March 21, 2019

Disclosures of Physical Climate Change Risks: A Case Study

Nicole L. Briggs and Kate M. Munson

Publicly held companies are facing increased pressure to disclose climate change risks to shareholders. Institutional investors, asset owners, and asset managers are among the groups of stakeholders supporting increased disclosure of material climate change risks under Securities and Exchange Commission (SEC) rules and related guidance. The range of financially related climate change risks is broad, varies widely by industry, and includes physical risks to facilities and other infrastructure.

Shareholder Pressure

Often, shareholders rely on SEC disclosures to provide transparency concerning management of climate change risks. For example, in 2017 Vanguard Chairman and then-Chief Executive Officer William McNabb issued a well-publicized letter to public company directors, advising them that “[o]ur evolving position on climate risk . . . is based on the economic bottom line for Vanguard investors” and “it is incumbent on all market participants . . . to embrace the disclosure of sustainability risks that bear on a company’s long-term value creation prospects.” Furthermore, McNabb emphasized the importance of the relationship between share price and available information given Vanguard’s “extensive indexed investments.” Investors routinely engage companies regarding climate change disclosures and increasingly are successful in winning approval of climate change–related shareholder resolutions.

Assessing Physical Climate Change Risks for Financial Reports

There are a plethora of reporting frameworks governing the disclosure of climate change risk––the most well-known being the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the CDP (formerly the Carbon Disclosure Project), and the new Task Force on Climate-related Financial Disclosures (TCFD). This article focuses on ASTM 2718-16 (Standard Guide for Financial Disclosures Attributed to Climate Change), which is a technical standard available to preparers of financial reports to determine relevant climate change risks. ASTM 2718-16 offers “options or instructions consistent with good commercial and customary practice for climate change-related disclosures accompanying audited and unaudited financial statements.” The standard focuses on climate change risks having “material financial impacts . . . including but not limited to real or expected risks of physical damage to facilities, regulatory costs and incentives, and shifts in the market for products and services.” The standard sets forth several types of circumstances that may give rise to climate change–related impacts warranting disclosure. These circumstances include “predicted changes in a company’s assets” such as changes in weather and sea levels, drought and fires, stranded assets, and declining resources. Such physical risks may require disclosure if they are specific, quantifiable, and material.

Quantifying Physical Climate Change Risks: A Hypothetical

The following analysis uses hypothetical “Company A” to illustrate analytical and quantitative techniques for evaluating potential climate change impacts. The focus is on physical risks to facilities and the supply chain. In this hypothetical, Company A has 10 facilities located throughout the United States and manufactures a product from raw materials supplied by national and international manufacturers. The company receives raw materials via ship, rail, and truck, and stores the raw materials and by-products in on-site tanks at each facility. Trucks distribute Company A’s product within each facility’s region.

The potential climate change impacts on the company’s facilities and supply chain could include wildfires, flooding, power loss associated with major storms, and changes to resource availability. While the types and magnitudes of potential climate change impacts may be site-specific to each facility, they generally fall into the following categories:

  • Plant upset conditions stemming from power loss, such as degradation or loss of chemicals requiring temperature controls to maintain stability;
  • Environmental releases from tanks or pipelines resulting from flooding, wildfires, or other weather events;
  • Changes in availability of raw materials, especially from regions most impacted by climate change; and
  • Delays and disruptions to distribution routes from major storms and wildfires.

Most companies will experience some impacts from climate change, although those impacts will vary by industry.

A quantitative analysis to evaluate climate change impacts can be conducted in three steps: (1) identification of relevant climate change projections; (2) a site-specific assessment based on scenario analysis to evaluate facility and infrastructure risks; and (3) quantification of costs and associated uncertainty using existing climate data in conjunction with established liability estimation techniques.

Step 1: Identify Climate Change Impacts

To quantify the financial impacts of climate change, Company A must first understand climate change impacts that are relevant to its facilities and supply chain. There are multiple resources that provide relevant climate change projections. Company A may rely on the most recent International Panel on Climate Change (IPCC) assessment report, state- or municipality-specific climate change assessment reports, or other governmental and scientific studies. For example, the IPCC estimates a range of future climate change impacts based on Representative Concentration Pathways (RCPs) that represent future global temperature rise due to different global greenhouse gas emission management strategies (e.g., business-as-usual versus different levels of emissions cuts).

Step 2: Quantify Infrastructure-Related Impacts

Once the relevant climate change impacts are identified, Company A can develop impact scenarios to evaluate how these changes might affect facilities, supply chains, and product distribution. Each impact scenario uses available resources and tools to evaluate a specific climate change event (e.g., a major storm or a wildfire) and infrastructure that could be impacted by that event (e.g., facilities or roads used for distribution). For example, if Company A has a facility located in a coastal municipality, one impact scenario would focus on how sea level rise might impact that facility. If the coastal municipality has modeled likely sea level rise for the next 100 years as part of its long-term planning, Company A could leverage this resource by using the model results and other data (e.g., regional land elevation data and the facility footprint) for a geographic information system (GIS) evaluation of the projected sea level rise impacts on facility flooding over time. In areas where region-specific impacts such as wildfire or precipitation projections are not well defined, it may be possible to develop regional modeling projections or compile existing data that can be used to evaluate impact scenarios. For example, the potential for major wildfires to shut down highways and impact regional product distribution could be evaluated based on available projections for the entire western United States.

Step 3: Quantifying Costs and Associated Uncertainty   

The third step, quantifying the costs associated with climate change risks to facilities and supply chains, raises the inherent uncertainty of factoring in multiple variables. Techniques are available, however, to deal with such complexity. For example, stochastic methods (relating to random variables) that have been applied in other contexts (e.g., at legacy contamination sites) are well-suited for valuing contingent environmental liabilities such as costs of climate change–related risks.

More specifically, a “decision tree” can be coupled with “Monte Carlo” modeling or analysis to evaluate the costs of each impact scenario. For example, in the course of evaluating sea level rise to determine the potential impact to a coastal facility, Company A could develop a decision tree that outlines: (1) each of the effects of sea level rise on that facility (e.g., loss of products, the need for building reconstruction, or remediation due to contamination); (2) the associated probabilities of these effects occurring; and (3) the predicted financial impact of the effects. Monte Carlo modeling is then useful for developing an aggregate, probabilistic cost distribution (i.e., the range of costs and associated occurrence probabilities) based on information documented in the decision tree.

In summary, examples of the available climate change vulnerability assessment tools and resources include the following:

Example Climate Change Vulnerability Assessment Tools and Resources

(1) U.S. Global Change Research Program, Fourth National Climate Assessment, Vol II Impacts, Risks, and Adaptation in the United States (2018), (2) TCFD, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017),


Applying these methods, a reporting entity can arrive at a range of costs associated with likely physical climate-related risks. This would satisfy the ASTM 2718-16 requirement that the company’s disclosures should include, among other things, the “estimated likelihood, magnitude, and timing of its financial impacts attributed to climate change” along with “a description of the approach used to quantify the impacts. . . .” In turn, if those ranges of costs are determined to be material, the company would be able to provide useful information in SEC filings for decision-making among shareholders and other stakeholders.

    Nicole L. Briggs and Kate M. Munson

    Published: March 21, 2019

    Nicole L. Briggs, Ph.D., Senior Air Quality Scientist, Gradient Corp., Seattle, WA

    Kate M. Munson, M.S., E.I.T., Environmental Scientist, Gradient Corp., Cambridge, MA