Investors and businesses demand and expect better data quality availability and deeper insights to mitigate climate risk losses, says KPMG partner
As the wildfires rage across Canada, investors have started to take proactive measures. As a new KPMG survey found, climate risk has now become business risk.
KPMG’s recent research found more than 90 per cent of survey respondents said climate risk has either already impacted their business or will in the future and are now factoring this into their long-term planning strategies. Additionally, 68 per cent of respondents said they’re actively updating emergency planning and preparing this year for climate-related events.
Clark Savolaine emphasized that climate events are now recognized by business leaders and investors as direct threats to operations and revenue and in turn, the stakes are tangible. For instance, severe weather can shut down operations, disrupt supply chains, and damage physical assets, notably residential and commerical property.
“We're seeing broad-based acknowledgement that physical climate events are happening with increased frequency and severity and therefore are a mainstream business risk that needs to be treated with the same effort and oversight as any other consideration,” said Savolaine, deal advisory partner at KPMG Canada.
“Business interruption leads to revenue loss, so you want to minimize the downtime of any kind of business interruption,” he added.
Other findings from KPMG include 53 per cent of respondents who are investing in infrastructure modifications to withstand extreme weather. This might include retrofitting buildings to be more heat-resistant, embracing adaptive architecture, or incorporating permeable materials and green infrastructure to manage stormwater runoff and reduce flooding.
Additionally, nearly eight in 10 (78 per cent) are investing in data, analytics and technology solutions to identify, monitor or mitigate climate risk.
While real estate and infrastructure investors are notably the most concerned, Savolaine underscored that in Canada’s interconnected economy, the distinctions between corporations, real estate, and infrastructure investors are often blurred, adding that businesses like, grocery chains, aren’t just retailers. They’re also significant property owners and investors.
However, infrastructure and real estate investors are indeed the ones who have been confronting climate risks for much longer than others, he added, because they “think in decades” and have been prepared as they’ve seen these issues come down the pipeline.
Savolaine also highlighted a major shift in how institutional investors, such as pension funds and other large capital holders, are approaching climate risk. Rather than waiting until after acquiring assets, these investors are embedding climate considerations into their upfront due diligence.
“Before they buy an asset, they're thinking about, how do we identify these risks, how do we price these risks? How do we build mitigation or resilience into our underwriting and our deal theses? That's been a big development that we've seen in the market over the last five or 10 years,” he explained.
When planning an exit, investors are anticipating questions from buyers about their climate risk strategies and how resilient the asset is under worsening conditions, noted Savolaine.
As for long-term investors, they're especially attuned to the inevitability of climate events.
“For many long-term investors, it’s less about if it happens than when it happens,” he said, highlighting the growing emphasis on resilience and mitigation as integral parts of investment planning.
This is what sets institutional and pension fund investors apart. Unlike other capital sources, these investors don’t flip infrastructure or real estate assets in just a few years, they hold them for decades. As Savolaine noted, they’re demanding and expecting better data quality availability and deeper insights.
They’re also increasingly using scenario planning to deal with climate risks. Not to predict exact outcomes but to evaluate which regions or assets may be more exposed if climate conditions worsen.
Consequently, some modeling reveals areas of lower exposure, which he called “an edge”, pointing to the upside potential that comes with climate change, particularly through the energy transition.
In turn, companies are putting more money into emergency planning and boosting operational efficiency to maintain resilience. Savolaine added that climate-related events also come with substantial financial burdens, from increased insurance premiums to rising energy costs and maintenance expenses.
“A variety of value drivers, like insurance premiums, energy pricing, the cost and dependability of supply chain are all things that are very near term and can be very costly for businesses,” he noted.
He also added that beyond the short-term impacts, companies are concerned with long-term valuation because understanding and mitigating climate risk is about defending the enterprise value in the eyes of future investors and stakeholders.
“The biggest thing that's changed is just the rising number of specific examples of how businesses or infrastructure assets are affected by these events,” he said, adding that businesses are grappling with compromised transportation networks, strained electricity grids, vulnerable supply chains, and even deteriorating air quality.
He also emphasized that the risks extend beyond infrastructure to include employees and customer access.
“The reason why I think businesses are more worried about this is just their own assets and operations, their own employees, and how they might be affected and how customers will be affected,” he added.
Whereas long-term investors are tracking shifts in electricity demand, fuel types, and consumer behavior to spot new markets, adding that what was once viewed as niche, like electric vehicles, is now mainstream, creating momentum across entire value chains, including energy storage and critical minerals.
And as to where the ESG messaging lies in the climate risk equation, Savolaine underscored “it has always meant climate risk and things like environmental risk management, occupational health and safety responsible supply chains, eliminating forced or child labour and the energy transition.”
