diff --git a/articles/climate-risk-assessments/components/flow-chart.js b/articles/climate-risk-assessments/components/flow-chart.js index 8d701850..dee6c879 100644 --- a/articles/climate-risk-assessments/components/flow-chart.js +++ b/articles/climate-risk-assessments/components/flow-chart.js @@ -39,7 +39,6 @@ const FlowChart = () => { { } sx={{ right: 0 }} /> - {active && ( - - + + {TEXT[view][active] && ( + - {TEXT[view][active] && ( - - {TEXT[view][active]} - - )} + > + {TEXT[view][active]} + + )} + + + {TEXT.Concerns[4]} - )} + @@ -97,7 +107,7 @@ const FlowChart = () => { fill='none' xmlns='http://www.w3.org/2000/svg' sx={{ - mt: 5, + mt: [5, -6, -7, -8], overflow: 'visible', width: ['100%', '75%', '75%', '75%'], }} diff --git a/articles/climate-risk-assessments/index.md b/articles/climate-risk-assessments/index.md index 84f21e98..bd471c6c 100644 --- a/articles/climate-risk-assessments/index.md +++ b/articles/climate-risk-assessments/index.md @@ -5,7 +5,7 @@ authors: - Oriana Chegwidden - Jeffrey Fralick - Sadie Frank -date: 07-17-2023 +date: 07-18-2023 summary: We held an expert convening to identify shortcomings and opportunities when evaluating financial risks to electric utilities from extreme heat. quickLook: Findings from an expert convenings on extreme heat and the electricity sector card: climate-risk-assessments @@ -21,13 +21,13 @@ components: color: yellow --- -Federal agencies, municipalities, and private companies are increasingly seeking information about the financial risks arising from the physical impacts of climate change. Across the United States, physical climate hazards, such as fires, droughts, and floods, have already taken a significant financial toll. In 2022 alone, there were 18 events that together caused a total of $165 billion in damages. Entities are taking steps in response: governmental institutions around the globe are [proposing](https://www.sec.gov/news/press-release/2022-46) and [issuing](https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en#:~:text=EU%20law%20requires%20all%20large,on%20people%20and%20the%20environment.) climate-related financial standards; non-governmental organizations have set forth voluntary frameworks for climate-related financial risk disclosure;See, for example, the Task Force on Climate-Related Financial Disclosures (TCFD). and policy efforts are emerging to better identify climate risks to the financial system and overall economy. For example, in 2021, President Biden issued [Executive Order 14030 (EO 14030)](https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/20/executive-order-on-climate-related-financial-risk/) to direct certain financial regulatory agencies to take steps to integrate climate-related financial risk into areas such as market regulation and financial stability. Later that year, the Financial Stability Oversight Council released its [Report on Climate-Related Financial Risk](https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf), which identified climate risk as an [“emerging and increasing threat”](https://home.treasury.gov/news/press-releases/jy0426) to U.S. financial stability and recommended that financial regulators evaluate whether existing assessment, disclosure, and risk management frameworks need to be updated or enhanced to include the consideration of climate-related financial risk. +Federal agencies, municipalities, and private companies are increasingly seeking information about the financial risks arising from the physical impacts of climate change. Across the United States, physical climate hazards, such as fires, droughts, and floods, have already taken a significant financial toll. In 2022 alone, there were 18 events that together caused a total of $165 billion in damages. Entities are taking steps in response: governmental institutions around the globe are [proposing](https://www.sec.gov/news/press-release/2022-46) and [issuing](https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en#:~:text=EU%20law%20requires%20all%20large,on%20people%20and%20the%20environment.) climate-related financial standards; non-governmental organizations have set forth voluntary frameworks for climate-related financial risk disclosure;See, for example, the [Task Force on Climate-Related Financial Disclosures (TCFD)](https://www.fsb-tcfd.org/). and policy efforts are emerging to better identify climate risks to the financial system and overall economy. For example, in 2021, President Biden issued [Executive Order 14030 (EO 14030)](https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/20/executive-order-on-climate-related-financial-risk/) to direct certain financial regulatory agencies to take steps to integrate climate-related financial risk into areas such as market regulation and financial stability. Later that year, the Financial Stability Oversight Council released its [Report on Climate-Related Financial Risk](https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf), which identified climate risk as an [“emerging and increasing threat”](https://home.treasury.gov/news/press-releases/jy0426) to U.S. financial stability and recommended that financial regulators evaluate whether existing assessment, disclosure, and risk management frameworks need to be updated or enhanced to include the consideration of climate-related financial risk. The physical risks of climate changeClimate-related financial risk assessments can include transition risk (i.e., the risks associated with societal responses to a changing climate, such as climate-related shifts in legislation, regulation, technology, and consumer preferences) as well as physical risk (i.e., the risks associated with weather and climate hazards). Here, we focus solely on physical risk. can be either acute (e.g., short-lived weather events like hurricanes) or chronic (e.g., changes in baseline conditions, like rising sea levels). Estimating physical climate risk exposure for a particular entity — an industry, city, or business — requires an interdisciplinary process that encompasses climate science, economics, and finance, and spans multiple timescales and geographies. ## A collaborative workshop series -To better understand this diversity, Environmental Defense Fund (EDF), the Initiative on Climate Risk and Resilience Law (ICRRL), and CarbonPlan hosted a [joint workshop](https://files.carbonplan.org/Physical-Risk-Workshop-Summary-Report.pdf) in May of 2022 on the use of physical climate information in the financial sector. +To better understand this diversity, the Environmental Defense Fund (EDF), the Initiative on Climate Risk and Resilience Law (ICRRL), and CarbonPlan hosted a [joint workshop](https://files.carbonplan.org/Physical-Risk-Workshop-Summary-Report.pdf) in May of 2022 on the use of physical climate information in the financial sector. The workshop convened former regulators and domain experts across multiple communities of practice — physical climate science modeling, economics, financial risk, law, and public policy — to discuss: (1) if and how physical risk information was currently being used; and (2) current gaps, challenges, and concerns with the use of physical risk information. A key takeaway from this workshop was the need for better translation of physical climate science concepts across disciplines and more robust frameworks to guide the analytical process of risk assessment, corroborating a recent call for a new profession of “climate translation.” @@ -37,17 +37,17 @@ This report summarizes outcomes of the Fall workshops and, in particular, highli ## Focusing on the electric sector -Physical climate risks are relevant to the entire United States economy. Any given company is subject to specific physical risks and will be exposed to particular harms, depending on the type and location of its physical assets, infrastructure, workers, and supply chain partners. +Physical climate risks are relevant to the entire United States economy. Any given company is subject to specific physical risks and will be exposed to particular harms, depending on the type and location of its physical assets, infrastructure, workers, and supply chain partners. To narrow scope, the workshop focused on a particular case study about the financial risk to one sector (electric utilities) impacted by one climatic hazard (extreme heat). This focus area was chosen for two reasons. -First, electric utilities serve an important public function through the provision of essential services. Power outages pose serious health consequences, such as temperature-related illness or disruption of care for individuals who rely on electricity-dependent medical equipment. Electric utilities have increasingly been impacted by extreme weather events, causing tragic loss of life and significant economic and health consequences. [For example](https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/why-and-how-utilities-should-start-to-manage-climate-change-risk), in 2017, Hurricane Harvey’s strong winds and record-breaking catastrophic flooding knocked down or damaged more than 6,200 distribution poles and 850 transmission structures across Houston, Texas. In California, an [investigation](https://www.theverge.com/2019/5/15/18626819/cal-fire-pacific-gas-and-electric-camp-fire-power-lines-cause) by the California Department of Forestry and Fire Protection (Cal Fire) found that the Camp Fire – California’s deadliest and most destructive wildfire on record – was caused by electrical transmission lines owned and operated by the Pacific Gas and Electric Company (PG&E).PG&E [filed for Chapter 11 bankruptcy](https://www.washingtonpost.com/business/2019/01/29/pge-nations-biggest-utility-company-files-bankruptcy-after-california-wildfires/) following the deadly and record-breaking wildfire season. More broadly, according to the [Fourth National Climate Assessment](https://nca2018.globalchange.gov/), utility infrastructure designed for historical climate conditions is more vulnerable to future weather extremes driven by climate change. Preparation for these changes, while crucial, also has associated costs. According to [recent estimates](https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/why-and-how-utilities-should-start-to-manage-climate-change-risk), preparing a typical Southeastern utility for the impacts of climate change will cost between $700 million and $1 billion. +First, electric utilities serve an important public function through the provision of essential services. Power outages pose serious health consequences, such as temperature-related illness or disruption of care for individuals who rely on electricity-dependent medical equipment. According to the North American Electric Reliability Corporation’s (NERC) 2021 Long-Term Reliability Assessment, long duration weather events driven by climate change threaten reliability when demand for electricity is driven above forecasts and supplies are reduced, especially when extremely hot weather encompasses a wide area for an extended period of time. Electric utilities have increasingly been impacted by extreme weather events, causing tragic loss of life and significant economic and health consequences. [For example](https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/why-and-how-utilities-should-start-to-manage-climate-change-risk), in 2017, Hurricane Harvey’s strong winds and record-breaking catastrophic flooding knocked down or damaged more than 6,200 distribution poles and 850 transmission structures across Houston, Texas. In California, an [investigation](https://www.theverge.com/2019/5/15/18626819/cal-fire-pacific-gas-and-electric-camp-fire-power-lines-cause) by the California Department of Forestry and Fire Protection found that the Camp Fire – California’s deadliest and most destructive wildfire on record – was caused by electrical transmission lines owned and operated by the Pacific Gas and Electric Company (PG&E).PG&E [filed for Chapter 11 bankruptcy](https://www.washingtonpost.com/business/2019/01/29/pge-nations-biggest-utility-company-files-bankruptcy-after-california-wildfires/) following the 2017 and 2018 wildfire seasons. More broadly, according to the [Fourth National Climate Assessment](https://nca2018.globalchange.gov/), utility infrastructure designed for historical climate conditions is more vulnerable to future weather extremes driven by climate change. Preparation for these changes, while crucial, also has associated costs. According to [recent estimates](https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/why-and-how-utilities-should-start-to-manage-climate-change-risk), preparing a typical Southeastern utility for the impacts of climate change will cost between $700 million and $1 billion. Second, extreme heat has a direct relationship to utility operations. [For example](https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7749027/#R11), higher temperatures not only increase electricity demand to provide cooling, but also lower the ability of transmission lines to efficiently carry power, increasing the likelihood of reliability issues, such as rolling blackouts, during prolonged heat events (e.g., heat waves). ## Soliciting perspectives -We solicited insights from more than 50 experts, including during the May 2022 workshop and through several sessions in Fall 2022. Experts represented five primary communities of practice: climate science, energy system modeling, energy economics, financial risk, and energy law and policy.Each interdisciplinary workshop was convened under Chatham House Rule, meaning that we and others can freely describe the information exchanged, but without attribution to specific individuals. The first workshop was structured around two sessions: (1) the current use of physical climate risk information; and (2) strategies to address gaps, challenges, and concerns that were identified from the first session. Following the first workshop, participants expressed interest in connecting further across disciplines to not only help facilitate the sharing of domain expertise, but also to develop a more detailed understanding of how climate information is used throughout the climate-related financial risk assessment process. +We solicited insights from more than 50 experts, including during the May 2022 workshop and through several sessions in Fall 2022. Experts represented five primary communities of practice: climate science, energy system modeling, energy economics, financial risk, and energy law and policy.Each interdisciplinary workshop was convened under Chatham House Rule, meaning that we and others can freely describe the information exchanged, but without attribution to specific individuals. The first workshop was structured around two sessions: (1) the current use of physical climate risk information; and (2) strategies to address gaps, challenges, and concerns that were identified from the first session. Following the first workshop, participants expressed interest in connecting to share domain expertise and to develop a more detailed understanding of how climate information is used throughout the climate-related financial risk assessment process. From August through September of 2022, we held five small group sessions to further understand how different communities of practice conduct climate-related financial risk assessments. We also conducted a series of one-on-one interviews with experts not directly represented in one of the five primary communities listed above (e.g., insurance, asset management). In December 2022, we convened a final synthesis workshop with experts from each small group session to share interim results and receive feedback. @@ -62,16 +62,16 @@ We synthesized participant feedback and learnings from the workshops into a conc The process and actors contributing to a climate-related financial risk assessment. Toggle between tabs to see the{' '} - INFORMATION - shared between communities, as well as their main - CONCERNS. A solid arrow indicates - an “effective” transfer of information that could be confirmed by multiple - actors (e.g., one community referenced using information generated by a - different community). A dashed arrow indicates that a participant shared - information but was unsure of its influence (e.g., in the case of risk - assessments influencing regulatory decisions), and a dashed circle denotes - that we were unable to confirm details about the kind of information being - transferred. + INFORMATION shared between + communities, as well as their main{' '} + CONCERNS. Click the numbered + circles to reveal more detail. A solid arrow indicates an “effective” + transfer of information that could be confirmed by multiple actors (e.g., + one community referenced using information generated by a different + community). A dashed arrow indicates that a participant shared information + but was unsure of its influence (e.g., in the case of risk assessments + influencing regulatory decisions), and a dashed circle denotes that we were + unable to confirm details about the kind of information being transferred. @@ -83,7 +83,7 @@ Within the framing of our conceptual model, we identified three patterns that ch Workshop participants characterized two modes of engaging with climate information. The first, covering the left-most boxes of Figure 1, involves direct engagement between a utility and domain experts from either the climate science or energy system modeling communities. These relationships support the analysis and interpretation of publicly available climate products, including the Coupled Model Intercomparison Project (CMIP) datasets and summary reports (e.g., National Climate Assessment). This kind of engagement is the key contributor to the climate vulnerability assessments provided to, and filed before, regulators. -In contrast, the remainder of Figure 1 depicts a process with little engagement across and between climate and/or energy experts. While this pathway also leverages publicly available summary reports, the core analytical process leverages proprietary data from private companies. The users of these products (e.g., financial actors) have little to no direct engagement with climate science expertise. +In contrast, the remainder of Figure 1 depicts little direct engagement with climate and/or energy experts. While these actors (e.g. financial researchers, insurance companies, ratings agencies) also ingest publicly available summary reports, the core analytical process leverages proprietary data from private companies. When using the private analytics products, the financial actors have little to no direct engagement with climate science expertise. Actors across multiple communities of practice indicated that climate information was valuable, but that specific areas of improvement would be helpful. Many indicated that more standardization across data sources would be useful, given that different sources can project different climate risks. Climate scientists cited their concerns about potential misapplications of climate data products (e.g., due to inadequate spatial and/or temporal resolution). Financial actors expressed related interest in publicly available tools, but said they defaulted to products from private analytics providers (e.g., climate risk scores), which they found more accessible.Recently, there has been rapid growth of these private analytics providers as [companies increasingly assess climate risks](https://prospect.org/economy/2023-04-12-rise-climate-rating-agencies/) to their business. Many of these providers offer asset-level climate information (e.g., localized to a building at a specific street address) in a format and scope designed for financial applications. Because of their business model, climate risk scores are [typically developed in “black box” settings](https://www.nature.com/articles/s41558-020-00984-6) using proprietary methods that commonly [lack peer review or independent verification](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4396826). Several financial actors in the workshops expressed some hesitation in fully relying on the climate information from these analytics providers due to a lack of transparency around their methods.