Key takeaways

• Physical climate risk is a financial risk
  Institutional investors understand this is not just another dimension of ESG or sustainability and are increasingly aware of the financial materiality of climate physical risks. The latter can indeed damage assets, disrupt operations and supply chains, affect infrastructure and reduce productivity.

• Confusion on how to calculate and mitigate exposure to physical climate risks meant investors were historically missing an actionable framework
  Available methodologies had historically produced radically different estimates of potential losses, explaining why most investors deemed physical risk analytics insufficient for decision-making, especially when weak transparency was compounded by investment strategies typically blending multiple objectives alongside physical risk reduction.
  

• A macroeconomic framework provides a transparent and robust foundation for broad portfolios
  Investors want to understand what they are buying and be aware of potentially unintended consequences for future returns. Our climate resilient indices translate recognized climate scenarios into estimates of aggregate financial impact (including both chronic and acute risks) across countries and industries before introducing further granularity and complexity. They support broad and consistent market coverage, which makes them well suited to the construction of benchmark-aware core indices.
  

• Broad implementation supports low benchmark deviation
  Using transparent methodologies and high-consensus data, our core SciX climate resilient indices preserve diversification, limit unintended sector or factor biases, and remain naturally close to the cap-weighted benchmark. This baseline can be complemented with tailored features, additional granularity and formal risk controls where required, with a clear assessment of the trade-offs associated with each customization.
  

Our SciX climate resilient indices help equity investors meaningfully and efficiently reduce their exposure to physical risks: a 15% reduction in model-estimated future losses relating to physical climate risk can be achieved in exchange for a tracking error of approximately 1% versus cap-weighted benchmarks.

Author

Shahyar Safaee
Deputy CEO and Business Development Director,
Scientific Climate Indices

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