www.IFC.org/ThoughtLeadership Note 10 | September 2016 HOW NEW DATA TOOLS CAN ASSESS CLIMATE RISKS Climate change doesn’t just threaten the environment, it poses risks to a country’s businesses and economy. Understanding these risks can be complex, yet there are a growing number of tools that can help businesses analyze how their operations will be affected. In order to integrate climate risk into their overall risk management models, companies will need a thorough understanding of how climate change can affect them. With it, they can then then take steps to build resilience into operations. Extreme weather events caused by climate change—floods, will need to analyze and evaluate the impact that those risks storms, and protracted droughts, as well as rising temperatures present to operations in order to integrate climate risk into overall and water shortages—can lead to financial and economic losses risk management models. for consumers, businesses, and governments. Yet many organizations lack the type of analysis needed to proactively The challenge for businesses in evaluating climate risk, however, prepare for such risks. While an abundance of information that is that the potential consequences of climate change are unclear, could help companies understand climate risk exists, it often is not as is the timeframe for those consequences. Being able to presented in a useful way or is prohibitively expensive. precisely pinpoint when and where climate related disruptions will occur is nearly impossible, particularly for extreme weather Now a growing number of datasets and scenario planning tools events that are periodic and acute. The uncertainty of the timing allow organizations to better understand how climate change in and severity of climate outcomes combined with the short-term general—and specific aspects of it in particular—threaten their nature of most business risk management decision presents an operations. These tools, many of which are still under additional challenge to understanding climate risk. development, can help articulate, quantify, and measure exposure to climate change risks, expected losses from extreme events, and Policymakers also recognize that climate risk is not simply a potential changes in their operating environments. single risk to the economy. Many countries are beginning to explore policies to address these risks across industries. For DEFINING CLIMATE RISK example, in 2015, the G20 and the Financial Stability Board Climate change is not a single risk. Companies face a multitude established an industry-led Task Force on Climate Related of risks across their business, each one of which has the potential Financial Disclosures with a mandate to develop voluntary to affect revenues, buildings, assets, and overall operations. The disclosure mechanisms on climate risk along three categories: United States Department of Defense called climate risk a “threat physical risks, transition risks, and liability risks. If successful, multiplier,” that is, a risk that has the potential to make many other these efforts will increase the amount of climate risk data business risks worse. Looking at the impact of any one risk to available to promote better risk decision making by many types operations in isolation, such as rising sea levels, could give a firm of users, including businesses and their investors.1 a false impression of its overall climate risks and prevent a thorough assessment of the multidimensional consequences of DIFFERING BUSINESSES, DIFFEREING RISKS climate change on business operations. Each business faces its own specific set of risks from climate change. These risks are interconnected and don’t just affect the Businesses need to start by identifying and defining potential physical assets of a business. Businesses also need to assess policy climate related risks that pose a threat to their operations, risks, legal risks, technological risks, market and economic including physical risks as well as policy, operational, and responses, and reputational considerations. In general, climate business interruption risks. These could include water shortages, risks can be divided into two broad categories, direct and indirect. the impact of climate change on other key resources, and carbon pricing policies, among many others. Once identified, businesses Direct Risks Indirect Risks relevant climate statistics, measured at the project site. For many Stem from physical changes Result from risks a company emerging markets, however, such data sets were previously in extreme weather and does not have direct control seldom available. climate, and affect assets, over, including resource operations, and supply availability, changes in Evolving climate research and new generations of climate models chains in a company’s direct regulatory environment, are now boosting the confidence of climate risk modeling, control consumer behavior, socio- including in regions and geographies previously lacking economic conditions, and stakeholder expectations significant data.2 In addition a number of sophisticated climate Affect production capacity, Affect demand for goods and risk analytics and modeling tools allow businesses to assess and operational costs, and ability services, operational costs, quantify climate risk and incorporate that information into their to do business and market valuation decision making process. Climate risk analysis, which needs to be Tend to be more obvious and Are typically harder to tailored to business operations, starts with an assessment of a readily identified identify and may be business’s objectives, its key risk parameters, and an underestimated understanding of which aspects of its operations could be affected by climate change. A food company, for example, would need to Climate risk analysis should adhere to established patterns of risk focus on the availability of water for crop production, supply analysis, which follow the approach of identification, analysis, chains, and other factors. quantification, mitigation, and monitoring. Companies also need to assess business risks of climate change in light of their With the rapid evolution of climate science, information on particular strategy, risk tolerance, and other business specificities. changes in the frequency and intensity of extreme events and the potential impact on business operations is becoming available. The identification and analysis of potential risks begin by taking The analysis typically requires global data gathered from sources multiple sources of data and modeling them in various scenarios. such as the National Center for Atmospheric Research, the Because of the uncertainty around the timing and impact of National Aeronautics and Space Administration’s Global Climate climate change, this process will involve evaluating the Change Directory, the United States Environmental Protection probability of different climate change scenarios, including Agency, Columbia’s Consortium for International Earth Science timeframes and warming levels, among other factors. Information Network, the Earth Institute, and the National and Oceanic and Atmospheric Administration data centers. Analysis Assessing the results of those models will allow a business to understand how its assets, systems, and critical operations are exposed to the frequency, severity, and duration of climate change and to determine how this exposure will change over time. From this information a business can begin to analyze the impact of climate risk on financial returns, performance, and the ability to meet customer needs. With these assessments, businesses can then determine the best approaches, plans, and options to mitigate climate risk, including building in resilience to risk and purchasing risk mitigation insurance. DATA, CLIMATE RISK ANALYTICS AND TOOLS The most fundamental component for understanding and analyzing climate risk is clear, verifiable, timely, and comparable data and modeling. Climate risk assessments should ideally draw on The World Bank Group’s Climate and Disaster Risk Screening Tool is one of the only comprehensive climate risk long-term, high-quality records of all screening tools for emerging market businesses. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group tools may be better able to assess certain types of risks. For example, tools focused on rising sea levels may be less capable of quantifying the impact of droughts. Once a business understands its risks, it can take the appropriate measures to mitigate potential damage, such as climate-proofing physical assets, or buying insurance or other financial products. The appropriate adaptation actions and associated costs for a given client are highly specific to the assets or processes being adapted. Below are a sample of the available tools that businesses and governments can use to understand and assess climate risks. Climate Risk Screening Tools A number of climate risk screening tools are emerging and many institutions, including the World Bank and IFC, are employing them to help understand climate risk in the investments they make. The Climate and Disaster Risk Screening Tools developed by the Source: Coastal Risk Consulting's Flood Risk Assessment Tool – www.coastalriskconsulting.com World Bank provide a systematic, consistent, and transparent way of this data will require using downscaled projections of global climate models to local conditions. To do that, these general climate projections are coupled with localized weather data that draw on information from the specific location of the business, including historical weather statistics from local weather stations. This process is easiest in regions where these models are in good agreement. In regions that lack such agreement, global and regional models can still provide better understanding of expected changes at a local level. The global and local data are then combined with a collection of highly localized climate models, resulting in tens of thousands of data points and probabilistic projections for the future. The statistical modeling projection built from these data points helps businesses understand climate risks in operations, the costs of those risks, and risk drivers. Additional tools draw on this information to analyze how climate risks interact with other business risks and how those risks evolve over time. Several institutions and climate analytics companies can now help businesses analyze and assess climate risk using this process. Fundamentally, the tools and models used by businesses to understand climate risks are only AgroClimate is a web-resource that gives farmers information about climate risks to help them manage as good as the input into those models. Some crops This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group businesses, including a short-term precipitation forecast tool, a seasonal forecasting tool, drought outlooks, hurricane forecasts, and annual assessments of agricultural climate risks. AgroClimate, which is maintained and operated by the University of Florida, is regularly used during training events with agricultural producers. Its modular platform means that it can be easily expanded to include other geographies and information. AgroClimate prototypes are currently under development for countries in Africa and South America. Coastal Risk Consulting provides coastal homeowners, as well as businesses and local governments, with an online flood risk assessment Four Twenty-Seven’s Climate Risk Forecasting and Screening Tool helps businesses tool to help these groups make informed decisions screen their facilities and identify ways to reduce vulnerability to a variety of climate risks. about risk from floods, including those that result from storm surges and rising sea levels. CRC's of considering short and long-term climate and disaster risks in flood prediction models integrate scientific data project, national, and sector planning processes. These tools from NOAA, the US Geological Survey, the US Army Corps of provide high-level screening at an early stage of program and Engineers, NASA, and other sources to assess current and future project development, identify climate risk issues, and determine flood risk at the property level. whether the project or program needs to incorporate other considerations as a result. The tools can be used for projects in The company helps local governments determine appropriate numerous sectors including agriculture, water, roads, energy, measures to stave off climate risks. Its Coastal Community Risk health, non-road transportation, mining, fisheries, forestry, urban Assessment generates flood risk maps, vulnerability assessments, planning, and solid waste investments. The climate risk ratings a preliminary outline of potential adaptation strategies, and site- they produce provide a structured and systematic process for specific recommendations for future adaptation planning, understanding climate and disaster risks and serve as a basis for including in areas such as sustainable design and construction, continued planning. transportation, water management, flood risk and coastal management, emergency preparedness, health, and biodiversity. The Global Risk, Resilience and Impacts Toolkit (GRRIT), managed by the National Center for Atmospheric Research and Four Twenty-Seven, a climate solutions company that works with the University Cooperation for Atmospheric Research, connects industry, government, and non-profits to integrate climate risk users to multiple public and private databases—from weather and intelligence into decision making, provides a Climate Risk climate models to current and projected populations, as well as Forecasting and Adaptation Strategic Tool that helps businesses risk, hazard, and vulnerability data. decide which measures to take to protect their operations against climate change. The tool helps businesses determine which of GRRIT’s tools pull critical pieces of information from these data their facilities and supply chains are most exposed to extreme sets that can be fed into other applications that help businesses weather events and rising sea-levels in both the short and long evaluate their options, such as the Engineering for Climate term. In addition, the tool provides financial evaluations that look Extremes Partnership climate risk applications. Other decision at the potential cost to a business if it doesn’t prepare for climate making tools being developed include one that can help cities change and a cost-benefit analysis of various preventative prepare for climate change and an application that predicts coastal measures. damages from cyclones. AgroClimate is a product of the Southeast Climate Consortium, CONCLUSION and is funded by the National Oceanic and Atmospheric In both advanced economies and emerging markets, climate Administration, the US Department of Agriculture, and the change has the potential to threaten numerous aspects of an National Institute of Food and Agriculture. Developed in 2005, organization’s operations, from direct damages to physical assets AgroClimate provides a number of tools for agricultural to interruptions in business processes and supply chains. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group Fortunately, there are a host of new climate risk analytics and tools, including several from the World Bank that provide private Stacy Swann is the former head of IFC’s Blended Finance Unit within IFC’s Climate Change Business Department, and is currently the CEO of Climate enterprises and governments with methods to assess and begin to Finance Advisors, LLC (sswann@climate-fa.com). develop strategies to address those risks. By integrating climate risk into their overall risk management models, these tools help Alan Miller is an independent consultant on climate change finance and businesses in all countries better plan for disasters and adapt their policy, retired from the IFC Climate Change Business department (astanley92@gmail.com). operations to the changing climate. 1 The Task Force on Climate-Related Financial Disclosures, “Phase I Report,” 2 IFC and Acclimatise, “Climate Risk and Business: Practical Methods for Assessing March 31, 2016. Risk,” September 2010. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group