A number of companies and asset managers are asking think tanks and other nonprofits to help them assess the physical risks climate change poses to their portfolio and potential investments.
Such relationships can help investors bridge the gap between finance and climate science, officials from financial companies and asset managers have suggested.
One such recent development was announced May 6. The Ontario Teachers' Pension Plan Board said it will be working with Wellington Management Co. LLP and climate change think tank Woods Hole Research Center to help model physical climate change risks in Ontario Teachers' investment strategies.
Under the newly announced collaboration, "the initiative will provide deep insights to Ontario Teachers’ investment teams on the medium- and long-term financial implications of physical climate-related risks," the entities said in a news release.
Ontario Teachers' investments include long-term assets such as real estate and private infrastructure companies in the areas of wastewater and water management, toll roads, and distribution and transmission lines, said Deb Ng, who heads responsible investing at the pension board.
The collaboration builds on one Wellington and Woods Hole launched in 2018 to help the California Public Employees' Retirement System assess the physical risks of climate change to that pension fund's portfolio. Through the partnership, the staff of Ontario Teachers', Wellington, and Woods Hole will combine climate research efforts and use the findings to map potential risks and impacts. In doing so they could also take into account climate variables such as heat, drought, wildfire, hurricanes, floods and water scarcity.
In the past, such research projects would be crafted upon request but that data could not be reused for other projects and therefore similar work would have to be started from scratch each time. The new process instead tries to retain the data in a way that can be applied to other locations and scenarios as needed, said Christopher Goolgasian, Wellington's director of climate research. And even though the data is available to everyone, the clients can still request private customized assessments using that data.
The biggest challenge to understanding climate risks is in translation, said Goolgasian. "Finance and climate change typically have not had a lot of intersection and so you have a different language, different ways that data is presented and you really need to interpret or translate that data so that investors can see how it would be practical, how they would execute on it," he explained.
Ng added that both the transitional risks of climate change, those driven by governmental policies and changing social expectations, and the physical risks must be assessed to properly understand what lies ahead. That said, "the physical risk aspect, in our mind, is a catalyst for transitional change or for behavioral change. So as physical risks manifest and continue to worsen, [they are] going to also catalyze responses from society," Ng said.
The value of working with nonprofits to understand climate risks also came up during an April 28 webinar hosted by the sustainability-focused shareholder group Ceres.
Peter Mennie, global head of ESG integration and research at Manulife Investment Management, said his company uses academic institutions to help educate employees on climate change topics. Having climate scientists come and talk to staff allows those employees to ask any questions ranging from "very basics of climate change all the way through to very technical issues on particular sectors," Mennie said.
"The science will change and we need to keep understanding how companies are reacting to it," Mennie explained.
Goldman Sachs Group Inc. uses a lot of nongovernmental organization data in climate research, said John Goldstein, Goldman Sachs' managing director and head of the sustainable finance group. "Leave aside them having points of view on a whole host of issues, there's a lot of subject matter expertise that can be used as a data set."
Goldstein's group also works to use climate change-related information across internal silos. For example, he said 45 employees participated in Goldman Sach's most recent call with a climate vendor. "What we're doing is bringing all the relevant people from all the relevant divisions to systematically go through the different inputs to better understand this data and sync our learning," Goldstein stated.
The DWS Group GmbH & Co. KGaA, an asset management services firm commonly referred to as DWS, has built its own engine for assessing environmental, social and governance risks using data from eight external data providers, said Roelfien Kuijpers, DWS' head of responsible investments for Ireland, Scandanavia and the U.K. Those providers include Trucost, MSCI Inc. and Sustainalytics. Kuijpers indicated that the information is then embedded into DWS' portfolio management system.
Trucost is an offering of S&P Global Market Intelligence.