Building Bridges: Using scientific information about the future of climate for asset-level financial risk assessment

  • Bardia MonavariChief Operating Officer, Pharos Platforms
  • Bhareth KachrooChief Technology Officer, Pharos Platforms
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Climate-related risks present profound challenges for financial decision-makers around the globe. In 2021 alone, the physical impacts of climate cost over US$280B (up from US$210B in 2020), and this number is expected to significantly rise over the coming decades. Such risks add a new dimension to the decisions made by investors, lenders, and insurers: buy or sell, upgrade an asset or do nothing, increase premiums or keep the same rate, disclose risks or not disclose? These decisions require new information, but more importantly, they require forecasts and projections about future climate – complex information that is exclusively produced by the scientific community. Incorporating information from the climate sciences, mainly climate models, is new for most business decision-makers, and there are a variety of emerging technologies & vendors that seek to close this climate information gap. This report seeks to shed light on some of the common questions asked by financial decision makers, such as: what are climate models? Why should we trust them? What are some of the problems associated with climate projections? And how can we practically use this information in strategic and operational decision-making?

To that end, this paper provides a primer on different types of climate models and their underlying mechanics, sources of uncertainty and complexity, and various methods that can be leveraged by decision-makers to make climate information actionable. This report also includes real world case studies drawn from the agriculture and energy sector in North America.