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“We are grateful to the many great climate warriors… that have led us all… and have brought the climate change agenda to the very centre of our political, economic and societal choices”.

September 8, 2020

Duarte Costa is the Climate Analysis Lead at Climate Scale – a climate services tech company based in Brussels, sponsored by the EU Commission’s Copernicus programme and Vortex. Its endeavour is to empower people to act on climate change. He red flags the fact that financial services are not properly equipped with adequate and science-based standards to incorporate climate change data and metrics into their climate risk analysis. Duarte further highlights the lack of pragmatic and objective standards to assess, report and disclose on physical climate risks. That TCFD (Taskforce on Climate-related Financial Disclosures) will result into greening of the finance sector – yet he reiterates that it requires to ensure that reporting on climate physical risks is based on the best climate science and adequately managing future uncertainties.

Duarte is excited with the fast pace at which climate risk reporting is being adopted and even legally incorporated in some jurisdictions. At the same time, he is concerned with the lack of precise and science-based standards in measuring and reporting physical climate change risks including their inherent uncertainty. We may see businesses building their resilience using data on future physical climate risks that are physically less plausible or robust, he warns. Even worse, businesses may ‘pick and choose’ the future climate trajectory of their choice and report and disclose their physical risks regardless of the actual scientific robustness and plausibility of these projections. This is a considerable risk that may in fact jeopardize the success and effectiveness of the TCFDs to protect the financial sector (and thereby us all) from climate change risks.

Duarte also reminds us to not forget that, climate change risks particularly, have a higher probability and impact than those of the current corona crisis. The fiduciary responsibility of the insurance sector, like that of financial lenders and regulators, is of utmost importance when dealing with climate change risk. Indeed, the lack of well-defined standards is a problem. Thereby, there is no guarantee that our financial institutions are safe and being adequately regulated to ensure they are resilient against climate change shocks. 

Climate change risks particularly, have a higher probability and impact than those of the current corona crisis.

Praveen Gupta: Any insights into what you are trying to achieve?

Duarte Costa: In an essence, my team and I strive to protect businesses from climate risks and build effective climate resilience. My main role at Climate Scale is to facilitate the complex information and understanding produced from these projections of climate change with our client’s needs and concerns about future climate. My approach builds on actively listening to clients and being there almost as an interpreter, translating multi-Tb of over 1000 climate model projections into accessible information to decide upon. This work has an element of empowering people to act on climate change and that is, in my opinion, the most significant contribution this role allows me to make.

My approach builds on actively listening to clients and being there almost as an interpreter, translating multi-Tb of over 1000 climate model projections into accessible information to decide upon.

PG: Are the financial services willing and equipped to incorporate climate change data and metrics into their climate risk analysis?

DC: Yes and no. Yes, they are willing. But no, they are not properly equipped. In fact, I have serious doubts that they can do it adequately (using the best available science) if it is not required of them to do so. The word adequately here plays a huge importance. It is possible to incorporate some climate change data into reports even for instance by applying some of the tools and methods of the past (where ESG accounting was also highly marginal). That was the time when physical climate risks were more a box to tick in sustainability reports. In 2020 that is far from being adequate and helpful to the goal of protecting businesses from climate risks and building climate resilience effectively. There is no doubt that there is a widespread awareness and concern in the financial sector about climate change, mostly in terms of climate mitigation (where can we reduce our carbon footprint?) and to a certain extent in terms of climate risks (how will we be affected by climate change?) and climate adaptation (what do we need to do to reduce such risks?).  The three cover a large landscape of sectors beyond finance and are in fast growth, particularly mitigation, but steadily – risk and adaptation too.

The lack of pragmatic and objective standards to assess, report and disclose on climate risks is leaving it unclear for many businesses how to actually incorporate this information into their financial risk assessments.

Yet, the lack of pragmatic and objective standards to assess, report and disclose on climate risks is leaving it unclear for many businesses how to actually incorporate this information into their financial risk assessments. So far, for those that have already started reporting financial climate risks, they do so under vague and rather qualitative standards of reporting. For instance, in some cases physical risks are reported based on heat maps highlighting low, medium, and high risks with little information on why this categorization and on the physical consistency and range of change in model simulations behind these categories. It is a good start, but not yet effective in ensuring business resilience against climate change. 

PG: Is the TCFD an effective way forward?

DC: The Taskforce for Climate Related Financial Disclosure (TCFD) is steadily emerging as a set of voluntary standards that are becoming widely adopted by businesses and regulators as a common ground for global reporting on climate risks. Many of us (including me!) are wishing that the TCFD will result into greening of the financial sector. However, in my view, these still remain rather qualitative and overly focused on the transitional risks of climate change, leaving the estimation, analysis, and disclosure of physical risks very much behind. This is worrisome and urgently needs to be addressed.

Many of us (including me!) are wishing that the TCFD will result into greening of the financial sector. However, in my view, these still remain rather qualitative and overly focused on the transitional risks of climate change, leaving the estimation, analysis, and disclosure of physical risks very much behind.

In fact, last year’s EY Global Climate Risk Disclosure Barometer revealed that businesses assessing and reporting their climate risks are overlooking and sometimes even omitting physical risks from their assessments of risk. The reason seems to be that these are (in theory but not always) experienced in the long term rather than immediately. In addition to this, according to the recent TCFD status report, there is insufficient information to factor in climate-related risks namely on assessing long-term returns. In either cases, while the adoption and demand for climate risk disclosure is growing, it seems that this rise reflects a reactive instead of proactive response to the risks of the climate emergency. Simultaneously, we are being forced to learn, in this current COVID-19 crisis, through extremely hard numbers (in number of lives lost and economic losses), of the cost of being reactive instead of proactive.

Accounting for climate change risks requires proactivity in considering long-term risks and in sourcing the right data to factor adequately in climate risks. For instance, on physical risk it is fundamental to set standards on data quality, data sources, types of climate models, levels of spatial and temporal resolution, types, and sizes of model ensembles. More importantly, how future physical uncertainty (an inherent element of future predictions of climate) is documented, reported, and managed. Reporting climate change physical risks must advance from being a tick-box add-on to risk assessment to a fundamental risk to be thoroughly assessed, based on the best science, and with implications to the core operation and decision-making of a business.

Reporting climate change physical risks must advance from being a tick-box add-on to risk assessment to a fundamental risk to be thoroughly assessed, based on the best science, and with implications to the core operation and decision-making of a business.

Moreover, TCFD recommendations need to continue to evolve to effectively guide businesses and protect the economy from large shocks. 

I am excited with the fast pace at which climate risk reporting is being adopted and even legally incorporated in some jurisdictions. However, I am concerned with the gaps and loopholes in doing so (especially on physical risks) using the best available science. This may (mis)lead into a general understanding of climate risk as a transitional one with little or no inclusion of the most intrinsic source of climate change risk: changes in the natural environment.

We may thereby see businesses building their resilience using data on future risks that are physically less plausible or robust. Or even worse, they may ‘pick and choose’ the future climate trajectory of their choice and report and disclose their physical risks regardless of the actual scientific robustness and plausibility of these projections for a given location on the planet. This is a considerable risk that may in fact jeopardize the success and effectiveness for the TCFD’s to protect the financial sector (and thereby us all) from climate change risks.

We may thereby see businesses‘pick and choose’ the future climate trajectory of their choice and report and disclose their physical risks regardless of the actual scientific robustness and plausibility of these projections.

Finally, let us be reminded that, climate change risks particularly, have a higher probability and impact than those of the current corona crisis and, like for the latter, uncertain and unknown risks are better dealt with using the best science available and a precautionary approach. These are aspects that the TCFD standards can have a crucial role in.   

PG: Climate Change presents a material risk about which the big business including big insurers have a fiduciary responsibility to warn investors. Are they emerging as important reformers?

DC: This is an especially important point. Insurers are certainly one who must pay a higher price for climate change risks. When we see the devastation caused by unprecedented extreme events like recent hurricanes in the USA, fires in Australia and floods in the UK and Europe we immediately know that these may also pose serious risks to insurance businesses that have not accounted for such inconceivable events. So, for the insurance sector, I would say that it is in their best interest to not only incorporate physical risk from climate change in their material risk assessments, but as importantly, to do so under the best physical robustness. In the experience I have with Climate Scale, this can play a significant difference in the outcome of future risk, if the overall uncertainty of projections and their physical robustness is not considered.

For the insurance sector, I would say that it is in their best interest to not only incorporate physical risk from climate change in their material risk assessments, but as importantly, to do so under the best physical robustness.

The fiduciary responsibility of the insurance sector, like that of financial lenders and regulators, is of utmost importance when dealing with climate change risk. Both as a warning on riskier assets from unknown risks (climate change risks are unapparent, non-immediate and often unprecedented) as well as an opportunity to steer businesses and the financial sector into a safer portfolio.

PG: No mandatory single standard exists, what is disclosed varies greatly from company to company. What do you believe needs to be done to make the lives of investors easier on this front?

DC: Except for a few countries (like France, Canada, and soon New Zealand), this is correct, but also changing quickly. Indeed the lack of well-defined standards is a problem: (i) for investors that need to have clarity (and some added pressure) on how to start doing something they have not done before and (ii) for us all that have no guarantee that our financial institutions are safe and being adequately regulated to ensure they are resilient against climate change shocks. 

Indeed the lack of well-defined standards is a problem: (i) for investors that need to have clarity(ii) for us all that have no guarantee that our financial institutions are safe and being adequately regulated to ensure they are resilient against climate change shocks. 

I am optimistic about the TCFD, despite the serious issues that I have raised. It is also very encouraging how rapidly it has been gaining leverage across the globe.  

The next step, which I think needs to be discussed and implemented right now, is to ensure that these standards actually safeguard our financial institutions, particularly in ensuring that businesses use the best information available, document and manage the inherent uncertainty of future climate under the best science. This is not trivial, neither to implement nor to be overlooked.

PG: How can technology tools like the ones you work on instill a sense of Climate urgency?

DC: The technology I work on serves to help businesses handling this component of physical risk – thus far largely omitted and overlooked by TCFD. My work focuses more on helping address this element of the TCFD process with solutions rather than instilling the climate urgency. I think, for that we are grateful to the many great climate warriors. Especially the newest generations, that have led us all – citizens, business-owners, employers, employees, politicians – and have brought the climate change agenda to the very centre of our political, economic, and societal choices.

PG: My best wishes Duarte. May your dedication and focus translate into a sustainable world!

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