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Advancing TCFD guidance on physical risks and opportunities

This report prepared by Four Twenty Seven and Acclimatise for the European Bank for Reconstruction and Development (EBRD) is a contribution to a collaborative initiative between the EBRD and the Global Centre of Excellence on Climate Adaptation (GCECA) on the topics of climate resilience, business and finance. It provides a set of recommendations on disclosure metrics specifically for corporations.

Key points

The report first focuses on the physical risks and distinguishes:
1. first order impacts, which refer to direct hazards from climate change, and
2. second-order impacts, which include all impacts of climate change on economic, human and ecosystems beyond the boundaries of the corporation.

  • Recommendation 1: Assess exposure to all first-order physical climate impacts
  • Recommendation 2: Assess physical climate risks over the duration of an asset’s lifetime or over the lifetime of a financial instrument
  • Recommendation 3: Disclose locations that are critical to value chains
  • Recommendation 4: Provide detailed information on the financial impacts of recent extreme weather events
  • Recommendation 5: Disclose the impacts of weather variability on value chains
  • Recommendation 6: Perform forward-looking assessments of physical climate risks. The report suggest the following metrics for projected impacts:
    – the number of sites and business lines exposed to relevant climate impacts;
    – the projected changes in production, revenues, operational expenditure or capital expenditure due to climate change;
    – value-at-risk from probabilistic estimates (for example, 1:100 or 1:200) of extreme weather event disruption to operations or production, key suppliers, customers or markets;
    – annual average losses from projected climate impacts.
    Recommendation 7: Describe risk management processes for physical climate change impacts

The report identifies three types of opportunities:
1. Opportunities related to managing existing physical climate risks;
2. Opportunities to respond to new emerging physical climate risks;
3. Opportunities to adapt to market shifts driven by physical climate impacts and cater to any resulting new market needs.

  • Recommendation 8: Identify opportunities based on managing physical climate risks and related market shifts
  • Recommendation 9: Assess physical climate opportunities over timeframes relevant to business planning
  • Recommendation 10: Disclose physical climate opportunities for business at the segment level; for critical facilities, disclose climate resilience benefits at the facility level
  • Recommendation 11: Disclose benefits from climate resilience investments using the same metrics as for the disclosure of physical climate risks
  • Recommendation 12: Include physical climate opportunities for business in qualitative disclosures
    Recommendation 13: Consider current and desired GHG concentration pathways and related warming projections as a basis for scenario analysis of physical climate risks and opportunities
  • Recommendation 14: Integrate scenario analysis of physical climate risks and opportunities into existing planning processes to ensure strategic, flexible and resilient businesses and investments
  • Recommendation 15: Avoid standardised scenario analysis in order to have a more comprehensive range of outcomes
  • Recommendation 16: Consider data from a wide variety of sources and scales when developing scenario analysis of physical climate risks
  • Recommendation 17: Take account of scientific uncertainty inherent in climate data and in scenario analysis of physical climate risks and opportunities
  • Recommendation 18: Disclose qualitative information that is relevant to the company and its investors