Carbon Delta estimates that approximately 16% of global enterprise facilities are under threat from coastal flooding. With rising sea levels, these facilities exhibit significant climate risk in equity portfolios. Nearly 80% of all enterprises in the MSCI All Country World Index* have at least one facility in a flood-prone area – a striking number that underlines the importance of accounting for these risks and integrating that information into investment decision making.

Data excerpt from Carbon Delta’s facility database for enterprises included in the MSCI ACWI. Red dots indicate facilities that are located in flood prone coastal zones and will see a change in flood risk due to sea level rise. Grey dots indicate locations that are not affected by coastal flooding.

The future impact of coastal flooding will be severely exacerbated by sea level rise. In fact, it is predicted that damage costs from coastal flooding will rise even faster than the costs from sea level rise alone[1]. In order to estimate and attribute damage costs to the operation facilities of a company, Carbon Delta uses probabilistic modelling and GIS technology to project future flood damages under climate change. The key modelling resource is Carbon Delta’s enhanced facility database that comprises approximately 600’000 geo-referenced assets from approximately 22’000 publicly listed companies. For each of these facilities, we assess the threat of coastal flooding and the associated financial risks related to asset damage and business interruption. This enables the attribution of costs to individual enterprises and feeds into the calculation of our Climate Value-at-Risk metric.

According to the latest academic research, it is estimated that over 10% of the current world population is located in a low elevation coastal zone[2]. This large population and significant exposure highlights the importance of measurement of coastal flooding as part of effective climate risk control. The relevance for financial markets and investors is even greater: Our calculations demonstrate that large enterprises are exposed to these risks at a much higher rate. For the MSCI All Country World Index, we estimate that 16% of all enterprise facilities are threatened from coastal flooding in the coming 15 years.

Flood threat Share of affected enterprises
At least 1 facility 79%
≥ 25% of facilities 25%
≥ 50% of facilities 9%
≥ 75% of facilities 4%
All facilities 3%

Shifting the focus to the level of individual enterprises the numbers begin to highlight the risk. We estimate that 79% of MSCI ACWI companies have at least one facility affected. Whilst only 9% of enterprises have more than half of their facilities affected, there remains a small bracket of 3% of enterprises whose entire operations are in flood-prone areas.

While flood protection, like sea walls and dikes, can strongly mitigate flood loss, a residual risk always remains. Our calculations show that climate change, manifested as rises in regional sea levels, will aggravate the residual risk for the vast majority of global enterprises.

Financial Impact

In terms of top down investments, Carbon Delta’s research on the risk of coastal flooding underlines the importance of identifying and integrating climate change risk into the investment decision making process. When considering investments in companies or securities that are exposed to coastal flooding, it is fundamental to engage with firms in order to identify those that have begun to build resilience and prepare for extreme weather scenarios such as coastal flooding under sea level rise. Carbon Delta’s data can enable investors to identify such locations and begin the facilitation process. It is especially important to asses these risks, because flooding is often accompanied with extreme asset damage if no flood protection is in place.

Should global action on climate change fail and extreme sea-level rise occur as predicted, most firms in exposed locations will experience more difficulty in insuring assets; with the potential for some companies to lose insurance cover should they fail to invest in adequate flood protection measures. Therefore, it is paramount to identify the companies that are more resilient, e.g. through better construction materials, upgraded floodwater drainage or retention capacities, and more comprehensive insurance coverage. Some firms will continue to achieve their goals thanks to corporate leadership and effective strategy that will increase resilience even in times of increasing weather conditions.

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Anja Ludzuweit

Dr. Boris Prahl

Senior Climate Researcher & Product Lead

Boris is leading the model design and development of physical climate risks at Carbon Delta. His goal is to bridge the gap between global and in-situ impact assessment by employing hyper-resolution models to describe the impacts of natural hazards such as flooding, storm, and wildfire. He is passionate to reveal the full costs of physical climate risks and make these tangible and meaningful to corporations. Boris holds a Ph.D. in Geoscience from Freie Universität Berlin and a Master’s degree in Physics from Imperial College London.

Questions? Ideas? Talk directly to Boris
+41 44 552 77 61 | b.prahl@carbon-delta.com

Sources

*Representation of ETFs through iShares by BlackRock. Included are the following ETFs: iShares MSCI World UCITS, Core S&P 500 UCITS, China Large Cap UCITS, EURO STOXX 50 UCITS, FTSE 100 UCITS, MSCI AC Far East ex-Japan UCITS, Core MSCI EM IMI UCITS, Core DAX® UCITS. CAC 40 is obtained through Euronext.

References

[1] Böttle, M., Rybski, D., & Kropp, J. P. (2013). How changing sea level extremes and protection measures alter coastal flood damages. Water Resources Research, 49(3), 1199-1210.
[2] Merkens, J. L., Reimann, L., Hinkel, J., & Vafeidis, A. T. (2016). Gridded population projections for the coastal zone under the Shared Socioeconomic Pathways. Global and Planetary Change, 145, 57-66.