Physical Risks of Climate
Change (P-ROCC)
A new framework for corporate disclosures

September 2019

“As a global asset owner with amulti‑decade time horizon, we think it
is critical to understand how companies
are planning to adapt to the physicalrisks of climate change. Absent thisinformation, we are left to wonder what, if
any, steps a company has put in place
to prepare for the future.”— Beth Richtman, Managing Investment Director-Sustainable
Investments at CalPERS“We believe that improved disclosure
from companies will help us better
assess climate-related risks and enhance
our capacity to serve as fiduciaries ofclient assets.”— Wendy Cromwell, Vice Chair and Director, Sustainable
Investment at Wellington

1Physical Risks of Climate Change (P-ROCC)

Background
In September 2018, Wellington Management, Woods
Hole Research Center (WHRC), and the California
Public Employees’ Retirement System (CalPERS)
announced a research collaboration to analyze andbetter understand how and where climate change
may impact global capital markets. In our research
to date, we have noted a lack of detailed company
disclosures on the physical effects of climate change.
Such disclosures will likely improve over time, as
more companies aim to comply with emerging global
regulations or voluntarily report activity in supportof existing frameworks — such as the CDP (formerly
the Carbon Disclosure Project), the Task Force on
Climate-related Financial Disclosures (TCFD), andother environmental, social, and governance(ESG) recommendations.
While supporting these climate-oriented frameworks
is a step in the right direction, it appears to us thatmost companies are primarily focused on assessing
and reporting transition risks. To meet the need

Potential benefits of the
P-ROCC framework
With this guidance, we encourage companies toleverage climate science-based scenarios to better
prepare for and disclose the physical risks of climatechange. We believe that improved disclosure ofclimate preparedness offers companies many
benefits, and we hope executive teams and boards of
directors find the P-ROCC framework useful as they
develop strategies to identify, measure, and manage
their physical climate risk exposure. An improved
understanding and disclosure of physical climate
risks could help a company:

Climate risks can bedivided into two areas:

1. Better relay information to capital providers,investors, markets, and regulators;

Transition risks refer to effects on

2. Meet new disclosure requirements
more effectively;

companies as economies decarbonize.
These risks may include policy and regulation,
litigation, adoption of alternative energy
sources, and shifting consumer preferences
or behavior.
Physical risks refer to the manifestationsof a changing climate and their associatedcosts. Physical risks include both chronicchanges, or long-term shifts in climate
patterns; as well as acute events, which may
increase in severity or frequency in light ofchronic changes.

1

for improved physical risk disclosure, Wellington
Management and CalPERS have collaborated tocreate a new Physical Risk of Climate Change(P-ROCC) framework,1 which we believe provides
a helpful guide for company management teams tointegrate climate science-based scenarios into theirstrategic planning and disclosures.

3. Assure investors that it takes these risks
seriously — (absent disclosure, market
participants may presume that the company isunprepared for climate-related risks, affecting
stock price volatility, cost of capital, confidence inmanagement, and potential litigation);
4. Recognize and adapt to the effects of climatechange on operations; and5. Form a baseline to assess and build
competitive advantage.

This framework does not include traditional climate-focused sustainability disclosures, such as corporate emissions policies or the exposure to transition
risks such as potential litigation, regulations, shifting consumer preferences, social pressure, and technological shifts. Numerous procedures and guidelines already exist for these and many companies are already managing to them.

2

Physical Risks of Climate Change (P-ROCC)

Business risks in achanging world
The physical risks of climate change are varied andglobal; they include chronic risks like extreme heat,drought, and water access as well as acute risks likewildfires, hurricanes, and flooding.
While we refer to these variables as “risks,” not every
climate-related impact on an individual company orindustry will be negative. Disclosures should consider
both the downside and the potential benefits ofclimate change to the firm’s business.

Chronic risks
Extreme heat may damage roads, buildings,

and transit infrastructure and can be devastating
for agricultural industries. Businesses may needto increase capital spending for maintenance andreplacement of equipment and inventory. They may
need to install sensors or other devices to measure
how well their infrastructure, operations, crops, or
livestock can withstand high temperatures. They
may even need to shift the geographies of their
supply chains.
Above certain levels, heat, especially when combinedwith humidity, takes a human toll. As regions see
more days of high heat, labor and energy costs may
climb as outdoor productivity and hours decline andworkers move indoors. Health care costs may go up,
especially among vulnerable populations. Customers
may change vacation destinations or have lessinterest in outdoor venues. Outdoor agriculturaland construction productivity and hours worked
may drop.

Drought can affect the availability, access, andpricing of water and food. It can also increase costs
for companies that rely on water as a key production
input or means of transportation. Finally, drought canhamper hydropower generation and the stability ofagricultural production.

Sea- level rise is one of the most significant

longer-term risks. Unmitigated, its potential for
destruction of coastal residential and commercial
property is significant, as is the potential impact offorced or voluntary human migration and the impact
on infrastructure, municipalities, and economic
growth. Companies may need to adapt or relocate
operations, at substantial cost.

Acute risks
Wildfires, hurricanes, and flooding

disrupt business operations by damaging property
or inventory, or by causing power outages orgovernment-service shutdowns. Such events
may keep customers away or prevent shipments
or transport; they may also contaminate soil andwater, which could degrade consumer confidence
in agricultural products and pose consumer
health risks.
If perceived to be chronic, these risks can influence
real estate values, as well as insurance costs
and coverage availability. As the frequency and/or intensity of these risks increases, companies
need to anticipate the potential business impacts
and build resilience. Here again, our researchsuggests that companies in geographies that risk
becoming unlivable, or suffering economically, due
to these risks may need to work with communities
to collectively increase adaptive capacity. New
adaptation business opportunities may arise as aresult of these needs.

3Physical Risks of Climate Change (P-ROCC)

P-ROCC framework —Defining preferredcorporate practices andclimate disclosures
Implement Preferred
Practices
1. Develop climate scenarios

In preparing for these risks, companies cannot
rely only on historical data. As the effects ofclimate change escalate, projections for the length,
frequency, or intensity of weather events based on
historical averages are likely to be less accurate.
Given the likelihood of more severe physicaloutcomes, we believe scenario planning based on
sound climate science research is imperative.
Climate scenarios are not predictions. They
depend on assumptions about greenhouse gas(GHG) emissions, which vary according to humanbehavior; and human behavior will, in turn, be
affected by government policies and technologicaldevelopments. Scenarios can help companies assess
and plan for a wider range of outcomes, so disclosure
should include management’s assumptions forunderlying scenarios. As such, companies should
not be evaluated on the accuracy of estimatedimpacts from climate change. Rather, they shouldbe evaluated on the thoughtfulness and robustnessof their scenario planning exercise and risk
management around potential effects.
The most important elements for integrating physicalrisks into strategic assessments include the useof sound climate science and a range of climate
scenarios and creativity (informed by the insights
related to a specific business model and industry
landscape) to imagine all of the potential effects on
a company’s business. A number of “off-the-shelf”
risk tools are emerging to facilitate company-level
scenario analysis; however, we suggest companies
delve more deeply into risk assessments and engage
senior management to ensure the highest quality
and most useful insights for the particulars of
their business.

2. Work with experts

Our collaboration with WHRC climate scientists
has reinforced the importance of working directlywith experts who understand the potential uses andimplications of various climate science models, aswell as the assumptions and nuances that comprise
impactful scenario planning.
A company may need to hire climate science experts,
work with an external consultant or climate specialist
firm, or otherwise attain the knowledge needed toassess their risks and opportunities. For companies
with significant exposure to climate change, staffing
for climate expertise should be considered a criticalorganizational function similar to legal, IT, accounting,or enterprise risk expertise. The price of failing toplan for the effects of climate change on operations,profits, labor, or customers could potentially dwarf
the cost of hiring a specialist to help anticipate andprepare for potential risks and/or be well worth theinvestment to capitalize on opportunities.

3. Build executive and board knowledge

Climate disclosures should note the executive-level
and associated resources responsible for building
climate resilience and managing associated risks.
Disclosing the executive level of responsibility will
help investors understand how the company isdelegating climate-risk planning, strategy, oversight,
and accountability. Boards of directors should also
be informed and have a long-term vision for thefirm’s strategy around climate change, including
effective management of risks and opportunities for
operations, labor, and customer relations. As such,the board should include member(s) or committee(s)that possess pertinent environmental knowledge andexperience, or have the ability to access appropriate
independent sources.

Develop Climate Disclosure
Below we offer a guide for developing physicalclimate disclosures that complement other climaterelated disclosure frameworks such as the TCFD and
CDP. Although we are not advocating a particular
reporting method or prescribing where suchdisclosure should be published, we do believe thatthese details will be of high interest to a broad setof asset owners and asset managers. Please notethat the suggested steps listed below are primarily
intended to help improve the quality and usefulnessof corporate climate-related disclosures on a broad
scale. As such, they should be viewed as guideposts,
rather than as a comprehensive “checklist” thatencompasses all risks facing business lines.

4

Physical Risks of Climate Change (P-ROCC)

Components of disclosure

Determinetime horizon

Assess climate
risk metrics
relevant to yourbusiness

Identify business’s
physical attributes(DELTA)

1. Determine time horizon for scenario planning. For
example:a. Short term: year to year
b. Medium term: three to five years
c. Long term: 10 to 30 years
2. Assess climate impact for each time frame, note
key assumptions, and review process.
a. Cite source of climate data and methodology.
b. Detail climate assumptions, such as which
warming scenario or scenarios (e.g., 1.5° or 3°,etc.) the company is planning for. We suggestthat management teams consider multiple
scenarios and time horizons and disclose each,
as well as the data considered. Identify the basecase your company uses for capital planning.
c. Outline ongoing climate variables and metrics
that are of the most concern and will bemonitored closely.
d. Learn from experience: Review the types andmagnitudes of extreme weather events thathave been disruptive or expensive in the past,noting any patterns. Recognize that climatechange may alter the frequency, length, andintensity of such events.
3. Analyze the physical attributes of the company’sbusiness and note key climate variables that areof concern.
a. This could include, for example, material
geographies housing key business assets,
including personnel, headquarters, supply
chains, and end markets. For each geography
identified, discuss probable impacts andassociated costs.
b. We suggest using the following organizing
principle (DELTA):
i. Demand: Changing location, health,resilience, and finances of customers.
Disclose percentage of revenue and profit
derived from countries or regions mostat risk.

Measureopportunities

Evaluate
impact on
revenueand profit

Consider risk
management
optionsii. Expenditures: Fixed asset augmentation,
repairs, and impairmentiii. Logistics: Business or supply chain/inventory disruptions, including travel andsecurity of inputs (energy and raw materials)
iv. Talent: Employee health and safety andlocation of labor poolv. Acquisition: Strategy to assess geographic
climate risks that may arise as a resultof potential mergers, acquisitions, or
expansion plans
4. Identify business opportunities; for example:
a. Expansion of product offerings
b. Demand from new markets
5. Evaluate impact on revenue and profit over thetime horizons chosen for scenario planning,assuming that no climate-related adaptation
measures are taken within the business. Disclose
estimated percentage ranges for the impact ofclimate change on revenue and profit. Note that
estimated impact ranges could be cumulative or
annual over these periods and may be positiveor negative. Make a qualitative assessment of
the materiality of this percentage range without
undertaking adaptation measures. Add descriptive
color as to the sources and pace of the overall
impact over these time horizons.
6. Discuss the actions the company has taken
or is considering to address the risks andopportunities that have been identified. This may
include existing or prospective risk-management
mechanisms such as:a. Transfer: Insurance coverage and how it may
be affected (e.g., pricing, availability)b. Adapt: Strategy to allocate capital expendituresassociated with facility or supply moves
and retrofits

5

Physical Risks of Climate Change (P-ROCC)

c. Repair: Disclose capital allocated to replacing
or repairing assets that are impaired as a resultof an acute event, and any relevant regulatory
provisions or other mechanisms
Quantify the degree to which these actions will
help the company adapt, including reference tothe aggregate impact on revenue and profit overthe chosen time horizons.

Closing thoughts

It was once said that the best risk tool is imagination.
Imagination enables companies to predict andprepare for the future. By offering the P-ROCC
framework, we are encouraging companies tocouple sound climate science-based scenariosand corporate imagination to better prepare theirorganization for the physical risks of climate change.
As investors, we seek improved disclosures about
how the companies we invest in are assessing theirvulnerabilities to and opportunities from climatechange and building resilience to enable theirlong-term success.
We recognize that climate risk assessment is awork-in-progress at most companies, so weencourage disclosure on a best-efforts basis in the
short term that improves with more refined analysis
over time.

Additional resources
The following reports may be of interest for additional
guidance and examples of disclosure:• Task Force on Climate-related Financial
Disclosures: Status Report (September 2018)• TCFD Implementation Guide: Using SASB
Standards and the CDSB Framework to Enhance
Climate-Related Financial Disclosures in
Mainstream Reporting• CDP Guidance for companies• Advancing TCFD Guidance on Physical Climate
Risks and Opportunities: Prepared by Four
Twenty Seven and Acclimatise for the European
Bank for Reconstruction and Development (EBRD)

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