The transition to a low-carbon, climate-resilient economy is increasingly recognized as a key factor to be considered in business strategy, and leading organizations such as the United Nations (UN) and the Intergovernmental Panel on Climate Change (IPCC) fear that the world is not on the same page The right path is to achieve net zero by 2050.
The financial sector is gaining increasing momentum in this area. An evolving, increasingly stringent disclosure and regulatory landscape is driving demand, with climate change mitigation and adaptation emerging as a megatrend for investment.
Based on sophisticated modeling of current and future physical and transition risks – and the interplay between the two – Bloomberg’s climate risk solutions offer opportunities for companies and investors alike.
What climate risk is and why it matters
Experts classify and analyze climate risk in two main ways: physical risk, which includes the acute and chronic impacts of rising temperatures on a company’s operations, and transition risk, which includes the risk associated with measures to decarbonize the economy.
This classification has been widely adopted by regulators and standard setters to highlight the risks and opportunities posed by climate change.
“With physical risks, we try to understand the impact of various temperature increases on a company’s operations. What impact will potential disruptions have on the company’s markets, customers, revenues and supply chain? This can include extreme weather events such as floods and wildfires and their impact on population and productivity,” said Ben Carr, Global Head of Climate Risk Products at Bloomberg.
Transition risk modeling and analysis depends on understanding the impact of the transition from fossil fuels to a low-carbon economy on different sectors, countries and regions.
“Depending on policy, technology and socio-economic developments, there are many potential paths that the transition could take, and these are the variables that we identify and examine in our risk models.” Because the transition occurs at different speeds in countries and different policies companies will be affected differently, even if they are in the same sector. The most obvious carbon-intensive sectors are energy and utilities, but other energy-intensive sectors such as transport and buildings also face significant transition challenges.”
The net zero transition is gaining momentum
There is growing interest in transition and physical risk analysis for companies and individual assets. Data from Bloomberg New Energy Finance (BloombergNEF) shows that investments in deploying low-carbon transition technologies exceeded $1 trillion for the first time in 2022.
Overlapping concerns are driving demand, including a general shift from voluntary to mandatory disclosure requirements, a greater emphasis on regulatory stress testing, industry-led net-zero alliances and a focus on developing and publishing transition strategies and plans.
“Forward-thinking organizations are building capacity with expert resources to support the development of robust transition plans – underpinned by high-quality data and analytics,” says Carr. “A credible climate change plan sets out how they will actively transform their business and what specific actions will be required to do so, taking into account the climate risks and opportunities a business faces. Essentially, they are looking at how they can decarbonize their business along the entire value chain.”
How Bloomberg supports climate risk analysis
Climate risk frameworks must also consider significant “known unknowns,” such as tipping points. Potential physical tipping points include the collapse of large ice sheets in Greenland and West Antarctica, widespread thawing of permafrost, and the collapse of ocean currents in the North Atlantic. On the other hand, there could be positive social turning points, such as a rapid reduction in renewable energy prices or significant growth in electric vehicle sales.
Bloomberg can draw on a range of data for its climate risk modeling. This includes data and assessments from the National Aeronautics and Space Administration (NASA) and the National Oceanic and Atmospheric Administration (NOAA). Additionally, Bloomberg modeling uses its own proprietary data based on transition research and analysis generated by BloombergNEF.
“Now we are bringing all of this together, along with our traditional data on corporate finances, financial markets, physical assets and supply chain data, to enable investors pursuing or implementing net zero strategies to understand the impact of climate change on their portfolios evaluate. says Carr.
“Interested companies must integrate high-quality climate risk analysis into all parts of their decision-making processes and business operations.”
Transition risk-related opportunities for investors
Transition risk modeling is suitable for sector-by-sector surveys. A sector-based approach can focus on the sectors most affected by the decarbonization of the economy.
“What technologies need to be developed to support the transition? To what extent has a company already invested in new technologies? How do they develop and open up new and old markets? What does your transition plan include and how much does it cost? Considerations like these provide insight into how their revenue changes or will change over time,” says Carr.
In addition, modeling of the current, forecast and required pace of transition in all sectors is carried out. A deep understanding of the different pathways to emissions reductions – and the changes in technology, infrastructure and the energy system along those pathways – can provide greater insight into what is happening where and who will drive change.
Carr and his team can leverage BloombergNEF’s data-driven insights into energy transition and finance to develop a more detailed and nuanced understanding of how the transition is impacting different companies and firms in Bloomberg’s transition risk analytics offering.
Energy security through renewable energies such as solar and wind are crucial in this area, and solar energy in particular is experiencing strong growth. Tripling investment in renewable energy such as solar and wind is one of the key recommendations of COP28.
Voluntary carbon markets and carbon capture, utilization, storage and removal (CCUSR) technologies are also receiving increasing interest.
Physical risk-related opportunities for investors
There are also ways to proactively support climate change adaptation, for example through investments to improve flood protection, crop resilience and food security.
These opportunities currently often exist in developing countries and are provided through blended financing arrangements, meaning private investors can use public money to increase their investments.
“Even if we reach the Paris Agreement target of well below two degrees, we will still see increasing severity and frequency of extreme weather events,” says Carr. “Investing in climate change adaptation builds resilience and enables companies to be better prepared for climate change. If we understand the risks, the impact on businesses and their lasting impact, there is a huge opportunity for financial services to support adaptation and business growth.”
Bloomberg is an early innovator of data-driven climate risk mitigation solutions for global investors, companies and financial services ready to make the transition. Climate risk solutions are based on sophisticated modeling of current and future physical and transition risks and the interaction between the two, providing a significant opportunity to support future-oriented business growth and resilience.
Request a demo here and learn more about Bloomberg’s climate risk mitigation solutions.