Climate Action

Disaster-Proofing by Decarbonization: Linking Physical Climate Risk to Transition Risk

September 19th marked the beginning of UN Climate Week. This year, we confront the climate crisis with greater urgency than ever before, as companies race to meet their decarbonization targets, struggle to comply with new disclosure requirements, and contend with financial losses from extreme weather events.

  • 26 September 2022
  • One Concern

September 19th marked the beginning of UN Climate Week. This year, we confront the climate crisis with greater urgency than ever before, as companies race to meet their decarbonization targets, struggle to comply with new disclosure requirements, and contend with financial losses from extreme weather events.

The UN Intergovernmental Panel on Climate Change (IPCC) speaks of the importance of solutions that both reduce emissions and address climate impacts. “Comprehensive, effective, and innovative responses,” the IPCC writes, “can harness synergies and reduce trade-offs between adaptation and mitigation to advance sustainable development.”

We can enable businesses to reduce their carbon emissions and climate-change driven losses at the same time — by applying the best available technologies for precision mitigation. 

As business insurers and commercial real estate operations executives know, they must invest as efficiently as possible to these ends: They have only so much money to spend, and if they allocate it inefficiently, they can fail to accomplish their environmental targets or protect their properties from the impacts of extreme weather.

Assuming a 2° global warming target, One Concern’s research team conducted an analysis that considers the hypothetical example of an asset owner that occupies 5,000 randomly-selected buildings in the Miami metropolitan statistical area. The Miami MSA is more vulnerable than most to weather-related disasters, which makes it possible to visualize the impact of wise resiliency investment more clearly. Like many real large corporations facing pressure to meet ESG targets, the hypothetical company has committed to a specific decarbonization pathway, and must now find the most economical way to accomplish its objectives. As we will see in this analysis, decarbonizing can also make a property more resilient, if mitigation is prioritized to those areas that are most vulnerable to downtime. 

Reducing Downtime Losses

In order to invest the budget effectively, the company must determine which of its properties face the greatest downtime risks from extreme weather events. That means understanding not just the risks to the company’s properties themselves, but also to the power substations and other critical infrastructure upon which the properties depend. Using One Concern, enterprise leaders can draw on advanced risk analytics and vast amounts of data to estimate this in ways that were previously impossible.

Not surprisingly, making sustainability investments substantially reduces losses resulting from downtimes. With One Concern, however, the company can allocate investment first to the buildings with the highest predicted losses, rather than applying budget evenly, reducing downtime losses much more effectively.

To make reasonable calculations of the magnitude of losses or savings to the company, our team used three numbers: the company’s One Concern Exceedance ProbabilityTM (1CEP), which is the likelihood that any event will trigger impairment or lead to downtime; the company’s One Concern Conditional DowntimeTM (1CDS), which is the building downtimes resulting from the failure of power or other external dependencies; and the company’s revenues. For these purposes, we assume that the revenues remain static, so they don’t impact the outcome. We also assume that the property’s electricity consumption follows a linear relationship with downtime to the property: a 1% reduction in the former leads to a 1% reduction in the latter. Below, we show the dramatic impact of the company’s choices about how to spend their sustainability funds over 5, 10, 20 and 30-year planning horizons. 

Downtime Loss = Exceedance Probability * Conditional Downtime * Revenues

As most asset owners know, the dependencies that their properties need to function–like power–are also a major source of their emissions. If they can decarbonize their assets through solutions like solar panels, they will also be able to function independent of an aging grid buckling under the influence of climate change. By decreasing their emissions, asset owners are also directly increasing their resilience.

If they leave their properties “as is” without investing in mitigation,  not only will the asset owner be unable to meet their GHG emissions target, they will face millions in downtime losses. It’s clear that decarbonization is the right choice for the company’s climate goals and bottom line.  However,  it’s not enough just to decarbonize: for maximum resilience and downtime loss reduction, it also matters how the company reduces its emissions. By prioritizing the properties most at risk from extreme weather, they can meet decarbonization goals and dramatically reduce their downtimes within just a few years.

If the asset owner chooses to make an even allocation of the resilience budget across all of its properties without prioritizing those properties most vulnerable to downtime,  it would realize savings of more than 50% of downtime at the 30-year mark, but if it made efficient allocations to those properties most at risk first, it could save more than 85%.  With the assumed revenues in this example, the difference in savings would be nearly $23 million, but regardless of an enterprise’s revenues, we expect the results would be proportionate. Because downtime decreases as energy consumption does, by mitigating the most vulnerable properties first (and therefore reducing or eliminating their energy consumption), the asset owner can optimize its fixed sustainability budget and increase “uptime.”

Meeting ESG Targets and Increasing Resilience

With tight sustainability budgets and pressure from investors and customers to meet ESG targets, it’s critical that every dollar spent on decarbonization serves multiple objectives. But how can asset owners identify the properties most vulnerable to the impacts of climate change? It’s not enough just to select properties in coastal areas or flood plains because properties in the same area can have vastly different vulnerability to hazards depending on the infrastructure they rely on, like substations and highways. The solution lies in granular, property-level analysis of dependency risk.

One Concern’s digital twin and resilience analytics bring disaster-proofing through decarbonization into focus. By employing a more sophisticated way to model the impact of climate change, and isolate the properties facing the greatest actual risk, it’s possible not only to reach carbon zero, but to bring downtime losses to zero too.

One Concern’s technology establishes a new industry standard, offering comprehensive quantitative analysis that scales across any number of properties.  The granularity of our analysis enables a more targeted and data-driven approach to mitigation than ever before.

Business leaders don’t have to choose between reducing their emissions and reducing the impacts of extreme weather on their assets: in fact, decarbonization dramatically reduces the risk of losses from natural hazards.  One Concern’s technology enables executives to work toward the IPCC’s goals of mitigation,  adaptation, and resilience working in concert. With precision mitigation, asset owners and enterprises alike can make climate adaptations on terms that protect their businesses and their properties while increasing their communities’ resilience and reducing their carbon footprint.