The transition to a low-carbon, climate-resilient economy is increasingly recognized as a key factor to consider in business strategy, with leading bodies like the United Nations (UN) and Intergovernmental Panel on Climate Change (IPCC) concerned the world is not on track to reach net zero by 2050.
The financial sector is gaining momentum in this space. An evolving, increasingly stringent disclosure and regulatory landscape is driving demand, with climate change mitigation and adaptation emerging as an investment megatrend.
Built on sophisticated modeling of current and future physical risk and transition risk — and the interplay between the two — Bloomberg’s climate risk solutions present opportunities for businesses and investors alike.
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What climate risk is, and why it’s important
Experts classify and analyze climate risk in two main ways: physical risk, which encompasses the acute and chronic impacts of rising temperatures on a company’s operations, and transition risk, which encompasses the risk associated with actions taken to decarbonize the economy.
This classification has been universally adopted by regulators and standard setters seeking to highlight the risks and opportunities arising from climate change.
“With physical risk, we seek to understand the implications of various temperature rises on a company’s operations. What are the implications for its markets, customers, revenues and supply chain from potential disruptions? These can include extreme weather events, such as flooding and wildfires, as well as their impact on populations and productivity,” says Ben Carr, Global Head of Climate Risk Products at Bloomberg.
Modeling and analysis of transition risk hinge on understanding the implications for different sectors, countries, and regions of the shift from fossil fuels to a low-carbon economy.
“There are many potential pathways that the transition could take, depending on policy, technology and socio-economic developments, and these are the variables we identify and examine in our risk models. As countries transition at various speeds and adopt different policies, companies will be impacted differently even if they are in the same sector. The most obvious carbon-intensive sectors are energy and utilities, but other energy-intensive sectors, like transportation and buildings, also face big transition challenges.”
The net zero transition is gaining momentum
There is growing interest in transition and physical risk analytics for companies and individual assets. Data from Bloomberg New Energy Finance (BloombergNEF) shows that investment in the deployment of low-carbon transition technologies exceeded $1 trillion for the first time in 2022.
Intersecting concerns drive demand, including an overall shift from voluntary to mandatory disclosure requirements, greater emphasis on regulatory stress testing, industry-led net zero alliances, and a focus on the development and public release of transition strategies and plans.
“Future-focused firms are building capability with expert resources in place to support the development of robust transition plans – underpinned by quality data and analytics,” says Carr. “A credible climate transition plan maps out how they will actively transition their business and the concrete actions needed to do so, taking into account the climate risks and opportunities that a company is exposed to. In essence, they’re looking at how they will decarbonize their business across the whole value chain.”
How Bloomberg supports climate risk analysis
Climate risk frameworks also need to account for significant ‘known unknowns,’ such as tipping points. Potential physical tipping points include the collapse of big ice sheets in Greenland and the West Antarctic and the widespread thawing of permafrost, as well as the collapse of oceanic currents in the North Atlantic. On the flip side, there could be positive social tipping points such as rapid reduction in renewable energy prices or significant growth in electric vehicle sales.
Bloomberg can draw on a range of data for its climate risk modeling. These include data and assessments from the National Aeronautics and Space Administration (NASA) and the National Oceanic and Atmospheric Administration (NOAA). In addition, Bloomberg modeling uses its own proprietary data based on the research and analysis of the transition generated by BloombergNEF.
“Now we’re bringing all that together, along with our traditional data on company financials, financial markets, and physical asset data and supply chains, to enable investors pursuing or implementing net zero strategies to assess the impact of climate change on their portfolios,” says Carr.
“Interested firms will need to mainstream good quality climate risk analytics into all parts of their decision-making processes and business operations.”
Transition risk-related opportunities for investors
Transition risk modelling lends itself to sector-by-sector interrogation. A sector-based approach can hone in on those sectors most affected by the decarbonization of the economy.
“What technologies need to be developed to support the transition? To what extent has a company already invested in new technologies? How do they access and engage new and old markets? What does their transition plan involve, and what does it cost? Considerations like these give insights into how their revenue is shifting, or will shift, over time,” says Carr.
There is also modeling of the current, predicted and required pace of transition across sectors. An in-depth understanding of various emissions reduction pathways – and the changes in technology, infrastructure and the energy system in those pathways – can give greater insight into what’s happening, where, and who will drive change.
Carr and his team can utilize BloombergNEF’s data-driven insights into the energy transition and finance to build a granular and more nuanced understanding of how transition impacts various companies and firms in Bloomberg’s transition risk analytics offering.
Energy security through renewables such as solar and wind are essential in this space and solar in particular is growing strongly. Tripling investment in renewable energy such as solar and wind is one of the key recommendations coming out of COP28.
Voluntary carbon markets and Carbon capture, utilization, storage and removal (CCUSR) technology are also garnering increased interest.
Physical risk-related opportunities for investors
There are also opportunities to proactively support climate adaptation such as investing to improve flood defenses, crop resilience and food security.
These opportunities are currently often in developing countries and delivered through blended finance arrangements, which means private investors can leverage public dollars to augment their investments.
“Even if we hit the Paris Agreement target of well below two degrees, we will still see increased severity and frequency of extreme weather events,” says Carr. “Investment in climate adaptation builds resilience and enables businesses to be better prepared for the changing climate. If we understand the risks, the impact on firms, and its lasting implications, there’s a big opportunity for financial services to support adaptation and business growth.”
Therefore, the launch of the Green Growth strategy is key for Zambia to navigate the climate challenges.
“The Government of Zambia, in collaboration with the Common Market for Eastern and Southern Africa (COMESA) and various development partners, has unveiled the National Green Growth Strategy (GGS). This strategy marks a pivotal step towards steering the country towards sustainable development, with a strong emphasis on environmental sustainability, economic growth, and social inclusiveness.”
The Zambia Green Growth Strategy represents a holistic framework aimed at integrating green growth principles into the fabric of the nation’s development agenda. At its core, the strategy seeks to leverage sustainable practices across key sectors such as agriculture, energy, and water management, with the overarching goal of enhancing resource efficiency, promoting sustainable infrastructure, and building resilience against the impacts of climate change.
Officially launched in the capital city of Lusaka on Wednesday, April 24, 2024, the unveiling ceremony was presided over by the Minister for Green Economy and Environment, Hon. Eng. Collins Nzovu. Speaking at the event, Minister Nzovu underscored the significance of the GGS in charting a sustainable course for Zambia’s future, highlighting its potential to drive inclusive and environmentally responsible growth.
The National Green Growth Strategy is anchored on four fundamental pillars, each of which plays a crucial role in shaping Zambia’s transition towards a more sustainable and resilient future:
This pillar emphasizes the importance of fostering economic growth that is resilient to the impacts of climate change. By promoting adaptation measures and integrating climate considerations into development planning, Zambia aims to build a robust economy capable of withstanding environmental challenges.
The GGS prioritizes the efficient utilization of resources, recognizing the finite nature of natural assets. Through initiatives focused on reducing waste, optimizing energy consumption, and enhancing resource productivity, Zambia seeks to maximize the benefits derived from its natural capital while minimizing environmental degradation.
Protecting and preserving Zambia’s rich natural heritage is a cornerstone of the GGS. By investing in ecosystem restoration, biodiversity conservation, and sustainable land management practices, the strategy aims to safeguard the country’s natural capital for future generations, ensuring continued ecological health and resilience.
Central to the GGS is the principle of inclusive development, which seeks to ensure that the benefits of green growth are equitably distributed across society. By promoting social inclusiveness, gender equality, and community participation, Zambia aims to foster a more equitable and just society where all citizens can thrive.
With concerted efforts and collective action, Zambia is poised to emerge as a shining example of sustainable development in the region and beyond.
The author is a multiple international award winning journalist and Economist.