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Speaker 1: This is Dana Perkins and you're listening to Switched on

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Speaker 1: the BNAF podcast. Extreme climate events are causing companies to

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Speaker 1: take a closer look at physical risk and think about

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Speaker 1: how climate events could impact their balance sheets, with case

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Speaker 1: studies showing impacts ranging from damage to facilities to all

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Speaker 1: out bankruptcy. Despite the financial threat, evaluation of physical risk

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Speaker 1: is just getting started and demand for disclosures is growing

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Speaker 1: amongst investors and policymakers. In twenty twenty two, a survey

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Speaker 1: conducted by CDP of over twenty three hundred companies found

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Speaker 1: that sixty five percent affirms were yet to identify physical risk,

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Speaker 1: and even fewer of those have conducted financial assessments of

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Speaker 1: those threats. So what is the actual scale of threat

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Speaker 1: that physical risk poses and what can be done to

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Speaker 1: improve reporting and data collection to find out more? Today

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Speaker 1: I am joined by Donielou, an analyst from bnaf's Climate

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Speaker 1: Risk team, and together we do a bit of a

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Speaker 1: which addresses the different forms of physical risk and which

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Speaker 1: weather events can leave the largest financial impact. Then we

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Speaker 1: go into more detail and talk about how physical risk

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Speaker 1: affects different sectors and why the financial services industry in

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Speaker 1: particular is vulnerable should investments be exposed to extreme weather events.

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Speaker 1: And finally, we discuss the insurance industry and its relationship

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Speaker 1: with physical risk and why increasing premiums or perhaps even

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Speaker 1: the refusal to ensure assets altogether, could lead to greater

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Speaker 1: awareness and reporting of data. BNAF subscribers will be able

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Speaker 1: to find research highlighted on today's show, including Donya's research

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Speaker 1: note beyond fire and floods. Firms gauge costs of physical

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Speaker 1: risk at BNAF dot com or at BNF go on

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Speaker 1: the Bloomberg terminal. If you like this podcast, if you

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Speaker 1: give us a review, it will make us more discoverable

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Speaker 1: by others. But right now, let's jump into our conversation

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Speaker 1: with Donya about physical risk. Dania, thank you very much

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Speaker 1: for joining today.

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Speaker 2: Thanks for having me, Dana.

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Speaker 1: This is going to be fun. So listeners, you've got

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Speaker 1: a Dania and a data here, so we'll endeavor to

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Speaker 1: make it clear who's talking each time, or you know,

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Speaker 1: we just won't refer to each other. But let's get going.

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Speaker 1: We're here to talk about physical risk and really what

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Speaker 1: the data behind physical risk is going to tell us.

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Speaker 1: So let's start off with a quick definition. Tell us

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Speaker 1: what is physical risk.

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Speaker 2: Physical climate risk is any damage disruption to operations, really

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Speaker 2: any risk that arises from weather related events. There have

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Speaker 2: been a lot of these right in the past few years.

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Speaker 2: We have wildfires, floods, drouts, et cetera. All of this

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Speaker 2: is physical climate risk. We can break that down into

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Speaker 2: two broad categories. So we have acute physical risks. These

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Speaker 2: are more event driven floods drought. Like I said, wildfires

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Speaker 2: have a start at an endpoint. The other category is

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Speaker 2: chronic climate risks, and these are related to long term

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Speaker 2: shifts in the overall climate patterns, so things that we're

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Speaker 2: going to see intensify with advancing climate change. These are

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Speaker 2: things like ocean acidification, sea level rise, erosion, things like that.

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Speaker 1: The underlying data for physical risk is notoriously difficult to

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Speaker 1: interpret within a confidence interval that scientists would actually be

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Speaker 1: really really comfortable with, and so oftentimes is that kind

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Speaker 1: of last bit of data that many financial institutions have

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Speaker 1: started to incorporate in although we are seeing increasingly show up.

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Speaker 1: Can we just talk a minute about the data itself

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Speaker 1: that underpins this analysis and why it's difficult to essentially analyze.

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Speaker 2: Yeah, well, we have really really good weather data right,

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Speaker 2: the scientific community climate scientists, we have really good weather data,

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Speaker 2: but it's mostly short term and it's very, very difficult

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Speaker 2: to predict, you know, in six months from now, or

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Speaker 2: in nine months or in a year and a half,

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Speaker 2: this hurricane is going to hit this exact place. So,

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Speaker 2: because there's long term uncertainty, it's hard to map out

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Speaker 2: exactly when or where these events will take place. And

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Speaker 2: then the second thing is that it's been difficult for

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Speaker 2: that sphere of whether in climate modeling to trickle down

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Speaker 2: into corporate level reporting. There's really a lack of corporate

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Speaker 2: level physical risk data because there's not yet a standard

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Speaker 2: mechanism for them to ingest this information, for them to

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Speaker 2: map it onto their own operations, and for them to

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Speaker 2: spit back out kind of a standard impact metric.

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Speaker 1: So there are two ways of looking at this as well,

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Speaker 1: which is first of all, the risk factors associated with

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Speaker 1: a certain event happening, and then the second is the

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Speaker 1: losses that your company may experience. Can you go into

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Speaker 1: the different kind of lost categories that somebody looking at

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Speaker 1: physical rips is taking into consideration.

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Speaker 2: Yeah, so most companies are going to be impacted either

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Speaker 2: in their direct operations or throughout their supply chain, and

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Speaker 2: we can break down their impact into a couple of categories.

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Speaker 2: So number one, like you said, there is direct asset damage.

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Speaker 2: So if a storm hits your area and it causes,

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Speaker 2: you know, a tree to fall on your roof, your

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Speaker 2: damage roof decreases your asset value and that's going to

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Speaker 2: take investment to fix. A second category, which is actually

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Speaker 2: much bigger, is the productivity loss from whatever damage you

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Speaker 2: suffered or disruption you suffered. So that's lost revenue because

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Speaker 2: your factory didn't have a roof, or because your factory

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Speaker 2: was flooded for a while, or because you know, the

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Speaker 2: climate patterns shifted and suddenly your solar power plant or

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Speaker 2: your wind power plant isn't generating the energy that it

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Speaker 2: usually does. That's actually the biggest category of loss and

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Speaker 2: financial impact for most companies productivity loss. And then the

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Speaker 2: third is indirect impact or indirect loss arising from all

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Speaker 2: points in your supply chain. So if a storm or

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Speaker 2: a drought knocks out your supplier to a key commodity

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Speaker 2: that you depend on, that delay and that kind of

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Speaker 2: increase in fees that you would face to get backup supply.

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Speaker 2: That's an economic cost as well delays from shipping goods

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Speaker 2: because maybe the canal that you use has low water

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Speaker 2: levels and it can't handle the throughput it normally does.

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Speaker 2: There's a lot of points along everybody's supply chain where

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Speaker 2: they can experience indirect physical risk.

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Speaker 1: So let's stick on that point for a second. Because

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Speaker 1: you mentioned the Panama Canal and shipping delays, let's go

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Speaker 1: into some examples that are impacting supply chains.

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Speaker 2: So Bloomberg did a lot of really great reporting last

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Speaker 2: year on specifically droughts low water levels across key shipping lanes,

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Speaker 2: therefore delaying logistics and delaying delivery for countless industries and

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Speaker 2: countless companies. That's one big one that we have a

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Speaker 2: lot of data on, and we have costs to sociated

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Speaker 2: with you having to wait an extra three days or

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Speaker 2: you having to pay an extra however much to get

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Speaker 2: your delivery through. We also have another category of supply

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Speaker 2: chain exposure lies with key manufacturers. So as an example,

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Speaker 2: a lot of the industries that BNF covers clean energy manufacturing,

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Speaker 2: a lot of those have China as a main manufacturing base.

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Speaker 2: And the report that we published, we found that ninety

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Speaker 2: two percent of mainland China's companies report vulnerability to storms,

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Speaker 2: So that means that a lot of these clean tech

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Speaker 2: industries that we're covering, they are therefore, in turn very

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Speaker 2: exposed to storm risk because if a couple of factories

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Speaker 2: in China get knocked out, then that creates obvious knock

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Speaker 2: on effects for later on down the supply chain. So

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Speaker 2: supply chains are basically how physical risks propagate from the

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Speaker 2: local place where it happens to the global stage.

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Speaker 1: So some of these indirect economic losses it feels like

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Speaker 1: almost you know, how long is a piece of string,

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Speaker 1: or even when we're looking at carbon emissions, these are

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Speaker 1: like the scope three emissions in this risk space. So

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Speaker 1: a bit of a subjective question. And in your opinion,

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Speaker 1: do you think that calculating the indirect economic costs is

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Speaker 1: more challenging to do or actually calculating what the different

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Speaker 1: physical risk kind of factors or percentages actually are.

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Speaker 2: Yeah, I think it's much more difficult. I mean, like

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Speaker 2: you said, it requires so much data, right, It requires

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Speaker 2: you to know the detail of each one of your suppliers,

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Speaker 2: each one of your downstream customers, where their facilities are,

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Speaker 2: how they operate, what materials or ingredients they depend on.

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Speaker 2: It's so many touch points, and I think that that

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Speaker 2: does make it very difficult for you, as the central

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Speaker 2: company to account for. But it's still necessary, right.

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Speaker 1: So you're choosing the indirect economic costs are probably the

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Speaker 1: more complicated of the two in this world of complicated maths.

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Speaker 2: I believe so. But I think an important point here

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Speaker 2: is that the indirect cost might be easier to address

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Speaker 2: with things like insurance or with things like, you know,

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Speaker 2: financial instruments or hedges or something like that.

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Speaker 1: I really want to talk about insurance, but before we

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Speaker 1: get there, let's talk a bit about the industries that

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Speaker 1: are most exposed to this risk. You bring up a

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Speaker 1: number of the industries that be NF covers, so for example,

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Speaker 1: utilities and the power sector is something that are inherently

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Speaker 1: at risk to physical factors. But what is this range?

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Speaker 1: Is it really pretty much any company that has a

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Speaker 1: physical presence, and if you think about it, even digital

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Speaker 1: companies have a physical server somewhere. And on that scale,

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Speaker 1: kind of which ones would you see as the most

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Speaker 1: at risk to physical risk factors?

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Speaker 2: It's it's really everyone, like you said, But as you

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Speaker 2: can probably expect, the industries that are going to be

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Speaker 2: most affected are the ones that depend on very predictable

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Speaker 2: weather patterns for their revenue generation. So these are going

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Speaker 2: to be industries like agriculture, right, you need to know

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Speaker 2: when frost usually hits. You need to know what rain

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Speaker 2: levels typically are in order to be successful and plan

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Speaker 2: your rotations. Forestry, same thing, power companies as well. You

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Speaker 2: need to know how high the wind blows or what

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Speaker 2: the sun radiation tends to be in order to plan

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Speaker 2: your output and in order to sign instruments like PPAs.

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Speaker 2: But like you said, it's not an exaggeration at all

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Speaker 2: to say that physical risk affects most industries everywhere, especially

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Speaker 2: as we consider that climate change is going to make

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Speaker 2: events more intense and most likely more frequent. A couple

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Speaker 2: of other categories that we talk about in the report.

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Speaker 2: If you are an industry that relies heavily on outdoor labor,

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Speaker 2: so these are folks like mining, agriculture, construction, you're going

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Speaker 2: to be more sensitive to heat and freeze events that

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Speaker 2: make that outdoor labor very difficult or impossible. If you're

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Speaker 2: an industry that is directly consumer facing, so hospitality or retail,

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Speaker 2: you're going to be extra sensitive to risks that knock

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Speaker 2: out consumer access to your locations, so floods, storms, freeze events.

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Speaker 2: And then finally, like you said, insurance and financial services.

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Speaker 2: This is a major group to call out, so banks,

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Speaker 2: investment asset managers, insurance companies, et cetera. These guys are

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Speaker 2: really exposed. They might not have the direct asset exposure

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Speaker 2: that we talked about earlier, but through their investments and

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Speaker 2: through their insured assets, they could face huge aggregate exposure

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Speaker 2: when a risk event does hit, because it essentially magnifies

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Speaker 2: their exposure.

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Speaker 1: So you mentioned things like frost and different sorts of events.

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Speaker 1: So now we've talked about the different I guess categories

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Speaker 1: of risk, the different industries that are most impacted, and

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Speaker 1: now let's talk about the weather event types a little bit.

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Speaker 1: In that in some respects you can actually say climate

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Speaker 1: change is almost synonymous with disrupting the water cycle. And

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Speaker 1: when you disrupt the water cycle, we're thinking of things

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Speaker 1: like more intense storms, but also droughts and things like frost.

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Speaker 1: Lots of backward looking weather data, but forward looking weather

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Speaker 1: data is more difficult to actually think about. When's the

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Speaker 1: need for climate scientists among all of these more dramatic

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Speaker 1: weather events. Kind of which are the most harmful when

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Speaker 1: you're looking at it in terms of losses.

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Speaker 2: When we looked at the data, it turned out that

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Speaker 2: drought tends to be the most expensive risk type. And

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Speaker 2: there's a couple of reasons for that, right, Droughts tend

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Speaker 2: to last a long time, sometimes multi year, and so

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Speaker 2: you naturally are getting more time to build up losses

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Speaker 2: in aggregate. However, the good news is that drought also

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Speaker 2: tends to have We calculated this ratio of potential loss

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Speaker 2: to cost of management, and it turns out that drought

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Speaker 2: has one of the highest essentially payoff ratios. Right for

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Speaker 2: every dollar that you invest in mitigating or managing your

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Speaker 2: drought risk, it pays off more. So you're avoiding more

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Speaker 2: loss because it tends to be so expensive when it

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Speaker 2: does hit.

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Speaker 1: So, if you're a company, or if you're a financial

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Speaker 1: institution looking to ensure or lend money, or really engage

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Speaker 1: with any of these companies and thinking about these weather

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Speaker 1: related events that could have an impact on your investment

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Speaker 1: or your business, I guess what I'm really wondering is

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Speaker 1: how many of these companies are being transparent about their

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Speaker 1: assessment of these risks, And you know, how are we

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Speaker 1: out there, How are you out there really judging whether

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Speaker 1: or not enough companies are taking this seriously.

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Speaker 2: Yeah, So, as you can expect, most financial players are

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Speaker 2: more and more asking for this type of data. However,

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Speaker 2: the company side, on the corporate side, they're having a

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Speaker 2: hard time getting to terms with all of this and

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Speaker 2: grappling with it and putting it in a presentable, standardized form.

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Speaker 2: Like we said, what's exciting about the report that we

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Speaker 2: just put out is that we finally are able to

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Speaker 2: set a baseline for physical risk exposures and costs across

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Speaker 2: most sectors and most geographies. And we did that by

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Speaker 2: looking at self reported data that came out of the

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Speaker 2: CDP questionnaire, covering about eighty five hundred companies, so quite

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Speaker 2: a good sample size. From that, we found that only

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Speaker 2: thirty five percent of companies are able to identify exposure

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Speaker 2: to any physical risks. Right, So that's saying, yes, I'm

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Speaker 2: exposed to floods, Yes I'm exposed to fire. That's not

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Speaker 2: even getting into quantifying what that exposure is. Only thirty

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Speaker 2: five percent of companies are identifying exposure to any physical risk.

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Speaker 1: And we've already established that we think that most companies

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Speaker 1: have some degree of exposure.

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Speaker 2: Exactly thirty five percent is low. And I think what

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Speaker 2: makes it even more concerning is that the CDP survey

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Speaker 2: is voluntary, right, You as a company don't need to

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Speaker 2: submit data. You tend to submit data if you are

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Speaker 2: ESG aware or if you are ESG forward as a firm. So,

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Speaker 2: considering that we're taking the sample from eighty five hundred

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Speaker 2: companies that are more ESG aware or more ESG leading,

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Speaker 2: still only thirty five percent of companies are able to

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Speaker 2: identify exposures. So I think that that really points to

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Speaker 2: the need to beef up reporting standards and to have

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Speaker 2: more guidance or pressure from financial institution and even policy

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Speaker 2: makers to get this data more out there.

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Speaker 1: Within the most exposed sectors. Well, what is the I

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Speaker 1: guess size of financial losses that were really expecting due

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Speaker 1: to maybe some of the more acute physical risks.

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Speaker 2: So let me explain what numbers we were able to

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Speaker 2: get out of this sample. It's really fantastic. So we

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Speaker 2: have data on company exposure to risks, So yes or no,

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Speaker 2: are you exposed to fire? Are you exposed to flood?

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Speaker 2: Number two? We have data on financial loss So if

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Speaker 2: a flood were to hit how much would it cost you?

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Speaker 2: And then number three, we have data on cost of

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Speaker 2: risk management. So if you say that you are exposed

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Speaker 2: to fires, what do you think what do you assess

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Speaker 2: as your own cost to reasonably manage that fire risk?

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Speaker 2: So we have those three data points. From those three

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Speaker 2: data points, we backed out a lot of great data

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Speaker 2: and we found that typically a loss from any given

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Speaker 2: physical risk event will cost around zero point three percent

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Speaker 2: of your annual revenue. When a storm hits, you're losing

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Speaker 2: zero point three percent. If another fire hits, you're losing

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Speaker 2: another through zero point three that's just a standard baseline

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Speaker 2: that we found from the data. Now, obviously your loss

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Speaker 2: is going to rise in line with the magnitude of

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Speaker 2: the event. So if a severe drought hits, or if

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Speaker 2: a severe fire hits, that's going to more than double,

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Speaker 2: going from zero point three to zero point seven percent

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Speaker 2: of your annual revenue. That's just out the door.

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Speaker 1: Yeah, and you had mentioned that before when you were

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Speaker 1: discussing droughts as potentially one of the more important things

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Speaker 1: for companies to look at. When they're looking at those

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Speaker 1: kind of you know, three different metrics and where they're

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Speaker 1: then going to try and mitigate their losses. Let's then

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Speaker 1: come to a group of companies that have been looking

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Speaker 1: at physical risk data for some time, and that will

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Speaker 1: be insurance companies. Actuarials are familiar with this, and I

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Speaker 1: think what I really want to understand is are the

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Speaker 1: insurance companies really the catalyst for change and are they

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Speaker 1: the ones that are putting pressure on companies to take

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Speaker 1: this seriously? Because I can think about this at a

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Speaker 1: much smaller scale, but anecdotally speaking, you know, my home

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Speaker 1: flooded and the insurance company that insurres my home was

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Speaker 1: not very happy about the payout that they had to

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Speaker 1: do in order to rebuild part of my home, and

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Speaker 1: as a result, I can't go to another insurer anymore.

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Speaker 1: On a much larger basis, insurance companies, well, they have

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Speaker 1: to look at risk in a very serious way. That's

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Speaker 1: central to their business for much larger sums of money

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Speaker 1: than my little old home. So really are insurance companies

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Speaker 1: at the center of all of this.

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Speaker 2: I think they can be a great catalyst, and they've

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Speaker 2: got a lot of things going for them right. I mean,

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Speaker 2: they already have a wealth of data, probably more data

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Speaker 2: than any individual other player will have on where assets are,

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Speaker 2: what risks they're exposed to, and more importantly, how they've

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Speaker 2: experienced risk events in the past and what that's cost

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Speaker 2: every time. They already have that wealth of data. Plus

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Speaker 2: they have the power to ask for additional data, right

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Speaker 2: they can say I'm not going to ensure you unless

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Speaker 2: you provide me with X, Y and Z. I think

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Speaker 2: they can be a great catalyst along with the rest

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Speaker 2: of the investment community, and like I said, policymakers building

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Speaker 2: more of these risk disclosures into disclosing mandates.

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Speaker 1: So when I think about extreme weather events, I think

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Speaker 1: about the planet as a whole. Granted that weather event

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Speaker 1: is happening in a local place, but a lot of

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Speaker 1: the causes are coming from a disruption that maybe took

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Speaker 1: place somewhere far away. Hence is the discussion around climate change.

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Speaker 1: But let's talk about, you know, mitigation, what companies are

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Speaker 1: actually doing in order to really respond to this.

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Speaker 2: So anecdotally from the survey, we were able to look

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Speaker 2: at a couple of explanations of what companies have planned

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Speaker 2: for in terms of physical risk management, and what we

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Speaker 2: found is that probably the number one solution is insurance.

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Speaker 2: And that's concerning right because that's taking a huge bit

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Speaker 2: that Number one, there's going to be insurance available, we

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Speaker 2: don't know if the insurance industry is going to change

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Speaker 2: their mind or up their fees or what have you.

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Speaker 2: So dealing with physical risk purely with insurance is not

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Speaker 2: going to be enough. So I think the natural evolution

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Speaker 2: later on, hopefully is going to be more and more

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Speaker 2: companies thinking about active mitigation. However, we're not at that

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Speaker 2: point yet. Another big category of risk management currently is

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Speaker 2: just risk monitoring, so putting a staffer or a team

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Speaker 2: on weather data and just keeping an eye out for

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Speaker 2: anything that might pose a risk to your own facilities

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Speaker 2: or to your own operations, and then being able to

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Speaker 2: flag that as a heads up before it happens. So,

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Speaker 2: as you can see, the current state of risk management

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Speaker 2: still has room for improvement, and we are excited and

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Speaker 2: looking forward to hopefully seeing more companies moving from purely

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Speaker 2: insurance and risk monitoring solutions into active mitigation.

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Speaker 1: I mean, just looking at LinkedIn, I'm seeing Hedge Funds

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Speaker 1: posting job roles for climate scientists, so presumably that's for

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Speaker 1: the incorporation of some of this sort of data to

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Speaker 1: then think about how this is going to impact their

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Speaker 1: investments in the companies that they're actually trying to assess.

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Speaker 1: All of this then really comes down to again the

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Speaker 1: sort of data that you can get your hands on,

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Speaker 1: and I know that we want better and more. How

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Speaker 1: does better internal accounting really come to pass? What needs

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Speaker 1: to be done to make this better?

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Speaker 2: You're right that everything needs to start with better reporting.

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Speaker 2: So the data set that we took for this report

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Speaker 2: is all voluntary. It's all voluntary self reported data. If

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Speaker 2: we get to a point in the near future where

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Speaker 2: we have mandates ESG mandates or enough investor pressure to

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Speaker 2: get to a set of standardized disclosures for physical risks,

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Speaker 2: I think that's going to move the ball forward significantly,

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Speaker 2: and we are hopeful that that will happen. So better

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Speaker 2: internal accounting what companies can do in the meantime to

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Speaker 2: prepare for that eventuality. I think number one, they can

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Speaker 2: start building up their own data library of historical impact

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Speaker 2: from physical risks. So, how many times have you experienced

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Speaker 2: flood or drought or severe heat waves in the past

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Speaker 2: X number of years? How long were the disruptions from

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Speaker 2: each of those events? How much did it cost you?

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Speaker 2: What solutions did you bring in to make that risk

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Speaker 2: go away faster. Building up that internal historical data library

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Speaker 2: is very important because that's going to add to the

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Speaker 2: rigor of what you can do for better reporting going forward.

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Speaker 2: We're also looking for more standardized metrics across the board.

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Speaker 2: So again just anecdotally, when we were looking at the

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Speaker 2: survey data set, a lot of companies are reporting data

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Speaker 2: points that are in the same realm, but they're not

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Speaker 2: using the same metrics. So they'll say, you know, my

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Speaker 2: factory was out for two days, some will say my

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Speaker 2: factory was out for you know, X number of cycles.

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Speaker 2: I think we need to bring in more standardized metrics

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Speaker 2: to physical risks so that comparison is possible. And then finally,

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Speaker 2: like we said, moving from softer risk mitigation measures like

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Speaker 2: insurance and risk monitoring, moving from that into more active adaptation.

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Speaker 2: That's going to be a big step, and I think

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Speaker 2: that it's very obvious that the world as a whole

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Speaker 2: is going to need to move in that direction. Within that,

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Speaker 2: it's going to be really important for companies to think

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Speaker 2: carefully about what type of solution works best for them,

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Speaker 2: what type of solution works best for the risks that

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Speaker 2: they face. So, for example, physical adaptations like barriers are

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Speaker 2: going to be really important for events that have a

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Speaker 2: concentrated exposure like storms or hail or to protect yourself

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Speaker 2: against flooding things like that. However, if you are more

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Speaker 2: so exposed to risks with a much wider impact area,

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Speaker 2: so things like drought or wildfires or heat waves, you're

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Speaker 2: going to have to come up with more operational preparedness

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Speaker 2: measures rather than physical So it's going to be really

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Speaker 2: important for companies to think about what risks, management and

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Speaker 2: adaptation looks like for them in order to budget all

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Speaker 2: of this accordingly well.

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Speaker 1: And budget creates the perfect segue for the financial sector.

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Speaker 1: You had already discussed insurance, Let's talk a bit about

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Speaker 1: other parts of the financial services sector. You know, really

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Speaker 1: what's at stake for them. So let's say banks, for example,

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Speaker 1: what are they exposed to and how are they responding.

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Speaker 2: So banks and the investment industry, they're exposed to physical

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Speaker 2: risk within each of their investments. So number one, they

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Speaker 2: face a lot of aggregate risks because physical risk piles

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Speaker 2: up and adds up across each of their investments. But

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Speaker 2: number two, they don't have as much agency to implement

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Speaker 2: the types of risk management or adaptation that they may

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Speaker 2: want to right, So, if they're concerned about one particular

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Speaker 2: investment facing significantly higher physical risks and they're comfortable with

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Speaker 2: they might be able to talk to that company. They

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Speaker 2: might be able to try and get them to make

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Speaker 2: some kind of change, but they don't necessarily have direct

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Speaker 2: agency to say, okay, we're putting up barriers at this facility,

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Speaker 2: so they face high risk and they're less able to

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Speaker 2: implement direct adaptation. In our report, we found something interesting,

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Speaker 2: which is that you can expect around seven percent of

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Speaker 2: a diversified portfolio to experience a risk in any given year.

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Speaker 2: And that's a significant number, right, seven percent of your

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Speaker 2: portfolio experiencing a risk. We have the numbers on costs,

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Speaker 2: so it really does add up.

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Speaker 1: You had mentioned adaptation, and one of the risks I

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Speaker 1: can see, and not to over use the word risk,

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Speaker 1: but one of the things that I can see is

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Speaker 1: companies responding in a way that focus is more on

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Speaker 1: adaptation than mitigation. And what I mean by that is

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00:24:49,760 --> 00:24:54,160
Speaker 1: building more robust infrastructure, which we certainly need in order

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00:24:54,280 --> 00:24:58,080
Speaker 1: to really weather the storm. No pun intended. Rather than

440
00:24:58,160 --> 00:25:00,200
Speaker 1: really get to the root of the problem with which

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00:25:00,240 --> 00:25:04,679
Speaker 1: are carbon emissions and climate change and the intensification of

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00:25:04,720 --> 00:25:07,520
Speaker 1: weather related events. In your opinion, do you see it

443
00:25:07,600 --> 00:25:10,760
Speaker 1: going that direction? Do you see adaptation essentially starting to

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Speaker 1: play a more prominent role in the way companies look

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00:25:15,040 --> 00:25:17,399
Speaker 1: at this sort of data and what they're going to

446
00:25:17,520 --> 00:25:17,959
Speaker 1: do with it.

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00:25:18,320 --> 00:25:21,399
Speaker 2: Absolutely, in the long term, I do. I think it

448
00:25:21,480 --> 00:25:23,920
Speaker 2: might still take a while to get there. The good

449
00:25:23,960 --> 00:25:28,200
Speaker 2: thing is that our report found that every single physical

450
00:25:28,280 --> 00:25:32,080
Speaker 2: risk has a positive payoff in terms of dollars invested

451
00:25:32,200 --> 00:25:35,800
Speaker 2: to manage set risk and avoided dollars of loss. We

452
00:25:35,920 --> 00:25:39,040
Speaker 2: mentioned earlier, drought has the highest ratio at around nine

453
00:25:39,040 --> 00:25:41,520
Speaker 2: point three, same with floods around nine point three. But

454
00:25:41,560 --> 00:25:44,520
Speaker 2: every single risk has a positive payoff when it comes

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Speaker 2: to investing in risk management.

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00:25:47,440 --> 00:25:50,199
Speaker 1: So if we established that, you know, while some of

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Speaker 1: these companies may be looking at mitigation reducing their emissions,

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00:25:54,160 --> 00:25:58,240
Speaker 1: really physical risk and data and information is spurring a

459
00:25:58,280 --> 00:26:01,800
Speaker 1: company to think about many respect adaptation more clearly. What

460
00:26:01,920 --> 00:26:05,399
Speaker 1: opportunities are there for companies in this and do you

461
00:26:05,440 --> 00:26:07,639
Speaker 1: think that there are companies that are not just looking

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00:26:07,680 --> 00:26:10,359
Speaker 1: at this risk data as a downside risk, but also

463
00:26:10,480 --> 00:26:13,720
Speaker 1: seeing a potential growth for some of their businesses. So

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00:26:13,800 --> 00:26:18,200
Speaker 1: I am thinking immediately for cement or steel, for reinforced,

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Speaker 1: certain physical buildings and roads and bridges.

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00:26:22,160 --> 00:26:25,960
Speaker 2: Well for individual companies, the payoff is that you're no

467
00:26:26,040 --> 00:26:30,960
Speaker 2: longer losing revenue from being offline because a physical risk

468
00:26:31,040 --> 00:26:35,000
Speaker 2: hit you. At a larger scale, moving beyond individual companies,

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00:26:35,040 --> 00:26:37,240
Speaker 2: there are going to be sectors that might see this

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00:26:37,440 --> 00:26:39,720
Speaker 2: as an opportunity. So, like you said, a lot of

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00:26:39,760 --> 00:26:45,000
Speaker 2: commodities like steel, metals, cement, they may be playing a

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00:26:45,040 --> 00:26:48,680
Speaker 2: critical role in building more physical adaptations as well as

473
00:26:48,680 --> 00:26:51,639
Speaker 2: the construction industry. The construction industry is obviously going to

474
00:26:51,680 --> 00:26:54,199
Speaker 2: be called upon to put all of that in place,

475
00:26:54,480 --> 00:26:58,040
Speaker 2: so they might see some kind of uplift from more

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00:26:58,119 --> 00:27:01,680
Speaker 2: company awareness and action on physical risk management.

477
00:27:02,040 --> 00:27:06,119
Speaker 1: Let's talk specifically about the energy transition and some of

478
00:27:06,160 --> 00:27:11,760
Speaker 1: the different electric utilities that we are really thinking about

479
00:27:11,800 --> 00:27:16,000
Speaker 1: in this transition, so wind and solar specifically, but even

480
00:27:16,119 --> 00:27:19,640
Speaker 1: some of the other parts of baseload power like nuclear

481
00:27:19,680 --> 00:27:25,000
Speaker 1: and hydro, which within these are most exposed to these

482
00:27:25,040 --> 00:27:28,400
Speaker 1: weather related risks. And I'm just even thinking immediately of

483
00:27:28,560 --> 00:27:30,560
Speaker 1: a wind farm. You know, how high can the wind

484
00:27:30,560 --> 00:27:32,960
Speaker 1: speeds go, how well do they perform in a hurricane?

485
00:27:33,080 --> 00:27:37,359
Speaker 1: Are there parts of this group of companies and generating

486
00:27:37,400 --> 00:27:40,120
Speaker 1: assets that are able to be part of the transition.

487
00:27:40,240 --> 00:27:44,240
Speaker 1: Are they also vulnerable or less vulnerable because they're taking

488
00:27:44,320 --> 00:27:47,160
Speaker 1: this into consideration building out new infrastructure.

489
00:27:47,400 --> 00:27:51,280
Speaker 2: Yeah, so every single type of energy or power asset

490
00:27:51,520 --> 00:27:54,199
Speaker 2: has some exposure to physical risk. Right. If you're a

491
00:27:54,240 --> 00:27:57,960
Speaker 2: nuclear plant, you need to be close by to a

492
00:27:58,000 --> 00:28:01,240
Speaker 2: water source, same as if you are a hydroplant. Wind

493
00:28:01,280 --> 00:28:06,960
Speaker 2: farms obviously need predictable wind speeds, Solar plants need predictable sunshine.

494
00:28:07,240 --> 00:28:07,960
Speaker 2: So aren't they.

495
00:28:07,840 --> 00:28:10,800
Speaker 1: Looking closely at this sort of data when they're thinking

496
00:28:10,800 --> 00:28:13,359
Speaker 1: about new projects or has it not been incorporated yet?

497
00:28:13,920 --> 00:28:17,800
Speaker 2: I'm not sure, but I believe that power companies are

498
00:28:18,080 --> 00:28:22,399
Speaker 2: quite sophisticated when it comes to integrating weather data into

499
00:28:22,440 --> 00:28:26,280
Speaker 2: their operational planning. I think that might translate into more

500
00:28:26,320 --> 00:28:30,159
Speaker 2: physical risk awareness. However, there's kind of a difference right

501
00:28:30,200 --> 00:28:34,160
Speaker 2: between short term weather planning and longer term physical risk.

502
00:28:34,560 --> 00:28:38,120
Speaker 2: The other interesting thing is that power companies might be

503
00:28:38,200 --> 00:28:42,520
Speaker 2: exposed to physical risks in more ways or different ways.

504
00:28:42,600 --> 00:28:45,120
Speaker 2: So you're not only exposed because if you're a wind

505
00:28:45,160 --> 00:28:47,520
Speaker 2: farm and it suddenly freezes, then you're no longer able

506
00:28:47,560 --> 00:28:50,640
Speaker 2: to generate power and get that revenue. That's number one

507
00:28:50,720 --> 00:28:54,040
Speaker 2: an exposure for you. But if you are involved in

508
00:28:54,320 --> 00:28:57,400
Speaker 2: any kind of power purchase contract, you're still obligated to

509
00:28:57,480 --> 00:29:01,160
Speaker 2: deliver power, right, So in that down time you're exposed

510
00:29:01,160 --> 00:29:05,800
Speaker 2: to huge volatility in the power markets. So the power

511
00:29:05,840 --> 00:29:09,280
Speaker 2: sector is exposed to physical risk in a variety of

512
00:29:09,400 --> 00:29:10,920
Speaker 2: different unique ways.

513
00:29:11,120 --> 00:29:13,760
Speaker 1: So Donia, you've taken a closer look at this, and

514
00:29:14,040 --> 00:29:16,240
Speaker 1: I want you to leave us with you know, essentially

515
00:29:16,280 --> 00:29:17,000
Speaker 1: a quick summary.

516
00:29:17,440 --> 00:29:21,520
Speaker 2: Be more aware of your physical risk exposure. Be prepared

517
00:29:21,640 --> 00:29:24,560
Speaker 2: for the fact that you will be expected to report

518
00:29:24,600 --> 00:29:28,760
Speaker 2: on it consistently, hopefully in the near future, and to

519
00:29:28,840 --> 00:29:32,960
Speaker 2: prepare for that, start building up your internal library of

520
00:29:33,120 --> 00:29:33,960
Speaker 2: data points.

521
00:29:34,120 --> 00:29:36,960
Speaker 1: Okay, you heard it here. Thank you very much for

522
00:29:37,040 --> 00:29:37,880
Speaker 1: joining us today.

523
00:29:38,280 --> 00:29:38,640
Speaker 2: Thank you.

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00:29:47,720 --> 00:29:51,040
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00:29:51,200 --> 00:29:54,640
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