New! Sign up for our free email newsletter.
Science News
from research organizations

Crucial gaps in climate risk assessment methods

Date:
July 2, 2024
Source:
University of Zurich
Summary:
Researchers have uncovered significant flaws in current climate risk assessment techniques that could lead to a severe underestimation of climate-related financial losses for businesses and investors.
Share:
FULL STORY

A study by Stefano Battiston of the Department of Finance at the University of Zurich and his co-authors has identified critical shortcomings in the way climate-related risks to corporate assets are currently assessed. Many current estimates of climate physical climate risk rely on simplified and proxy data that do not accurately represent a company's true risk exposure. This can lead to significant underestimates of climate-related losses, with serious implications for business investment planning, asset valuation and climate adaptation efforts.

Potential losses up to 70% higher than previously estimated

The research team developed a new methodology that uses detailed information about the location and characteristics of a company's physical assets, such as factories, equipment and natural resources. This approach provides a more accurate picture of climate risks than methods that use proxy data, which often assume that all of a company's assets are located at its headquarters. "When we compared our results with those using proxy data, we found that the potential losses from climate risks could be up to 70% higher than previously thought," says Stefano Battiston. "This underscores the critical need for more granular data in risk assessments."

Preparing for the worst: The role of extreme events

The authors also point to the importance of considering "tail risk" in climate assessments. Tail risk refers to the possibility of extreme events that, while rare, can have catastrophic impacts. "Many assessments focus on average impacts. Our research shows that the potential losses from extreme events can be up to 98% higher than these averages suggest," says Stefano Battiston. "Failure to account for these possibilities can leave businesses and investors dangerously unprepared."

More funding for climate adaptation

The study's findings have significant implications for climate policy, business strategy, and investment decisions. The researchers emphasize that more accurate risk assessments are crucial for developing effective climate adaptation strategies and determining appropriate levels of climate-related insurance and funding. "Our work shows that we may be seriously underestimating the financial resources needed for climate adaptation," concludes Stefano Battiston.


Story Source:

Materials provided by University of Zurich. Note: Content may be edited for style and length.


Journal Reference:

  1. Giacomo Bressan, Anja Đuranović, Irene Monasterolo, Stefano Battiston. Asset-level assessment of climate physical risk matters for adaptation finance. Nature Communications, 2024; 15 (1) DOI: 10.1038/s41467-024-48820-1

Cite This Page:

University of Zurich. "Crucial gaps in climate risk assessment methods." ScienceDaily. ScienceDaily, 2 July 2024. <www.sciencedaily.com/releases/2024/07/240702135518.htm>.
University of Zurich. (2024, July 2). Crucial gaps in climate risk assessment methods. ScienceDaily. Retrieved July 18, 2024 from www.sciencedaily.com/releases/2024/07/240702135518.htm
University of Zurich. "Crucial gaps in climate risk assessment methods." ScienceDaily. www.sciencedaily.com/releases/2024/07/240702135518.htm (accessed July 18, 2024).

Explore More

from ScienceDaily

RELATED STORIES