An estimated US$79 trillion of global credit risk is linked to environmental considerations and over 60% of the companies on the S&P 500 Index (with a market capitalization of $18 trillion) own physical assets that are at high risk of at least one type of climate change related physical risk.

While the global response to climate change is a long-term one, the physical risks of climate change are both immediate and significant. For Wellington Management, the global investment management firm with over US$ 1 trillion in assets under management, solving for this challenge is something they believe in and is a key opportunity for their business.

Wendy Cromwell, who is Vice Chair and Director of Sustainable Investment at Wellington Management, says, “Physical climate risk is currently a massive information blind spot in the investment industry, despite it’s potential to have profound impacts on asset prices globally. Investors who are able to bridge the gap between science and finance will be well-positioned to price and manage these risks.” In her role setting the research agenda and strategies for the firm's sustainable investment practice, climate research and strategies have become of critical importance in this regard.

Physical climate risks have fundamental implications for global asset prices and the flow of investment capital. Given the complexity and the interrelated nature of climate risks, understanding exposure and resilience at the asset level required Wellington to pursue deeper integration of climate science and financial analysis.

“Physical climate risk is currently a massive information blind spot in the investment industry, despite its potential to have profound impacts on asset prices globally. Investors who are able to bridge the gap between science and finance will be well positioned to actively price and manage these risks.” It is clear to Wellington that without science and investors working in partnership, investors and companies will be unable to prepare adequately for the impact of climate risk, be it through adaptation, mitigation, or the longer-term transition of capital and assets. While the investment industry has become used to generalist finance professionals allocating investments across a range of industries from pharmaceuticals to technology, the understanding of physical climate risk is still nascent and those that do not endeavor to understand it well are risking their and their clients’ capital.

In 2018, Wellington formed a partnership with top-ranked, globally recognized independent climate research institute, Woodwell Climate Research Center, creating a ground-breaking partnership between finance and academia to better understand the links between physical climate risks and asset prices.

Chris Goolgasian, Wellington’s Director of Climate Research, believes the impact of physical climate risk to be fundamental, “Climate change consequences are already unavoidable, driving the need to adapt to a changing planet. As climate change impacts the fundamental liveability of inhabited regions, migration out of less sustainable areas is likely to lead to large scale asset repricing. In this regard, assets that are inherently tied to a particular location and susceptible to climate change will be particularly vulnerable.”

Given the complexity of physical climate risk, without science and investors working in true partnership, climate risk is unlikely to be addressed and investors risk losing large amounts of investment capital, never mind about making a return Goolgasian leads the dedicated team of climate scientists and financial analysts that has sought to understand corporate and regional climate risk preparedness, quantify climate-related liabilities and security prices, and assess material business costs and consequences. The partnership’s research focused on the study of eight climate variables: heat, drought, wildfires, floods, hurricanes, water availability, sea level rise and air quality, each of which poses different degrees of risk to different regions and asset types. The team’s output has connected climate science and finance via a series of geospatial maps that visually plot capital-market segments and financial analyses over multiple climate variables, an approach named integrated spatial finance.

“Translating science into financial concepts is one of the biggest challenges facing investors seeking to manage the growing risk of climate change. The close partnership with science and academia has provided Wellington with a unique capability to assess these risks across assets and geographies,” Goolgasian says.

Wellington’s geospatial maps allow investors across its platform as well as climate research advisory partners such as CalPERS and Ontario Teachers’ Pension Plan to compare relative climate risks across geographies, making asset location a critical input in risk assessment and asset pricing. Assets with significant dependence on fixed locations, such as real estate, mortgages, municipal bonds and infrastructure have higher physical climate risk exposure than more moveable assets. This will impact their pricing and drive potential shifts in value between assets within and across sectors, leading to differential outcomes, for example for airports versus airlines in aviation, for theme parks to cruise ships in leisure, and for land to farming equipment in agriculture.

In addition, Wellington’s insights based on this climate science research is driving a variety of changes across the asset manager’s business, including the depth and quality of engagements with companies, investor and client engagement, portfolio company outreach, and the creation of new investment products related to climate risk and change. Wellington has already launched a first fund product managed by Goolgasian that invests in companies whose business models and revenues are linked to physical climate risk factors, and several other related investment approaches are in the pipeline.

Addressing the fundamental risks raised by global climate change requires developing intellectual property in partnership with multiple stakeholders and quickly turning it into practical solutions. Building on the success of its research to date Wellington is seeking to deepen its academic linkages to climate research. Cromwell adds, “We are expanding our climate strategy to encompass climate transition risks to help investors navigate longer-term climate shifts across geographies and asset classes”. As part of this engagement, Wellington is creating a database of 1,500 major global equity stocks ranking both their physical climate and climate transition risk score, for both clients and portfolio managers.

Wellington’s initiative is part of its broader aim to be a leader on climate issues in the investment industry, a role that Wellington’s Managing Partner and incoming CEO Jean Hynes has said she believes is critical for the organisation as a forward-looking fiduciary: “As a founding signatory of the Net Zero Asset Managers Initiative Wellington is committed to analysing and integrating both transition and physical risks into the investment process. Our collaboration with Woodwell Climate Research Center on physical climate risk laid the groundwork for our net zero commitment while also highlighting the key adaptation needs that face society and markets.”

Addressing the fundamental risks raised by global climate change has become the essential driver of a growing set of actions across the world. Success requires investment in developing intellectual property in multiple stakeholder partnerships and quickly turning the output into practical solutions, a need that the pandemic has only reinforced. It is clear that a number of large investors at the vanguard of the finance industry are stepping up and taking the lead in this regard and Wellington is among them.

Wellington is an active participant in the ‘Force for Good’ Project on the future of capital in support of the UN Secretary General’s Strategy and Roadmap for Financing the 2030 Agenda for Sustainable Development

About Wellington Management.
Tracing its history to 1928, Wellington Management is one of the world’s largest independent investment management firms, serving as a trusted investment adviser to more than 2,200 institutional clients and mutual fund sponsors in 60 countries. Wellington had over US$1 trillion of client assets under management as of 31 March 2021.

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