Climate Risks

Assess the likelihood, timing and scope of climate risks

In Climate Risks: An Investor’s Field Guide to Identification and Assessment, financial analyst Bob Buhr delivers a risk-based framework for classifying and measuring potential climate risks at the firm level, and their potential financial impacts. The author presents a “climate risk taxonomy” that encompasses a broad range of physical, transition and natural capital risks that may impact a firm’s financial profile.

The taxonomy presented in the book will be of interest to investors and lenders involved in:

• The identification and assessment of the potential scope and impact of a wide range of risks that might normally remain outside of more traditional risk or credit analysis, usually for horizon issues;
• The determination of the points at which climate risks may crystallize into real and significant financial exposure
• The assessment of the relative aggregate riskiness of portfolios exposed to climate and natural capital risks at the firm level

A rigorous and practical toolkit for the assessment and measurement of a broad range of potential climate risks, this book offers fund managers, portfolio analysts, risk experts, and other finance professionals a clear blueprint for assessing potential financial impacts at firms arising from climate change.

Preface ix

Chapter 1 Introduction: Why We Need a Risk Taxonomy 1

Chapter 2 What Should a Climate Risk Taxonomy Do? 19

Chapter 3 The Climate Risk Taxonomy and Its Constituents 45

Chapter 4 Physical Risks 57

Chapter 5 Adaptation Risks 95

Chapter 6 Mitigation Risks 131

Chapter 7 Natural Capital Risks 193

Chapter 8 Concluding Observations 217

Selected Bibliography 219

Organizational Information 223

Acknowledgments 227

About the Author 229

Index 231

BOB BUHR, PHD, is an Honorary Research Fellow at Imperial College’s Centre for Climate Finance & Investment. He spent 30 years as a corporate bond analyst and is currently engaged with several NGOs on an array of climate-related issues, including natural capital and adaptation risks. He has published several reports on topics like green bonds, climate-vulnerable countries, and sovereign risks.

Anthropomorphic climate change is a critical and rising threat to humanity. Despite this, denial and indifference to the issue remain deeply embedded in many communities, including much of the financial community. Numerous investors and other finance professionals remain unaware of the dramatic impact that climate change can have on a firm’s financial health, ignoring or discounting the very real risk baked into many assets.

In Climate Risks: An Investor’s Field Guide to Identification and Assessment, distinguished researcher and veteran bond analyst Dr. Bob Buhr delivers a practical and robust framework for classifying potential climate risks at the firm level. The book offers a climate risk taxonomy that incorporates a broad range of physical and transition risks that could affect a firm’s financial profile.

The toolset provided in this book enables banks, investors, and regulators to assess the relative aggregate climate and natural capital risk to which a portfolio or individual firm is exposed. It also allows readers to determine the potential scope and impact of a wide range of risks that might remain hidden by traditional risk and credit models, mainly from issues relating to uncertain time horizons. Finally, readers will be equipped to form a sound judgment regarding where and when climate risks will manifest as financial risks.

Climate Risks breaks down, at a granular level, the real financial costs of climate change to individual firms and portfolios. It captures both natural capital costs as well as costs incurred (or likely to be incurred) as a result of the expected transition to a more sustainable economy.

An engaging and hands-on discussion of a pressing issue, Climate Risks persuasively demonstrates the hidden and not-so-hidden risks posed by climate change to companies of all shapes and sizes. It belongs in the libraries of investors, regulators, lenders, and any finance professional with a responsibility for identifying risk.

IDENTIFY AND ASSESS THE FINANCIAL IMPACT OF CLIMATE RISKS FACED BY INDIVIDUAL FIRMS

Climate Risks: An Investor’s Field Guide to Identification and Assessment is a singularly incisive discussion of how to identify and quantify the riskiness of individual assets and portfolios that arises from climate change. It offers an intuitive and robust framework for classifying and measuring both physical risks to natural capital and risks posed by the expected transition to a more sustainable economy.

Author Bob Buhr draws on over 30 years of finance and research experience as he sets out a comprehensive climate risk taxonomy that will facilitate the assessment of the potential scope and impact of a wide range of risks that may remain largely outside traditional risk and credit analyses. You’ll learn how to formulate an informed judgment with respect to where and when climate risks may crystallize at a financial level.

An essential resource for lenders, investors, regulators, policymakers, and anyone else with an interest or stake in accurately identifying and measuring climate-related financial risk, Climate Risks clarifies and simplifies an increasingly urgent, substantial, and systemic threat.