The increasing incidence of extreme weather events such as typhoons, floods, droughts, and other natural calamities is pushing Asian central banks, supervisors, and regulators to look into the impact of climate risks on investments.

“We have spent a lot of time over the past few years working on climate risk. This has really captured a lot of attention by central banks, supervisors, and regulators around the world in terms of trying to map out the various elements of climate risk that could be affecting our investments,” says Michael Lewis, managing director and head of ESG Thematic Research at DWS.

Climate risk as applied to the financial sector refers to losses that may hit an investment portfolio as a result of weather-related events such as floods, droughts, rising sea levels, and others. “Such events have impacted share prices and new data suggest markets have not yet priced in climate risk,” Lewis says.

“We are in the process of incorporating both physical and transition climate risk into our portfolio construction by favoring firms with a more climate change-resilient business model,” adds Lewis.

Transition risk refers to those risks emanating from a switch to a low-carbon and climate resilient future. This has multiple angles, including shifts in energy policy and changes in climate, and can alter intensity according to different scenarios.

DWS has worked with Four Twenty Seven, a third-party data intelligence company, to understand the climate risk profile of companies to determine how climate-resilient their business models are. For example, Four Twenty Seven’s dataset can map out the physical locations of a company’s corporate facilities and match it against computer-generated climate models to ascertain a company’s exposure to physical climate risk.

This methodology will allow listed companies in the Asia-Pacific to be assigned a “risk score” that rates how climate resilient a company’s business model is. “Coupled with our assessment on transition risk, this work allows us to rank companies according to their resilience for both transition and physical climate risk. Ultimately this will allow us the ability to tilt our portfolio construction towards companies that are more resilient to climate risk,” Lewis says.

According to a white paper published by DWS Global Research Institute, three types of risk indicators form part of Four Twenty Seven’s physical climate risk indicators: operations risk score; supply chain risk score; and market risk score.

The operations risk score includes weather-related events such as heat stress, water stress, extreme precipitation, wildfires, the rise in sea level, as well as hurricanes and typhoons. Operations risk indicators measure the exposure and sensitivity of a company’s assets to physical climate risks.

The supply chain risk score includes supply-side factors such as the corporate’s country of origin and its demand for resources. Climate change risks can multiply through global supply chains. Disruption may stem from extreme weather events, but also from climatic changes to regions for crop farming, mineral extraction, or fluctuation of production or transportation costs.

The market risk score includes sellside factors such as country of sales and weather sensitivity. Market Risk scores provide insights into the major issues pertaining to a business: its primary customers, markets, and sales. The metric estimates how patterns of purchasing and consumption may fluctuate because of climate change.