CWR APACCT 20 Index – Finance Sector Input on Methodology

By Debra Tan 24 November, 2020

CWR's Tan shares 5 key points from the 100+ finance professionals' input

SLR will impact us sooner & harder so, to avoid an Atlantean future, we did the heavy lifting and created the CWR APACCT 20 Index; to make it practical & finance-driven, we got input from 100+ financial professionals
Not surprised by interest as very exposed with US$5.7 trn in GDP from the index 20 APAC cities; indeed, 66% were mainstream finance & input came from across various financial disciplines
Key takeaways: all think base case is 3-4°C (not 1.5-2°C) & 89% to 97% think tail risks should be factored into valuations and that despite imperfections, 94% want the index; now it is time for govts & finance to use to the index to protect APAC from becoming Atlantis

Urgent and dire action is needed to avoid Atlantis. Our inability to rein in emissions means that we will reach 1.5°C of warming as early as 2030. This means we will feel sea level rise (SLR) impacts sooner. And by 2100 forget about worst-case scenario SLR of 1m, we are looking at plausible SLR of 3m.

SLR impacts will come sooner; yet, most APAC cities are nowhere near prepared…

…so we created the CWR APACCT Index to help avoid an Atlantean future

Such levels of SLR will be devastating for APAC and as can be seen from our analysis of APAC government adaptation performance vis-à-vis the level of coastal threats we face, most cities are nowhere near prepared for this level of inundation. More in Surviving rising seas – 20 APAC Cities: who’s ahead & who’s behind?”

So don’t fly blind into an Atlantean future; be realistic & prudent. Don’t just focus on carbon transition risks, it’s time to get on top of the new risk landscape.

But since coastal threat assessments can be complex & daunting, we decided to take advantage of the downtime created by COVID-19 lockdowns to do the heavy-lifting and created the CWR APACCT 20 Index to close the knowledge gap in the region.

Enter the CWR APACCT 20 Index

We wanted to create a practical index that was useful to the financial sector; to help the sector gauge absolute and relative risks across the region so that it can spread such clustered risks today to avoid systemic shocks. Also, by seeing the real threats ahead, the sector can drive governments & corporates to step up adaptation for coastal threats that we will lock-in at 1.5°C so as to avoid revaluations plus fast-track decarbonisation to avoid 4°C of warming which will turn capitals and key cities of APAC into the new Atlantis.

Who better to ensure that it is finance-driven, than the industry itself.  Here, we are pleased to say that 100+ finance professionals provided input into the index development – the majority provided feedback through a survey, while a core group helped us frame this work, select cities and/or design the survey. So who are they and why did they bother to help us?

Here are 5 things you should know…

1. Who? They are not all “green”; in fact most of them are from mainstream finance…

This is not surprising as we are NOT talking about ESG or a carbon tax; this is good old bread and butter risk management and discounted cash flow valuations. The assumption of infinite going concern is a concept that underpins all financial valuation models.

Not surprised by finance sector interest as very exposed…

…20 index cities = US$5.7 trn in GDP

We are not surprised that the financial sector was interested – they are very exposed. The 20 APAC coastal cities in our index generate for US$5.7trn of GDP per year and drive around a quarter of global air and sea cargo volumes.

Clearly there will be serious problems if they were to be the new Atlantis.

The APAC 20 cities have seven stock exchanges that account for US$29trn of equity trading value in 2019 compared to NASDAQ’s US$16trn plus loan books are also concentrated … more here.

Sooner than you think chronic coastal threats could trigger systemic shocks. So it was also not surprising that we received high level input that cut across various financial disciplines:

2. Despite the variety, they all thought the base case was 3°C-4°C by 2100…

3°C-4°C as the new base case for assessing risks received the highest “likely” votes & least “unlikely” votes. Their consensus toward 3°C-4°C is clear from the charts below:

Note that out of all the scenarios, 1.5°C-2°C received the highest share of “very likely” votes at 39% as well as the highest number of “very unlikely” votes at 26%. In short, while they are confident of reaching 1.5°C-2°C, they are also clear that it is an unlikely base case scenario. Also, the share of “no opinion” increases significantly at 4°C-5°C indicating less confidence at the top end of the range.

Clear that all understood that rising temperatures bring rising risks

However, all of them understood that rising temperatures bring rising risks. Their answers show a trend of increasing confidence denoted by the clear rise in share of “very likely” votes as temperature scenarios rise.

More importantly, they recognise that the 1.5°C-2°C scenario is not without risk – 81% of those surveyed said that physical risks are “likely” and “very likely” in this scenario.

3. But a lion’s share (89% to 97%) agreed that tail risks should be factored in for different types of valuations

It is clear that long term SLR and storm surge risks impact valuations. When asked if they agree that long term sea level rise (SLR) and storm surge risks should be taken into consideration, >89% “Strongly Agree” & “Agree” that tail risks from coastal threats impact various types of valuations:

Views changed before and after the survey – for equity valuations and corporate credit this moved up from at least 83% at the start of the survey to 89% by the end of the survey. Agreement on tail risk implications for sovereigns and project valuations were even higher post survey at 93% and 97% respectively.

Interestingly, the results across all types of valuations show a clear shift in favour of “Strongly Agree” post survey with the number of “Disagrees” also falling. One noted “Changed my mind as I didn’t realise all this data is available”. Besides this, their concerns over what’s at risk also changed – check out their input into various key coastal threats in the report “Avoiding Atlantis: The CWR APACCT 20 Index”.

4. Wanted index to reflect “real risk” … adaptation vs. mitigation; want it despite imperfections …

When we asked the sector what they wanted from the index, the majority wanted to see both absolute and relative risks, and so we obliged with: 1) CWR APACCT 20 Index for two climate scenarios one at 1.5°C that we will lock-in and another at 4°C that we must try to avoid and 2) At-a-glance coastal threat assessments in the form of City Factsheets for each of the 20 cities.

Our index includes government action as 90% of those surveyed said they wanted to include them as they can alleviate risks. Governments can 1) push for a reduction in carbon emissions so that the worst risks are avoided (mitigation) and 2) invest in protecting people and assets from the expected physical threats due to a warming planet (adaptation).

Index only includes adaptation as when blended, risks are hidden

But our index only includes adaptation action, and not mitigation as a blended approach including mitigation & adaptation in the same index will hide risks. A city could still be exposed due to a lack of adaptation efforts locally because for mitigation to be effective it needs to be carried out globally.

Half of those surveyed agreed with us and a further 11% wanted an adaptation only index compared to 1% who wanted a mitigation only index. Meanwhile 38% said a blended index was still useful.

There were multiple challenges regarding the SLR levels selected, selection of indicators for subsidence, flooding methodology, what type of maps to use, how to assess storm surge plus government adaptation action.

94% want index despite imperfections

 

The invaluable feedback from the sector helped us overcome them all and decide indicators and weightings for the index. These are all discussed in detail in our report. But what’s worth noting here is that 94% want the index despite imperfections.

5. What they wanted to do with it

While 42% said they were “just curious” to see the results (we assume to see if their own property investments are at risk), 40% wanted to use the results to engage with companies and 29% wanted to embed water risks in ESG scores.  Meanwhile, around a quarter said they wanted to use it to “seek strategic opportunities”, “embed water risks in valuations” as well as “engage with policy makers”. 17% said the index would help them hedge portfolios and 11% said it could inform a change portfolio weightings.

And that was before the survey!

90% said survey helped them better think through coastal threats & their financial implications

A few of them even invited their peers to participate after they completed the survey.

And of course they wanted more cities evaluated in the index; plus wanted us to build indices for other types of water risks. We would love to accommodate the requests above but one step at a time!

The CWR Coastal Capital Threat Series …

We didn’t set out to write 5 reports, just the index, but the results were so shocking and the climate news that is accelerating SLR so grim that we ended up writing multiple reports. We also wanted to do the latest climate science justice – there are literally hundreds of research papers on polar ice, SLR estimates, ocean expansion, marine ice sheet/cliff instabilities, permafrost thaw, Arctic sea ice, RCP scenarios, subsidence, and typhoon paths (see summary here).

We didn’t set out to write 5 reports but the results were so shocking & SLR news so grim…

..now with the series we can accurately start protecting assets & our cities

And it’s not just the physical risk landscape but the financial regulatory landscape is also changing, so we also covered its progress plus worst-case no-regret scenario building.

We know that this is dense, but we wanted to get all the information out there so that we can start spreading risks, repricing assets, stepping up adaptation to protect cities from 1.5°C locked in impacts and fast-tracking decarbonisation to avoid 4°C.

In a way, you could say that the CWR Coastal Capital Threat Series is our no-regret scenario. And if we can protect millions of people plus avoid financial collapse, then it was all worth it!


CWR Coastal Capital Threat Series

  • The CWR Survival Guides to Avoiding Atlantis – Sea levels can be 3m by 2100, putting urban real estate equivalent to 22 Singapores underwater in just 20 APAC capitals & cities. With US$5.7trn of annual GDP at stake, get on top of the new risk landscape to survive
  • Surviving Rising Seas – 20 APAC Cities: Who’s ahead & Who’s Behind? – The homes of 28mn to 100mn+ residents could be submerged in just 20 APAC cities. Which cities are more prepared? We walk you through the Top 5 Most Proactive & the Bottom 5 Laggards in our CWR APACCT 20 Index
  • Sovereigns At Risk: Lots Of Capital In Vulnerable Spots – Clustered nature of rising coastal threats plus lax govt action put APAC sovereigns at risk. CWR’s analysis of GDP, trade, markets & bank loans reveal intense concentration of risks. As no-sense strategies pervade, see who’s in CWR’s watchlist
  • Existential Coastal Threats: 8 Things You Must Know – Rapid SLR will happen sooner than we think, yet we are still driving investments to vulnerable locations. CWR’s Debra Tan shares 8 things you need to know about the existential threat from SLR – from glaciers in the mountains to ice sheets in our poles, permafrost + more

Further Reading

  • Future SLR Projections & Biggest Worries – In this follow up interview, HKU’s Dr. Nicole Khan shares her biggest concerns on how future SLR projections are rising higher & faster than thought & shares the best approach for building realistic scenarios
  • It Happened – Central Banks And Water Risks – Half a dozen new reports by the NGFS means that CWR has achieved a key milestone in embedding water risks in finance. Debra Tan and Dharisha Mirando expand on these game-changing moves by the central banks. The credit evolution has started
  • Thirsty And Underwater: Rising Risks In Greater Bay Area – How will water & climate risks, including rising sea levels & droughts, threaten the already water-stressed Greater Bay Area (GBA)? CWR’s Tan & Mirando explain in their latest CLSA report and highlight companies’ failure in climate risk disclosures
  • No-Sense Climate Strategies: From DSD To HSBC – Hong Kong’s shortsighted & unrealistic climate plans will leave key assets & infrastructure exposed that mean the government, companies, investors and the public are even more exposed. China Water Risk’s Dharisha Mirando & Debra Tan expand
  • Are Asia’s Savings Exposed To Water & Climate Risks? – Asian asset owners have portfolios skewed towards domestic markets that will bear the brunt of climate change. Find out about these risks and what to do as our Dharisha Mirando shares key takeaways from the new report China Water Risk co-authored with Manulife Asset Management & the Asia Investor Group on Climate Change
  • The Future Of Finance – HKGFA’s Dr. Ma Jun believes in post-COVID times, investors & bankers should expect more emphasis on environmental disclosure by regulators, which will pave the way for higher quality green finance products
  • Climate Fight: Finance As Asia’s Most Effective Weapon – Green finance is set to take off as regulations promote carbon pricing and better disclosure but Dr Ma and Huang also see gaps that need closing like integrating ESG factors in risk management
Debra Tan
Author: Debra Tan
Debra heads the CWR team and has steered the CWR brand from idea to a leader in the water risk conversation globally. Reports she has written for and with financial institutions analyzing the impact of water risks on the Power, Mining, Agricultural and Textiles industries have been considered groundbreaking and instrumental in understanding not just China’s but future global water challenges. One of these led the fashion industry to nominate CWR as a finalist for the Global Leadership Awards in Sustainable Apparel; another is helping to build consensus toward water risk valuation. Debra is a prolific speaker on water risk delivering keynotes, participating in panel discussions at water prize seminars, numerous investor & industry conferences as well as G2G and academic forums. Before venturing into “water”, she worked in finance, spending over a decade as a chartered accountant and investment banker specializing in M&A and strategic advisory. Debra left banking to pursue her interest in photography and also ran and organized philanthropic and luxury holidays for a small but global private members travel network She has lived and worked in Beijing, HK, KL, London, New York and Singapore and spends her spare time exploring glaciers in Asia.
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