Measuring the Climate Transition Physical Risk: Business Exposure and Validation Perspective

There is an observable rise in the frequency and severity of weather hazards that is likely attributable to global climate transition. In some regions, these hazards pose a variety of significant risks to building, contents, inventories, and supply chain. We developed a suite of models that result in global maps of frequency and severity for 12+ hazards. These models are based on various global climate models outputs and observational data from governmental sources. The observed hazard record is related to observed weather parameters, and an environmental hazard index is developed over the historical period. Once a historical layer is created and validated, the same methodology is used with the CMIP6 output over future projections for various scenarios. Finally, these results are combined with specific business assets’ locations and characteristics to assess their potential exposure. It is imperative that climate transition science can help drive and determine effective risk evaluation to businesses seeking to plan and mitigate the future climate impact.

Most businesses just recently started to take climate considerations into account and include climate risk in their broader risk management frameworks. Along with this adoption, it quickly became apparent that developing and interpreting quantitative climate risk models present a number of challenges, including varying spatial data resolutions, limited historical observational data, alignment with models’ objectives and use, and regulatory compliance. To help address the challenges, PwC US has established a holistic four-steps model validation framework that can confirm scientific and conceptual integrity of the models, their readiness, and fit for purpose.

This framework includes the following stages: pre-development (climate data selection, gathering, and preliminary analyses), development (literature review, model implementation, and back-testing), post-development (present-day hazard benchmarking and climate impacts), and production (hazard layers’ spatial consistency and completeness). In addition to providing a holistic approach that can enhance the models’ reliability, our validation framework can promote the development of shareable validation procedures. This approach has already been applied at PwC US to more than 12 climate hazard models’ development.