Let’s Get Physical: Comparing Metrics of Physical Climate Risk
17 Pages Posted: 20 Apr 2021 Last revised: 17 Jun 2021
Date Written: April 19, 2021
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: Suggested Citation