A number of Asian countries are more vulnerable to climate change due to greater exposure to risks arising from misalignment with low-carbon transition, according to a new report.

Corporates and financial institutions in the region can alleviate such threats, and be better positioned to seize related opportunities, by adopting proactive climate risk analysis and management, according to the report, Pricing Climate Risks in Asia, from Center for Green Finance Research ( CGFR ) under Tsinghua University’s National Institute of Financial Research.

Climate risks are classified into physical risks, referring to both the acute and chronic impacts from climate or environmental events, and transition risks, meaning financial and reputational risks resulting from policy, legal, technology and market changes in the transition to a low-carbon economy.

For the most part, climate risk assessment methodologies currently used by companies are scenario-based, which is a type of stress test under alternative climate scenarios, and often based on temperature targets.

Early stages

While existing tools are helpful, the CGFR report notes that climate-related risk analysis is still in its initial stages and methodologies are being constantly updated to allow for more granular analysis.

“Pricing climate risks is still in the early stages of development, and both the limited awareness and the knowledge gap are especially glaring in Asia,” says CGFR director Sun Tianyin, who is the report’s lead author.

“Businesses cannot count on conventional analytical tools to measure climate risks given their characteristics of non-linearity and unprecedentedness, and must be prepared to adopt the latest tools and methodologies from all sources available.”

Swiss Re has warned that Asia’s GDP may shrink as much as 26.5% by 2048 if no action is taken to tackle climate change, compared with an 18.1% reduction in the global economy under the same circumstances.

The prediction was based on Swiss Re’s Climate Economics Index, which ranks 48 economies according to how severely their GDP is likely to be impacted by climate risk factors.

Lack of competence

The CGFR report says a majority of companies and financial institutions in Asia remain unprepared to manage coming climate risks, particularly those in countries most vulnerable to climate emergencies such as Myanmar, The Philippines, and Bangladesh.

Among the key reasons Asian-based businesses are not yet actively managing climate risks are insufficient awareness, a lack of competence to conduct climate risk analyses, and a lack of appropriate data.

Only a limited number of businesses and financial institutions have the required resources and capabilities to conduct climate risk analysis or climate pricing, the report finds.

Achieving a greater level of capability requires significant initial investment, while corporate leaders should consider the long-term nature of climate risks against a preference for short-term profits.

To close this gap, the report says, a joint effort by government, business and financial institutions is needed to build capability, gather robust data, and cultivate an understanding of the true impact of climate change on businesses.

By contrast, those who have already or are in the process of implementing proactive risk management – through plans for transformation, switching investment policies, transparent disclosure, carbon accounting, and ESG integration – find themselves in a better position to take advantage of opportunities, the report says.