nestle, FirstGroup, Logitech International, Clorox, Campbell Soup, Delta Air Lines, Nan Ya Plastics, Nippon Express and Nissin Foods Holdings that they believe should take immediate actions to reduce direct and indirect climate risks.

"In a world where temperature rises are becoming unavoidable, investors are faced with the reality that we cannot insulate our investments from the effects of climate change. Instead, we need to be able to understand the material risks that companies are facing so that we can engage with them appropriately and build resilient portfolios in line with investors' fiduciary duty. By setting out our expectations of companies, we can support companies in improving their governance, management and disclosure in this area." adds Marion Maloney, Head of Responsible Investment & Governance, Environment Agency Pension Fund.

Listed companies generate up to 40% of the industrial emissions responsible for driving climate change. Reducing industrial pollution along organizations' value chains requires addressing Scope 1, 2, and 3 risks. 'Scope 1' covers direct emissions by a company – for instance, using fuels to heat a building or in an industrial process. 'Scope 2' is connected to purchases of electricity. 'Scope 3' covers all other indirect emissions: the energy used by a supplier, the use of equipment by customers, or the transportation of goods by a third party.

 

The Latest United Nations Climate Change Research Findings

The Intergovernmental Panel on Climate Change (IPCC) is the United Nations body for generating and dispersing the leading scientific research on climate change. The IPCC's Sixth Assessment Report on Climate projects a modest increase of 1.5°C within 20 years without immediate actions to reduce industrial pollution.

 

Researchers believe that an increase of this magnitude will lead to a wide variety of environmental risks. For instance, a rise of 2.3°C would increase the average drought time by about two months. Increasing 3°C would create a 100% probability of at least one ice-free Arctic summer, dramatically raising water levels worldwide.

Around the world, floods, wildfires, and severe storms have taken place with greater frequency in recent years, increasing the need for investment managers to think pragmatically about how to allocate resources in a way that responds to direct and indirect risks caused by climate change.

The floods and wildfires that have taken place across Europe, the US, and Australia over the last few months also highlight the urgency of understanding physical risks and assessing the direct and indirect impacts on companies and investment portfolios. According to research conducted by the IGCC, climate change is exposing public and private organizations to risk in the following focus areas:

Transition risks

  • Policy and regulation
  • Technology development
  • Consumer preferences

Physical risks

  • Chronic (e.g., temperature, precipitation, agricultural productivity, sea levels)
  • Acute (e.g., heat waves, floods, cyclones, and wildfires

Microeconomic Risks

  • Property damage and business disruption from severe weather
  • Stranded assets and new capital expenditure due to transition
  • Changing demand and costs
  • Legal liability (from failure to mitigate or adapt)
  • Capital depreciation and increased investment
  • Shifts in prices (from structural changes, supply shocks)
  • Productivity changes (from severe heat, diversion of investments to mitigation and adaptation, higher risk aversion)
  • Labour market frictions (from physical and transition risks)
  • Socioeconomic changes (from changing consumption patterns, mitigation, conflict)
  • Other impacts on international trade, government revenues, fiscal space, output, interest rates, and exchange rates
  • Loss of income (from weather disruption and health impacts, labor market frictions)
  • Property damage (from severe weather) or restrictions (from low-carbon policies) increasing costs and affecting valuation

Macroeconomic Risks

  • Capital depreciation and increased investment
  • Shifts in prices (from structural changes, supply shocks)
  • Productivity changes (from severe heat, diversion of investments to mitigation and adaptation, higher risk aversion)
  • Labour market frictions (from physical and transition risks)
  • Socioeconomic changes (from changing consumption patterns, mitigation, conflict)
  • Other impacts on international trade, government revenues, fiscal space, output, interest rates, and exchange rates

Financial risks

  • Credit risk
  • Defaults by businesses and households
  • Collateral depreciation

Market risk

  • Repricing of equities, fixed income, commodities, etc.

Underwriting risk

  • Increased insured losses
  • Increased insurance gaps

Operational risk

  • Supply chain disruption
  • Forced facility closure

Liquidity risk

  • Increased demand for liquidity
  • Refinancing risk

 

Bitvore Delivers the Precision Intelligence Investors Need to Mitigate Physical Climate Risks

Bitvore was designed to use unstructured alternative data sources to help better understand the unique ESG risks organizations encounter when seeking to work with external partners.

Trusted by more than 70 of the world's top financial institutions, Bitvore provides the precision intelligence capabilities top firms need to counter risks in their business ecosystem with the power of data-driven decision-making.

Uncover rich streams of business insights from unstructured data that act as the perfect complement to the internal data and insights your firm is already generating. Our artificial intelligence and machine learning-powered system provide the ability to see further, respond faster, and capitalize more effectively.

Get in touch today to learn how the Bitvore family of products can help your organization mitigate ESG risks.

ESG for Munis