Lights, Camera, Action the Time to Quantify Climate Risk is Now

KPMG Australia have delivered a comprehensive quantification of climate risk to organisations across a wide range of industries including banking, mining, oil, energy distribution, and roads and infrastructure. This presentation showcases the learnings acquired through client engagements across transition risk analysis and physical risk analysis.

Transition Risk Analysis Transition risk is business-related risk from societal and economic shifts toward a low-carbon future. i.e., future transition risks are more significant in a “cooler” world.

KPMG Australia’s transition risk analysis incorporated:

• A multi-country, multi-sector computable general equilibrium (GCE) model of the global economy used to represent human society.
• A reduced-form global carbon-cycle model used to represent the earth system.
• An Integrated Assessment Model (IAM) linking mathematical representations of human society and the earth system to capture cause-effect chains.

Learnings relevant to actuaries from transition risk analysis will be presented through key themes, including:

• Modelling economic, policy and technology constraint mechanisms and their interactions.
• Forecasting macro and micro financial metrics for individual companies based on sectoral and regional developments.
• Identifying strategic opportunities in transition pathways beyond traditional actuarial input.
• Affecting change through tangible quantification of climate risk, including to key decision-making stakeholders.

Physical Risk Analysis Physical risks arise from the physical effects of climate change and environmental degradation. i.e., future physical risks are generally more significant in a “warmer” world. KPMG Australia’s physical risk analysis incorporated:

• Catastrophe modelling outputs for multiple acute (e.g. bushfires, flooding, and cyclones) and chronic (e.g. rising sea levels, droughts, heatwaves) perils.
• Vulnerability analysis for various asset classes to the modelled perils.
• Sequential asset restoration modelling based on available repair resources.
• Financial analysis to quantify impacts of damaged assets.

Where applicable, physical risk analysis extends to asset-to-asset dependency modelling for assets connected in ‘networks’ (e.g. energy and rail networks). This modelling recognises the ‘downstream’ dependence of assets on others within their ecosystem.

Key learning themes for physical risk analysis include:

• Unlocking untapped value of existing organisational data sources.
• Balancing real-world phenomena and scientific rigour in the bespoke modelling approach.
• Parameterising physical assumptions in the context of limited data.
• Developing trust with clients through transparency and openness to client perspectives.

Find the Q&A here: Q&A on 'Modelling a Range of Risks'