Indirect climate risk in financial analysis

While the financial sector has become increasingly adept at assessing direct climate and sustainability risk to its prospects and holdings, there is a blind spot in climate risk analysis: the indirect impact of climate change flowing through global supply chains.

Our groundbreaking research reveals how these hidden risks affect investment returns—and why traditional risk assessment methods might leave you exposed.

What’s inside this whitepaper:

• Financial impacts of climate change can come from direct impact on holdings, as well as indirectly through complex linkages with the broader economy, such as via supply chain disruption.
• This middle ground, the mesoeconomy, currently presents the biggest blind spot in climate risk analysis for the finance sector. This is the hazy space in between the microeconomics of firm decision making and the macroeconomic trends within which firms must operate.
• We have developed a new approach to measure these risks – our indirect climate risk scores map sectors’ supply chain vulnerabilities to climate risks, capturing information on supply chain risk that is not currently fully priced in by the financial market.
• To test the application of these indirect climate scores to financial analysis, we used empirical evidence sourced from financial market data over a 10-year period, built hypothetical portfolios with and without the application of the scores as a screening tool and compared the performance.
• Our experiment produced statistically significant results indicating both a correlation between indirect climate risk and lower total returns to equity, and better performance of the portfolios with equities selected in consideration of indirect climate risk than those selected without consideration of this risk.

Complete the form below to access the full whitepaper, including our detailed methodology and findings.