Companies in the car components, construction and engineering, and paper and forestry sectors are among the most vulnerable to extreme climate risks in China, according to Morningstar Sustainalytics.
Those industry groups, along with aerospace and defence, are the most exposed to asset impairment and business disruptions caused by flooding, coastal inundation and extreme heat, said the environment, social and governance (ESG) data unit of funds researcher Morningstar.
“The industries most exposed are [those] that rely on transport and logistics hubs such as rivers and ports that are more likely to be affected by flooding and coastal inundation, [which are] leading hazards of physical climate risk around the world,” Alicia White, senior product manager of climate solutions at Morningstar told the Post.
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“For companies exposed to flooding and heat, the upcoming El Nino cycle will likely bring additional risk.”
El Nino is a natural climate pattern in the Pacific Ocean that brings warmer sea-surface temperatures and has a major impact on weather around the world, often causing heatwaves, droughts and floods.
The Morningstar Sustainalytics assessment comes as China swelters in extreme heat for a second consecutive summer, with the north of the country bearing the brunt this year. In 2022 the southwestern and central regions were the worst hit.
In June, Beijing recorded 13.2 days with temperatures reaching at least 35 degrees, the highest since records began in 1961. Meanwhile, heavy rain and floods have hit southwest and southern China.
Globally, the onset of El Nino will greatly increase the likelihood of new temperature records and more extreme heat globally, the World Meteorological Organization warned on Tuesday.
Morningstar Sustainalytics assessed the physical climate risks of some 12,500 companies and over 12 million assets they own or lease, in collaboration with climate risk analytics provider XDI.
Under a greenhouse gas emissions trajectory correlating to just under 2 degrees Celsius of global warming by 2100, the average loss ratio of 11 Chinese auto component makers tracked was 1.03, followed by 0.89 for 11 construction and engineering firms and 0.56 for four aerospace and defence companies.
Expressed as the cumulative losses arising from environmental hazards between this year and 2050 divided by cash flows from operations in the same period, the ratio measures a company’s financial resilience to physical climate risks. The higher the ratio, the lower the resilience.
The losses estimated include damage inflicted on a company’s owned or leased assets, besides the costs of lost productivity arising from environmental events including extreme heat, freeze-thaw, extreme wind, flooding, soil subsidence and forest fire.
Under the Paris Agreement of 2015, governments have committed to contain global warming at well below 2 degrees above pre-industrial levels. However, the policies in place as of last November around the world would result in 2.7 degrees of warming, according to Climate Action Tracker.
In terms of the amount of total losses, the construction and engineering sector has the biggest exposure, estimated at an average of US$12.7 billion for the 11 firms if temperatures were to increase by 2 degrees.
The software, construction materials and semiconductors industries were assessed to be the least exposed to climate risks among companies headquartered in China.
The average total loss ratio of Asia-Pacific firms, at 0.22, is less than half the 0.46 of European and North American firms. This is because of the latter’s higher asset values and revenue relative to Asian firms with similar climate risks, White said.
Globally, regulators are raising corporate climate-related disclosure requirements to spur investment in decarbonisation.
In Hong Kong, the stock exchange has proposed tougher requirements on climate and sustainability risk disclosures by listed firms, aligned with a set of international standards launched last week.
Asset managers globally have also faced rising pressure from regulators to disclose their environmental risk exposure in recent years.
Last November, Hong Kong’s Securities and Futures Commission mandated that asset managers with at least HK$8 billion (US$1.03 billion) of clients’ assets must report the greenhouse gas emissions footprint of both investees and fund products.
Asset management firms regardless of size are also required to set up governance structures and policies to assess, disclose and manage climate risks and opportunities.
More from South China Morning Post:
- Northern China suffers in the heat, but the south faces heavy rain and flood risk
- Northern China feels the heat as El Nino summer looms
- Urgent economic, societal changes needed to avoid climate change disaster, UN warns ahead of global summit
- Climate change a far greater threat to global economy than Covid-19 pandemic amid rising intensity of heatwaves and floods, Swiss Re says
- Sweltering heat in Hong Kong, extreme weather events worldwide signal need to act on climate change, scientists say
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