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By David Gadd, Group Climate Change Director, Legal & General
What are some physical and transition risks for organizations and how can these be managed?
The physical and transitional risks will vary depending on the business model of the financial institution. For insurers in the life sector, typically, the most material transition risk will be for the organizations asset portfolio, particularly if they have material exposures in high carbon sectors of the economy where the most radical change is required to achieve net zero. The interesting challenge is to identify which companies will embrace the challenge of net zero and evolve their business model to find new profit opportunities (e.g. utility companies moving to renewable energy generation), as opposed to those that are slow to adapt and may be exposed in fast changing market when the world realises it needs to move faster.
Physical risk is more likely to impact firms property and other real asset exposures (either through their direct ownership of these assets or if they provide security to mortgage or other lending), than their operations, particularly if they have long duration asset exposures. For non-life insurers physical risk and the viability of continuing to insure high carbon sectors will have growing importance.