Article Law360

How Cos., Asset Managers Can Plan for Physical Climate Risk

In the last year, the scope and size of measurable physical impacts from climate change have proved yet again that climate change is no longer a future risk.

It is here and now, in the form of raging wildfires from California to Australia;[1] temperatures from 65 degrees in Antarctica to 90 degrees in Anchorage, Alaska;[2] floods throughout the Midwest at the conclusion of the wettest 12-month period in U.S. history;[3] and a record fourth year in a row with at least one Category 5 hurricane in the Atlantic.[4]

The speed and scale of the climactic shifts underway are driving calls for action, with climate change protests being staged at the World Economic Forum in Davos (led by Time Magazine’s 2019 Person of the Year Greta Thunberg), Inc.’s headquarters in Seattle and a Harvard-Yale football game in Connecticut; and climate change lawsuits against oil majors and the federal government unfolding in courtrooms across the country.[5]

Major corporations in all industries are responding to these calls with emissions reduction pledges. BP PLC recently set a new ambition to become “a net zero company by 2050 or sooner.”[6] Microsoft Corp. pledged to become “carbon negative by 2030.”[7] And certain banks and insurers continue to divest from coal.[8]

At the same time, however, there is recognition that even the most aggressive emissions reductions pledges will not halt climate change’s progress overnight. And consensus is growing among companies and asset managers that climate change presents significant business risks, as well as business opportunities, that must be taken into account when planning for the future.[9]

Task Force on Climate-Related Financial Disclosures

The Task Force on Climate-Related Financial Disclosures, or TCFD, an effort launched by the G20’s Financial Stability Board and chaired by Michael Bloomberg, has positioned itself to be the dominant framework used by companies and asset managers to assess, manage and report on climate risk.[10]

According to a Feb. 12 TCFD press release, support for the TCFD framework encompasses over 1000 organizations representing a market capitalization of nearly $12 trillion.[11] Additionally, signatories to the United Nations Principles for Responsible Investment, representing $90 trillion in assets, are in the process of completing their first reporting cycle with mandatory reporting of certain TCFD-aligned information.[12]

Physical Climate Risk: Potential Costs and Opportunities

Physical climate risk — a term for the potential impacts of increasing frequency and intensity of extreme weather events and long-term climactic shifts — is one of the major categories of risks identified by the TCFD framework.[13]

According to the Intergovernmental Panel on Climate Change’s most recent synthesis report, in the coming years, climate change will likely cause higher frequency and longer duration heat waves across the globe; more frequent extreme precipitation events in many locations, including over most midlatitude land masses; changes in average annual precipitation, with some areas becoming wetter and others becoming drier; and rising sea levels in more than 95% of the ocean area.[14]

Droughts, wildfires, storms and floods resulting from these changes threaten not only asset-heavy businesses with key infrastructure in locations vulnerable to climate change, but also asset-light businesses with suppliers and customers in such locations.

The good news is that this risk can be assessed, as the BlackRock Investment Institute demonstrated last year when it partnered with Rhodium Group LLC, an independent research provider focused on climate change, to assess the physical risks posed by climate change to U.S. municipal bonds, commercial mortgage-backed securities and electric utility equities.[15] And once assessed, the risk can be managed with a tailored climate resiliency program.

Companies and asset managers that proactively develop such programs can improve their bottom line and environmental, social and governance, or ESG, performance,[16] thereby increasing value for investors and other stakeholders.

Developing an Effective Climate Resiliency Program for Physical Risk

Risk Assessment

Physical climate risks vary greatly by region,[17] so the first step to developing an effective resiliency program is defining the contours of the risk for the specific company or set of assets at issue. For most companies and asset managers, this first step requires engaging a third-party to conduct a risk assessment.

A number of firms have sprouted in recent years that offer analytics tools to assess the physical climate risks posed to properties and businesses over a given time frame, such as Four Twenty Seven Inc., which was acquired by Moody’s Corp. last year, and Jupiter Intelligence.[18] Additionally, certain environmental consulting firms with climate modeling expertise can develop more tailored risk assessment programs.

In selecting a risk assessment provider, companies and asset managers should consider factors such as the ability of the provider to assess physical risks to supply chain assets as well as owned or leased assets; the resolution of the datasets used for the geographies at issue; the time horizons assessed relative to the company’s or asset manager’s anticipated hold or use period; the types of climate risks assessed; whether existing or planned asset-level, local and regional adaptation measures are taken into account; and cost.

Additionally, consistent with the TCFD framework, companies and asset managers should ensure that the risk assessment provider takes into account a range of potential climate scenarios, including the 2 degrees Celsius or lower scenario that is the goal of the Paris Agreement, as well as higher scenarios.[19]

Program Development and Implementation

Once the risk assessment has been completed, a tailored resiliency program can be developed. Successful resiliency programs for physical climate risk are built on two pillars: (1) asset integrity; and (2) robust crisis response capacity.

Asset integrity refers to the ability of the assets in question to withstand more frequent and intense extreme weather events and other climactic changes. Asset integrity can be improved through facility building and operational modifications or, on a macro level, by moving certain assets to less vulnerable locations or broadening the supplier or customer base. However, even the most robust asset integrity measures will not eliminate physical climate risk.

Crisis response capacity refers to the ability of an organization to mitigate this remaining risk, i.e., to minimize the impact of extreme weather events when they do strike. Organizations can build crisis response capacity by systematically increasing preparedness across five core capacities: collection, coordination, controls, communication and contracts.[20]

Skilled counsel can assist with each of these core capacities, but particularly with respect to contracts. For example, many businesses lack comprehensive insurance for losses resulting from extreme weather events.[21] Although the insurance market for such coverage is tightening,[22] experienced counsel can leverage risk assessment and asset integrity data to negotiate tailored policies, as well as draft favorable force majeure and risk transfer provisions for other types of contracts.

Leveraging the Results

An effective resiliency program for physical climate risk allows companies and asset managers to maximize value through risk reduction, and provides opportunities for highlighting ESG achievements. For example, the value of asset integrity improvements can be calculated with cost-benefit analyses; reductions in overall and net losses due to extreme weather events can be tracked; and implementation of a robust crisis playbook can be touted.

Additionally, the resiliency program can provide an avenue for companies and asset managers to move closer to the forefront with respect to TCFD-aligned reporting — riding the wave, instead of being swept away by it.

Jennie Morawetz is an associate at Kirkland & Ellis LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Jill Cohen and Thomas Fuller, Australia’s Fires Through a Californian’s Eyes, N.Y. Times (Jan. 9, 2020),

[2] Daniella Silva, Anchorage, Alaska, Hits 90 Degrees in Record-shattering Heat Wave, NBC News (July 5, 2019),; Derrick Bryson Taylor, Antarctica Sets Record High Temperature: 64.9 Degrees, N.Y. Times (Feb. 8, 2020),

[3] Rain-Soaked U.S. Had Its 2nd-Wettest Month on Record in May, NOAA (June 6, 2019),

[4] Matthew Cappucci, Freak Storms of 2019 Atlantic Hurricane Season Left Trail of Destruction and Revealed Climate Change Fingerprints, Washington Post (Dec. 4, 2019),

[5] According to a climate change litigation database developed by the Sabin Center for Climate Change Law at Columbia University and Arnold & Porter, over 1,000 climate change cases have been filed.

[6] BP Sets Ambition for Net Zero by 2050, Fundamentally Changing Organization To Deliver, BP (Feb. 12, 2020),

[7] Brad Smith, Microsoft Will Be Carbon Negative by 2030, Microsoft (Jan. 16, 2020),

[8] According to the Institute for Energy Economics and Financial Analysis, over 100 banks and insurers with assets under management or loans outstanding in excess of $10 billion have announced plans to divest from coal assets.

[9] For example, BlackRock CEO Larry Fink’s January 2020 letter to CEOs asserted that “climate change has become a defining factor in companies’ long-term prospects,” and noted that “investors are increasingly ... recognizing that climate risk is investment risk.”

[10] Ali Zaidi, Alexandra Farmer and Paul Tanaka, FSB Climate Disclosure Framework Poised for 2020 Traction, Law360 (Sept. 24, 2019),

[11] More Than 1,000 Global Organizations Declare Support for the Task Force on Climate-related Financial Disclosures and Its Recommendations, TCFD (Feb. 12, 2020),

[12] TCFD-based Reporting To Become Mandatory for PRI Signatories in 2020, PRI (Feb. 18, 2019), The TCFD-aligned information required to be reported concerns climate change governance and strategy.

[13] The TCFD framework divides climate-related risks into two major categories: (1) transition risks; and (2) physical risks. Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures 5–6, TCFD (June 2017), Transition risks are the policy, legal, technological and market changes that may impact a business in the transition to a lower carbon economy. They are most obviously relevant for the energy and transportation sectors, though they extend to many other sectors as well.

[14] Climate Change 2014 Synthesis Report 10–13, IPCC (2015), According to NOAA, in 2019 there were 14 weather and climate disaster events with losses exceeding $1 billion across the United States, compared to an average of 6.5 for the period 1980-2019.

[15] Getting Physical: Assessing Climate Risks, BlackRock (April 4, 2019),

[16] Numerous articles and web postings have documented the push of ESG considerations into mainstream investing and management. See, e.g., Rakhi Kumar, Nathalie Wallace and Carlo Funk, State Street Global Advisors, Into the Mainstream: ESG at the Tipping Point, Harvard Law School Forum on Corporate Governance (Jan. 13, 2020),; Howard Moore, ESG: Becoming Mainstream, Institutional Investor (Nov. 4, 2015), And the intense public focus on climate change combined with the rise of the TCFD framework has positioned climate change to dominate the broader conversation about how to factor ESG considerations into decision-making.

[17] Getting Physical: Scenario Analysis for Assessing Climate-related Risks 3, BlackRock Investment Institute (April 2019),

[18] Firms That Analyse Climate Risks Are the Latest Hot Property, The Economist (Nov. 23, 2019),

[19] The TCFD framework calls on businesses to “describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.” TCFD Final Report 14.

[20] Alexandra Farmer, INSIGHT: Be an Averter: Tips for Preventing Environmental Crises, Bloomberg Environment (May 1, 2019),

[21] According to Munich RE, in 2019, $150 billion in global losses were caused by acute natural catastrophes. Only one-third of these losses ($52 billion) were insured.

[22] Changing Weather Could Put Insurance Firms Out of Business, The Economist (Sept. 19, 2019),