CalPERS, Wellington Launch Climate Risk Evaluation Framework

Guide aims to help firms assess, disclose climate change risks to their business.

The $373 billion California Public Employees’ Retirement System (CalPERS), and investment management firm Wellington Management have launched a framework designed to help companies assess and disclose the potential risks of climate change on their business.

The framework is intended to improve how companies disclose their physical vulnerabilities and help asset owners and investment managers better evaluate . how companies they invest in will be able to adapt to risks.

“It is critical for us to understand how our companies are planning to adapt to the physical risks of climate change,” Beth Richtman, CalPERS’ managing investment director of sustainable investments, said in a statement.

Richtman said that without this information CalPERS can only guess what, if any, steps a company has taken to prepare for the future. “To date, we find financial disclosures have a long way to go in order to provide the type of information that we would find impactful to our investment process,” she added.

The framework is the product of a collaborative initiative formed last September between the two institutional investors, who define physical risks as inclusive of – but not limited to – extreme heat, drought, wildfires, hurricanes, flooding, and water access.

The aim is for the framework to act as a guide for management teams to disclose how they identify, measure, and manage their exposures to these newly recognized risks. CalPERS and Wellington said the guide can help companies better relay information to capital providers, investors, markets, and regulators; meet disclosure requirements more effectively; recognize and adapt to the effects of climate change on operations; form a baseline for comparing and testing assumptions against industry counterparts; and assure investors that they take these risks seriously.

Wellington said that according to its research, many companies overlook and underreport climate-related physical risks that can be material and important to disclose to stakeholders.

The guide provides information on the different types of climate risks, and their potential effects on businesses. For example, extreme heat can damage roads, buildings, and transit infrastructure, and devastate agricultural industries. As a result, businesses may need to increase capital spending for maintenance and replacement of equipment and inventory. They may need to install sensors or other devices to measure how well their infrastructure, operations, crops, or livestock can withstand high temperatures. And they may even have to shift the geographies of their supply chains.

Drought can affect the availability, access, and pricing of water and food, and can increase costs for companies that rely on water for production or transportation. It can also hinder hydropower generation and the stability of agricultural production. Sea-level rise is one of the most significant longer-term risks, according to the framework.

“Unmitigated, its potential for destruction of coastal residential and commercial property is significant,” framework authors write, “as is the potential impact of forced or voluntary human migration and the impact on infrastructure, municipalities, and economic growth. Companies may need to adapt or relocate operations, at substantial cost.”

Wildfires, hurricanes, and flooding also disrupt business operations by damaging property or inventory, or by causing power outages or government-service shutdowns. The framework says that such events can keep customers away or prevent shipments or transport. Additionally, they may also contaminate soil and water, which could degrade consumer confidence in agricultural products and create consumer health risks.

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