The flaws in current climate risk assessments for corporate assets have been uncovered
Conducted by Stefano Battiston and his team at the University of Zurich’s Department of Finance, the research highlights that many existing methods rely on simplified or proxy data, failing to accurately portray companies’ true exposure to climate-related risks.
This oversight could lead to significant underestimations of losses, affecting crucial aspects such as business investment planning, asset valuation, and climate adaptation strategies.
“This underscores the critical need for more granular data in risk assessments,” Battiston warned.
The need for granular data
Battiston and his co-authors developed a new methodology that focuses on detailed information about the location and specific characteristics of a company’s physical assets, including factories, equipment and natural resources.
Unlike traditional approaches that often assume all assets are centralised at corporate headquarters, this method provides a more precise assessment of climate risks.
“Our research shows that the potential losses from extreme events can be up to 98% higher than these averages suggest,” Battiston emphasised.
The impact of extreme events
The study also highlights the importance of accounting for “tail risk” in climate assessments.
Tail risks refer to extreme events that are rare but can have devastating consequences. According to Battiston, these events can inflate potential losses up to 98% compared to average estimates.
“Failure to account for these possibilities can leave businesses and investors dangerously unprepared,” Battiston warned.
Policy and business strategy
The findings from this study carry significant implications for climate policy, business strategy, and investment decisions.
Accurate risk assessments are critical for developing effective climate adaptation strategies and determining adequate levels of climate-related insurance and funding.
“Our work shows that we may be seriously underestimating the financial resources needed for climate adaptation,” Battiston concluded.
Moving Forward
Battistton’s study serves as a wake-up call. It advocates for a shift toward more detailed and precise data collection methodologies to understand better migration climate risks.
As climate-related challenges intensify globally, Batiston and his team’s research reminds us of the importance of robust risk assessment frameworks.
By addressing current weaknesses and embracing more accurate methodologies, businesses can take proactive steps towards climate resilience and sustainable growth.
