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How vulnerable are Asian firms to extreme weather?

Wild fires, flooding, droughts, rising sea levels, and typhoons are a growing risk for businesses in Asia Pacific, the world's most climate-vulnerable region. But how well prepared are Asian companies to weather the coming storms?

Wild fires, heat waves, intense flooding and droughts, rising sea levels, and typhoons. These are some of the extreme weather conditions to batter Asia-Pacific this year. As emissions and global temperatures continue to rise, these extreme weather conditions are predicted to worsen. This makes it vital businesses are equipped to endure an increasingly warming world.

The recent COP26 climate conference, coupled with August’s sobering Intergovernmental Panel on Climate Change (IPCC) report, which United Nations secretary-general António Guterres warned was “a code red for humanity,” have promoted the need to reduce carbon emissions and confront climate change up the agenda in corporate boardrooms.

“There is an urgent need for climate action,” said Michael Salvatico, head of Asia Pacific ESG [environmental, social and governance] business development at S&P Global Sustainable1, a data intelligence firm. “We need to rapidly decarbonise global economies. The starting point for this urgent action in my mind was 2015.”

According to analysis by S&P Global Sustainbale1, vital corporate assets worldwide, including factories, transport networks and power transmission lines, increasingly face threats from catastrophic weather events triggered by climate change.

There is an urgent need for climate action. We need to rapidly decarbonise global economies. The starting point for this urgent action in my mind was 2015.

Michael Salvatico, head of Asia Pacific ESG business development, S&P Global Sustainable1

S&P Global Trucost data also reveals in a comparison of industries that physical assets owned by the utilities, materials, energy, consumer staples and healthcare sectors are at the frontline of threats from climate change between now and 2050.

In addition, the report found that, if left unmitigated, water scarcity poses the greatest threat from climate change to all industries. However, in spite of this it rarely shows up on investors’ radars. The analysis also flagged up Asia as the most vulnerable region to climate change.

Across Asia, extreme weather conditions pose huge threats to economies. Rising temperatures will lead to reduced working hours in labour intensive industries, such as agriculture, construction and mining. Rising sea levels and severe flooding threaten to engulf cities and heavily impact industries.

Based on such factors as water, pollution, extreme heat and general vulnerability to climate change, 99 of the 100 most risk-prone cities in the world are in Asia, with the sinking Indonesian capital Jakarta topping the list.

McKinskey Global Institute’s report, Climate Risk and Response in Asia, warns assets and infrastructure could increasingly come under threat from extreme weather hazards. For example, in 2050, a 100-year-old flood in Tokyo has the potential to cause up to US$13.1 billion of direct damage to real estate.

In preparation, Tokyo Metro has started work to prevent water ingress and minimise damage by monitoring precipitation data acquired from space. Measures are also being taken to enhance passenger safety. The Malaysian government has also taken steps to cope with floods by increasing river channel capacity, building a highway tunnel, and channelling water to holding ponds.

As the impacts of climate change continue to grow, mitigating climate risk and adapting business models are becoming increasingly important for companies, investors and governments across Asia Pacific.

Sydney Gliserman, associate director at Control Risks, has noticed a “perspective shift” when talking to clients about climate risk. However, she notes other potential risks that can result from climate risks continue to be ignored.

“You can’t just talk about environmental risk without linking it to all these other risks that organisations are going to increasingly face. There are social risks and the way you engage with communities. An environmental risk can quickly become environmental activism, which can quickly produce community unrest. This can quickly become a security issue or crisis.”

Salvatico added that the impacts of climate change and awareness of the physical risks it poses are of increasing importance to companies in APAC. He points to the climbing membership in the Asia Investor Group on Climate Changem, an initiative to create awareness and encourage action among Asia’s asset owners, as evidence. 

Additionally, almost 1,000 companies in Asia-Pacific have signed up to the Task Force on Climate-Related Financial Disclosures (TCFD). It has developed guidelines to help companies disclose climate-related risks and opportunities, including physical risk exposure and carbon emissions.

“Investors are starting to focus on climate change and its impact on their portfolios,” Salvatico noted. “Not just from an individual company perspective but also the stewards of capital to these companies are increasingly concerned about the physical risk implications.”

The recent COP26 climate conference reiterated the urgency for change as nations pledge their commitment to limit global warming to 1.5°C and align the finance sector with net-zero by 2050. And organisations have a huge role to play.

“The reality is companies are an important factor in the decarbonisation of global economies,” said Rick Lord, S&P Global head of methodology innovation, ESG innovation and analytics. “Investors increasingly expect companies to commit to ambitious decarbonisation targets and to both understand the transition and physical risks that they face, and to communicate credible plans to ensure the resilience of their operations and business models in a changing climate.”

An additional incentive for companies to decarbonise is the introduction of carbon taxes. This will be applied to companies unable to meet carbon reduction targets. Current climate risk assessments are starting to include carbon price risk indicators to determine a company’s exposure if they fail to hit reduction goals by 2030.

“We’re already hearing that a carbon price will potentially apply to imports through carbon import duty,” said Salvatico. “It will be difficult to avoid. So, there are multiple pressure points for companies to rapidly decarbonise. It’s coming from regulators, through supply chains and potentially where they sell their goods.”

Companies that carry out assessments to mitigate ESG risks while decarbonising operations can reap the rewards, said Salvatico. Quantifying their carbon footprint is the key first step, before tracking alignment with the Paris Agreement, according to S&P Global’s six steps to net-zero. Currently, global companies are on track for 3ºC warming, falling 72 per cent short of required emissions reductions to stop global warming from exceeding 1.5°C, S&P Global data finds.

Paris-aligned companies “have the potential to make better investments and be better companies for employees, consumers and communities,” said Salvatico. “They can have better access to markets and capital, and can show improved financial performance. Those who start now stand to benefit from being an early mover.”

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