Climate Risk

Climate change is one of the most impactful global challenges of our time. In the years ahead, the climate challenge is likely to be cross-cutting, including the environment, government, business, finance and health.

As the effects of climate change continue to intensify, understanding climate-related risks and developing strategies for mitigating those risks have become top priorities for businesses, governments and societies around the world.

Climate-related risks are defined as the potential negative impacts of climate change on businesses, governments and society. The potential impacts of climate change can take many forms, including physical risks — such as rising sea levels and damage to infrastructure and property from extreme weather events — and transition risks, such as those associated with the shift to a low-carbon economy.

Assessing and quantifying climate-related risks has become a crucial area of focus for energy producers and consumers following the 2017 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

We expect TCFD implementation to shift toward a focus on physical climate change risks, which include risks associated with higher emissions and temperatures, and not just transition risks, such as regulatory-driven commodity demand destruction in a 2-degree C or lower climate scenario.

The intensity of physical risks will vary depending on the location of different assets and operations. However, assessing these risks beyond temperature and precipitation — such as changes in local sea level or acute events such as flooding, drought and wildfire — requires more modeling efforts.

To provide the more granular assessments that investors are seeking on the impact of climate change, an integrated approach that combines climate and economic modeling could be developed to assess and quantify the financial implications of physical climate risk.