Countdown to COP27: Q&A with experts from Riskthinking.AI and Bloomberg LP on physical climate risk in Africa

With COP27 days away, the eyes of the world will be focused on the decisions and solutions forged by policy makers, business leaders, civil society and other stakeholders from around the world. We spoke with Ron Dembo, CEO and Founder and CEO of Riskthinking.AI and Edo Schets, Head of climate finance solutions at Bloomberg LP, to understand more about the challenges of climate change on the African continent.

A key objective of this year’s COP is to achieve an enhanced global agenda for action on adaptation. There is growing recognition that some physical climate risks will materialize even if global warming is contained to below 2 degrees, and that funds need to flow to emerging economies to support climate adaptation. Africa is at the epicenter of climate risk.

Bloomberg has partnered with Riskthinking.AI to project and explore the physical climate risks set to materialize across Africa and the rest of the world over the course of this century. Using advanced data science technologies, we create insight into a large volume of scientific projections to enhance understanding into these physical risks and inform Africa’s adaptation needs.

Investors too, not only policymakers, should be concerned about physical climate risks.

Why is it important for global markets to understand physical risk?

Ron: The cost of physical climate risk to society will be very significant and is set to grow over time as we try to come up with solutions to mitigate it. The immediate issue is that there is a mispricing of financial instruments since physical climate risk is not accounted for adequately. One reason is that financial institutions traditionally did not need data on the physical makeup of their counterparties, but this information is critical with climate financial risk entering the picture.

Edo: To help close such data gaps, regulators around the world are increasingly requiring mandatory disclosures on physical risk. For example, the European Banking Authority’s rules on Pillar 3 disclosures ask European banks to report how much of their portfolio is exposed to chronic and acute physical risks. Physical risk should therefore increasingly be reflected in reporting.

COP27 is hosted by Egypt and focus will be on Africa’s role in climate action. What are some of the key physical risks Africa is facing?

Ron: Africa is at the epicenter of climate risk. The combination of heat, drought, flooding, and so on, together with a lack of resources to mitigate climate risk, puts this continent, with a very high proportion of subsistence agriculture, under severe social strain. Potential mass migration coming out of Africa may in turn reach Europe and other countries. Climate change will also have a large impact on power generation and other key sectors. Our analytics allow us to instantly see, for example, which power generation assets in Africa are most at risk. We create climate risk scores that are location-based, and account for both chronic and acute physical risks. We can thus pinpoint where the biggest climate tail risks will arise.

How might these risks impact global markets?

Edo: Aside from creating considerable humanitarian risks, physical climate risks can affect revenues of companies, incomes of households, government spending and a government’s ability to raise fiscal revenue. All of this will have a bearing on the financial instruments that are exposed to the affected businesses, households, and governments. That includes bank loans, equities and bonds among other instruments. This is particularly difficult as the companies and countries most affected by physical risk are also most in need of funding to create resilience to those risks. Finding ways to price physical risks while maintaining access to funding for climate change adaptation is therefore crucial. By the same token, if climate risks are accurately priced, investment in adaptation should improve a country or company’s market access, as it would reduce risk exposure. In other words, better pricing of climate risk can help create better incentives to invest in adaptation.

What unique data or insights can Bloomberg provide in this area?

Edo: Bloomberg has partnered with Riskthinking.ai to develop climate risk scores for companies and countries, to help investors analyze physical risk and factor it into their investment decisions. To build these scores, we use Riskthinking.ai and Bloomberg datasets including financial, carbon, geospatial and supply chain data. Our first joint scores will be released in the coming months and will provide insights into the physical risks faced by companies. Clients will be able to dissect which parts of a company are most at risk, for example factories in certain regions, and what the relevant risk factors are.

Are there any opportunities in Africa, or in developing a deeper understanding of Africa, that you’d like to highlight?

Ron: Yes, there is a wealth of data on the various economic sectors and major physical infrastructure in Africa which could be analyzed to incorporate climate risk. For example, we use Riskthinking.AI’s analytics to understand the risks and effects of mitigation and adaptation strategies. This type of analysis could be used to inform grants for mitigation and adaptation across the continent, as well as to influence the future policies of African countries. The risks are severe and the consequences great – it is our sincere hope that COP27 will add impetus to measuring and managing these risks.

Bloomberg has identified some of the biggest future climate change risks for the African continent, and the world. Learn more by visiting our website.