Let’s Get Physical: Comparing Metrics of Physical Climate Risk

17 Pages Posted: 20 Apr 2021 Last revised: 17 Jun 2021

See all articles by Linda Isabella Hain

Linda Isabella Hain

University of Zurich - Department of Banking and Finance

Julian F Kölbel

University of Zurich, Department of Banking and Finance; MIT Sloan

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Date Written: April 19, 2021

Abstract

Investors and regulators require reliable estimates of physical climate risks for decision-making. While assessing these risks is challenging, several commercial data providers and academics have started to develop physical risk scores at the firm level. This paper compares six physical risk scores, which rely on either model-based or language-based methodologies. We find a substantial divergence between these scores, also among those based on similar methodologies. Risk scores also lead to different rankings within and across sectors. We show how this divergence causes problems when testing whether financial markets are pricing in physical risks. Our results imply that financial markets may currently not be able to adequately account for the physical risk exposure of corporations using available risk scores. We identify six primary sources of uncertainty that drive the divergence of scores and offer recommendations for improving firm-level physical risk scores.

Keywords: Climate change, physical risk scores, disagreement, model uncertainty

JEL Classification: G12, G24, G32, Q54

Suggested Citation

Hain, Linda Isabella and Kölbel, Julian and Leippold, Markus, Let’s Get Physical: Comparing Metrics of Physical Climate Risk (April 19, 2021). Available at SSRN: https://ssrn.com/abstract=3829831 or http://dx.doi.org/10.2139/ssrn.3829831

Linda Isabella Hain

University of Zurich - Department of Banking and Finance ( email )

Plattenstr 32
Zurich, 8032
Switzerland

Julian Kölbel

University of Zurich, Department of Banking and Finance

Schönberggasse 1
Zurich
Switzerland

MIT Sloan ( email )

100 Main Street
Cambridge, MA 02142
United States

Markus Leippold (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

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