The worse risks aren’t the hidden ones – they are the mispriced ones
The Science Based Targets Network can help uncover hidden risks, as well as price them.
Source: SBTN
Warren Buffett made his fortune by understanding and properly pricing risks. When Berkshire Hathaway takes a financial hit, Buffett almost always acknowledges the problem was not missing a risk; it was mispricing it.
In 1997 he wrote: “A pernicious aspect of catastrophe insurance, however, makes it likely that mispricing, even of a severe variety, will not be discovered for a very long time.” We can replace the phrase “catastrophe insurance” with “climate change” and the statement is still valid.
When you look through a company’s annual reports you can see they recognise the financial risks of climate issues. Most of these risks aren’t hidden, but are they properly priced?
Here is where the Science Based Targets can help. The purpose of the SBTs is not to put a euro sign on these risks, but rather to identify, measure and mitigate specific pressures, including land/sea use change, resource exploitation, pollution, climate change and invasives species.
The SBT process is extremely valuable in other ways, such as complying with the Corporate Sustainability Reporting Directive (CSRD) and pricing risks. The SBT process encourages companies to integrate climate-related issues into risk management and decision-making.
These risks can include:
- Higher cost of capital
- Stranded legacy assets or business models
- Higher insurance costs and higher chance of catastrophic events
- Reputational damage
- Loss of access to raw materials or critical resources
- Litigation
It is difficult to accurately price these risks, but it is nearly impossible to price them without first objectively measuring at-risk resources or processes, such as through the SBT process.
In the SBTN’s excellent introductory module they have a slide which explains how their process can help a company identify risks. They should also emphasise how SBTs can be the first step in pricing those risks. There is a lot of added value from the SBT process which isn’t immediately apparent.