Deutsche AM puts its money on measurement of physical climate risk
Deutsche Asset Management is set to consider companies’ exposure to catastrophic climate events as part of its investment decision-making.
Deutsche developed the new approach with the help of California-based climate intelligence advisory firm Four Twenty Seven. The latter has mapped the physical locations of more than 1m corporate facilities globally and uses scientific models to assess the likelihood of them being affected by climate hazards such as heatwaves, floods and cyclones.
Deutsche said it was the first time this had been done for investment purposes, and it provided a method of calculation for individual companies’ exposure to catastrophic events.
The approach has been developed for measuring physical climate risk in equity portfolios.
In a statement, the asset manager said it would be able to integrate a company’s physical climate risk equity score within new investment products, and assess the implications of climate events for individual companies in its portfolios.
The move backs up Deutsche Asset Management CEO Nicolas Moreau’s previously expressed view that investors have not been taking seriously enough the physical impacts of climate change, and focussing too much on the potential repricing of economic assets.
More recently, Moreau said natural disasters such as the hurricanes making landfall in the US this year “discredit” the investment industry’s current approach to accounting for climate change risk.
The focus on transition risk resulted in “a false sense of comfort” that the investment implications of climate risk, while substantial, would arise in the long-term, according to Moreau.
Physical disruption from hurricanes or floods posed a “clear and present danger”, he argued. Also, scientists believed that stronger and more frequent extreme weather events would be a feature for many years to come even if greenhouse gas emissions fell to zero tomorrow, he said.
“Investment managers need to contend with the physical aspects of climate risk with some urgency,” said Moreau.
Companies need to disclose their related risk exposures, but investors should not wait for them to do so and also needed to seek alternative sources of information, he said.
This would include information from the mapping of corporate facilities’ physical location as Four Twenty Seven does.