Policy Brief
Mainstreaming Physical Climate Risk Disclosures and Adaptation in ESG Matrices
Shravan Prabhu, Vanya Pandey, Mohammad Rafiuddin, Labanya Prakash Jena, Anushka Maheshwari
September 2024 | Climate Resilience
Prabhu, Shravan, Vanya Pandey, Mohammad Rafiuddin, Labanya Prakash Jena and Anushka Maheshwari. 2024. Mainstreaming Physical Climate Risk Disclosures and Adaptation in ESG Matrices. T20 Policy Brief.
Overview
The New Delhi Declaration reinforces the G20's commitment to achieve net-zero emissions by around 2050, stressing the importance of corporate commitment to climate goals and strong policy actions. Yet, the rising frequency, intensity, and duration of extreme weather events underscore the critical need for climate adaptation and the integration of physical climate risk disclosures into mainstream ESG frameworks.
Currently, just 4 per cent of the top 100 companies fully adhere to TCFD recommendations, which primarily address transitional climate risks. The challenges are steep—low awareness, complex frameworks, and inadequate guidelines on integrating physical climate risks into financial metrics, especially for small and medium-sized enterprises (SMEs). This limited disclosure hampers investors and lenders from accurately assessing risks, resulting in capital misallocation and jeopardising financial stability.
As the TCFD transitions into the ISSB, this paper examines how prepared G20 corporations are to disclose physical climate risks and offers targeted recommendations for improvement. We propose creating detailed guidelines for risk assessments, ensuring that disclosure frameworks are interoperable across G20 nations, and developing a platform for physical climate risk modeling. We also explore scenarios of how these disclosures could shape investor decisions. For this, we advocate for a shift toward comprehensive frameworks that not only disclose risks but also detail risk management and adaptation strategies, supported by global cooperation.
Key recommendations for the G20
1. Develop detailed guidelines for mapping physical climate risks on financial metrics
- Address TCFD gaps by creating sector-specific guidelines for assessing acute and chronic climate risks.
- Develop a standardized framework to quantify the financial impacts of physical climate risks, adaptable for various businesses, including SMEs.
- Provide clear, actionable metrics to help corporations analyse and disclose physical climate risks effectively.
2. Ensure interoperability of disclosure frameworks across G20 countries
- Standardise metrics for disclosing physical climate risks across G20 nations to enhance comparability and reduce trade barriers.
- Align reporting requirements with TCFD guidelines to boost transparency and consistency in climate-related financial disclosures.
- Balance detailed disclosure mandates with cost-effective compliance strategies, particularly for SMEs.
3. Develop a climate risk modelling platform for knowledge sharing and capacity building
- Create a G20 ‘Physical Climate Risk Modelling Platform’ to refine climate models, strengthen risk assessment frameworks, and support capacity building.
- Expand collaborations among G20 nations to generate fine-resolution, open-access climate data.
- Enhance the G20 Climate Risk Atlas by downscaling to more granular levels, aiding both large businesses and SMEs in disclosing and adapting to climate risks.
"As extreme weather events and climate variability increase, investors and regulators will demand that corporations disclose physical climate risks to their businesses and value chains. For corporations, especially SMEs lacking the tools and capacity, integrating climate impacts into financial metrics is complex. This brief assesses G20 corporations' readiness for imminent physical climate risk disclosures and offers recommendations to address gaps. A key scenario to consider is that higher climate risks may lead to investor reluctance, so frameworks should focus not only on risk assessment but also on climate risk management and adaptation."
