THE way Temasek quantifies climate risk based on an internal carbon price assumption of US$42 per tonne is a generalised technique that comes with “all kinds of problems”, but it is a “small step on a very long journey” the state investor is on to work out a better approach.

Temasek’s head of risk management Robert Mainprize made these remarks at a Ecosperity Conversations session held in partnership with the CleanEnviro Summit Singapore 2022 on Wednesday (Apr 20). The session is part of Temasek’s series of year-round, focused dialogues on sustainability megatrends and topics.

A report by Tsinghua University’s Center for Green Finance Research, which unpacked existing climate risk analysis practices and examined their limitations, was launched at Wednesday’s session, and Mainprize was discussing it with a panel.

“How do you price these things? I think we’d be deluding ourselves that we can put a decimal place type (of answer) on it,” he said when asked how the company prices the two categories of climate risks raised by the report – physical risks and transition risks.

Physical risks refer to both the acute and chronic impact from climate or environmental events, while transition risks refer to financial and reputational risks resulting from policy, legal, technology and market changes in the transition to a low-carbon economy.

He opined: “Even the most sophisticated approach is still going to be an approximation, but it is important that we do it than to just ignore these risks.”

Asked how companies are to be assessed if they are making good progress on their net-zero targets, Mainprize said greenwashing is “clearly a big issue”, pointing out that there is some degree of correlation to companies that have a lot tied to ESG currently and the amount of money they spend on business relations. 

Therefore, Temasek employs various techniques to monitor information flows outside of standard disclosures, including scraping social media to pick up stories or information bites that might tell if companies aren’t actually doing what they say they are doing, he revealed.

At the session, the lead author of the report, titled Pricing climate risks in Asia, Sun Tianyin, Center for Green Finance Research’s deputy director, also presented its key findings. He said climate risk analysis is “still nascent” and faces key limitations.

He noted that limitations to existing transition risk analysis methods include:

• Limited consideration for adaptation: An organisation’s ability to adapt affects the extent of transition risk faced.

• Insufficient scenario types: Many models rely on scenarios by the International Energy Agency, which target sectors with high carbon emissions.

• Imbalanced consideration of risk drivers: Policy-related risks are studied more than technology and reputational risks.

• Difficulties projecting long-term: Conventional modelling tends to be built for shorter time horizons.

He went on to list limitations to physical risk analysis methods. They are:

• Limited scope of analysis: Most approaches do not analyse the macro or socioeconomic impacts of climate disasters.

• Lack of transparency: Tools are often provided by commercial vendors and hence do not disclose the methodology’s core.

• Insufficient company-wide data on sensitivities: Most organisations don’t collect enough data on their own operations.

• Limited geospatial data: Many organisations lack hazard and asset-related geospatial data.

• Limited compatibility with financial institutions’ decision-making: Climate scenarios have longer time horizons and uncertainties which financial institutions’ financial models may not properly integrate.