Financial Risk Analysis

Financial Risk Metrics

Currently, Sust Global provides two metrics of financial risk: (1) Structural Damage and (2) Business Interruption. A brief description of each is provided below with a deeper discussion of hazard-specific calculations found in the Methodologies section:

Structural Damage - Direct damage to structures, including homes, warehouses, businesses, etc., calculated as the percentage of a structure’s value expected to be destroyed. Because structural damage is defined as a percentage of overall value, the financial loss can only be computed when an asset’s value is known. Structural damage estimates are available for wildfires, floods (both coastal and inland), and tropical cyclones.
Business Interruption - Days per year in which business cannot be conducted due to a variety of direct (e.g., damage to asset structure) and indirect (e.g., damage to nearby energy grid or transportation networks) impacts. Direct impacts (i.e., Tier 1) are available through the API and dashboard. Indirect impacts (i.e., Tier 2) are only made available upon request as a .csv file. Business interruption estimates are available for wildfires, floods (both coastal and inland), tropical cyclones, and heatwaves.

Data Availability

Financial risk is calculated across a range of warming scenarios, time horizons, spatial scales, and hazards. The following cuts of data are readily available:

Warming Scenarios - SSP1, SSP2, SSP5
Time Horizons - Baseline, 2030, 2050, 2080
Spatial Scales - Asset, Portfolio (i.e., asset sum), Polygon (e.g., county)
Hazards - Wildfire, flooding, tropical cyclones, heatwaves

Methodologies

For each asset within a portfolio, physical risk exposure is evaluated under a variety of warming scenarios (e.g., SSP5) throughout the 21st century across multiple hazards. To estimate the resulting financial impacts, we use damage functions to translate hazard exposure (e.g,. 1 meter of flooding) to impacts like asset damage (e.g., 10% of structure value) and business interruption (e.g., 10 days). Our damage functions are empirically derived and based on publicly available and peer-reviewed research. Greater detail on hazard-specific damage functions are provided in the following sections.

By combining physical hazard exposure with damage functions, we can estimate the financial impacts of climate hazards in several meaningful ways. One such method is to examine the financial loss in response to a particular hazard event (e.g., 1-in-100 year flood). Additionally, we can look beyond a specific hazard event and estimate the average annual expected loss by integrating financial risk across multiple hazard return periods (e.g., 1-in-10 year, 1-in-50 year, 1-in-100 year, etc.). While the former approach can estimate the financial loss in a year where an asset was ‘hit’ by a large event, the latter represents the expected financial loss per year, averaged over many years.

Financial impacts are estimated under a particular warming scenario (e.g., SSP5) and at a particular period of time (e.g., 2050). Beyond calculating losses for a single hazard, we aggregate financial impacts across hazards to give a more holistic perspective on climate-induced financial risk. Lastly, in addition to estimating finacial losses at each asset, we calculate the imapact across portfolio by aggregating projected loss across all hazards and all assets.

Floods

Flood losses are based on flood depths associated with particular return period events (e.g., 1-in-100 year flood). We use damage functions based on data from the US Army Corps of Engineers. Given a flood depth, these empirically-derived functions describe the resulting damage to a structure. Because flood damage varies across structure types (e.g., single family wooden home, reinforced concrete 5-story building), we use a variety of structure-specific damage curves. Although we provide a default damage curve, more precise estimates of flood-driven financial risk require building-type information for each asset.

The US Army Corps of Engineers damage functions were designed based on building standards in the United States. However, building standards vary across the globe and are directly tied to a structure’s vulnerability to flooding. For example, one meter of flooding is likely to cause less damage to a structure in Japan, where the building standards are high, than it is to the same structure in the Philippines, where the building standards are lower. To enable more accurate estimates global risk, we apply corrections based on regional differences in building standards, following the CLIMADA risk analysis framework.

Cyclones

Wind-driven losses associated with tropical cyclones are based on 1-minute sustained wind speed measured at 10m for particular return period events (e.g., 1-in-100 year cyclone). We use damage functions from the CLIMADA risk analysis framework. Given a wind speed, these empirically-derived functions describe the resulting damage to a structure. Because wind-related damage varies across structure types (e.g., single family wooden home, reinforced concrete 5-story building), we use a variety of structure-specific damage curves.

Although we provide a default damage curve, more precise estimates of wind-driven financial risk require building-type information for each asset. Similar to the flood damage curves, regional differences in building standards are accounted for to provide more accurate estimates of global risk.

Wildfires

Financial impacts from wildfire are based on the percent chance of a wildfire event within 1km of an asset in a given year. Unlike wind speed and flood depth, damage functions for wildfire are not publicly available. One reason for this lack of data is that, unlike wind and flooding, wildfire damage does not scale with hazard intensity. Rather, wildfire damage can be thought of as binary - meaning a structure either catches fire, or does not. We derive a binary wildfire damage curve based on historic impacts from California wildfires. When a wildfire is located within 1km of an asset, we assume a 10% chance of the asset being impacted. If impacted, a fire would destroy 75% of an asset’s value.

Heatwaves

Losses due to heatwaves are based on the number of days per year when temperature exceeds the 98th percentile. Here, the 98th percentile is calculated using the previous 30 years of data for each particular location. We use a relative measure of heat - specific to a location and time - because impacts often depend on whether the local population and environment is affected. For example, a 40°C day in Phoenix, Arizona is unremarkable whereas a 40°C in London, England may result in significant disruption.

Asset Type Specific Damages

As mentioned above, an asset’s vulnerability to hazard exposure (i.e., susceptibility to damage if exposed) is strongly governed by the structure type (e.g., reinforced concrete building). Although a default structure type can be used if asset-level structure type information is unknown, financial risk outputs will be more accurate if structure type is uploaded for each asset. Asset type can be included using the label:type column. Doing so will enable us to quantify financial impacts using specialized damage functions based on each asset type while accounting for industry- and structure-specific characteristics.

Available Asset Types

The available asset types are given in the table below. For Climate Explorer to recognize an asset type, you must include a column named label:type that matches exactly the label given below in bold.

CATEGORY	LABEL FOR USE IN CE	EXAMPLES OF THIS TYPE OF ASSET
Agriculture	Agriculture	Agricultural areas, horse stalls, veterinary offices
Commercial	Retail Trade	Appliances, Auto Dealer, Auto Dealership, Bait Stand, Bait Stand, Bakery, Bakery, Boat Sales/Service, Book Store, Book Store, Camera Store, Candy Store, Carpet and Paint Shop, Clothing, Clothing Store, Clothing-Mens, Convenience Store, Crafts, Department Store, Department Store, Drive thru market, Drug, Drug Store, Fabric Store, Feed Store, Flea Market, Florist, Fruit Stand, Furniture, Furniture Store, Gas Station, Gas/Butane Supply, Gift Shop, Greenhouse, Gun Shop, Hardware, Hardware, Hobby Shop, Home Repair Store, Large Furniture, Large Grocery, Lawnmower, Liquor, Liquor Store, Liquor Store, Meat Market, Medium Grocery, Motorcycle Dealer, Music Center, Neighborhood Grocery, Nursery, Paint Store, Pawn Shop, Remnant Shop, Service Station, Service Station, Shoe Repair, Shoe Store, Small Grocery, Supermarket, Toy Store, Tractor Sales, Trophy Shop, Upholstery Shop, Used Appliances/Cloth, Used Furniture, Vacuum Cleaner Sales, Variety Store, Video Games, Wine Store.
	Parking	Garage
	Wholesale Trade	Auto Junk Yard, Auto Parts/Mufflers, Beer Warehouse, Bottled Gases Warehouse, Food Warehouse, Heavy Equipment Storage, Jewelry, Lumber Yard, Lumber, Machine Parts Storage, Medical Supplies, Municipal Storage Warehouse, Paper Products Warehouse, Private Storage, Quonset Hut Storage, Safety Equipment, Sporting Goods Warehouse, T.V. Repair, T.V. Station, Trailer Parts, Warehouse
	Personal and Repair Services	Auto Repair, Barber Shop, Beauty Salon, Boat Service, Car Wash, Cemetery, Cleaners substation, Funeral Home, Laundry, Photo Studio, Private Day Care, Re-Upholstery, Truck Mfg & Sales, Washateria, Watch Repair
	Professional/Technical Services	Accounting Firm, Airport, Big Office Commercial, Boat Storage, Business, Filtering Plant, Import Sales, Legal Office, Office Building, Piers, Professional, Real Estate Office, Sewage Treatment, Transport Company, Utility Company
	Banks	Bank
	Hospital	Hospital
	Medical Office/Clinic	Chiropractic Clinic, Dentist’s Office, Doctor’s Office, Medical Office, X-Ray Service
	Entertainment & Recreation	Bowling Alley, Cafeteria Restaurant, Country Club, Drive-In Restaurant, Fast Food Restaurant, Fishing Party Boat, Full-Service Restaurant, Lounge, Physical Fitness, Private Club, Private Golf Course, Private Pool, Recreation Facilities, Restaurant, T.V. Station, Tavern, Telephone Exchange
	Theaters	Private Hall, Indoor Theater, Movie Theater, Organization Hall, Drive-In Theater
	Commercial	Generic grouping for items in Commercial category
Education	Grade Schools	Commercial School, Library, School, Elementary School
	Colleges/Universities	College, University
	Education	Generic grouping for items in Education category
Government	General Services	City Hall, Post Office, Government facility
	Emergency Response	Fire Station, Police Station
	Government	Generic grouping for items in Government category
Industrial	Heavy	Boiler Building, Cabinet Shop Mfg, Concrete Mfg, Door Mfg, Fabrication Shop, Heat Exchanger Mfg, Heavy Machine Shop, Lumber Mill, Metal Coatings Services, Metal Recycling, Pipe Threader Facility, Research Lab-Machine, Welding-Machine
	Light	Battery Mfg, Commercial Printing, Cooling Tower, Electronic Equip Mfg, Frame Shop, Furniture Mfg, Industrial Loading Dock, Instrument Mfg, Leather Goods Mfg, Locker Bldg, Maint Bldg-Mfg Facility, Newspaper Print Plant, Newspaper Sales Office, Office-Mfg Facility
	Food/Drugs/Chemicals	Chemical Laboratory, Chemical Plant Bonding, Chemical Plant, Chemical refinery, Detergent Mfg Facility, Feed Mill, Food Processor, Meat Packing, Oil Storage Tanks, Plastic Mfg
	Metals/Minerals Processing	Foundry, Refinery-Lead, Sand & Gravel, Sheet Metal
	High Technology	Data Center, Microchip Mfg
	Construction	Carpet Tile Flooring, Carpeting Service, Construction Co, Contractor Roofing, Contractor-Electric, Heating & Air Conditioning Service, Pier Drilling Co, Plumbing Co, Plumbing Services, Sandblasting Co, Water Well Service
	Industrial	Generic grouping for items in Industrial category
Religion	Churches and Other Non-profit Org.	Church, Civic Association
Single Family	Single Family Dwelling	One, two, or three story, with or without basement
Residential	Manuf. Housing	Mobile Home, Manufactured Home
	Multifamily Dwelling	Apartments, Condominium
	Temporary Lodging	Hotel, Motel
	Institutional Dormitory	Institutional Dormitory
	Nursing Home	Nursing Home, Rest Home
	Residential	Generic grouping for items in Residential category