Understanding climate risk intelligence: how we build long-term business resilience

Climate risk intelligence reveals how physical hazards like flooding or extreme heat might affect organizations, and how the transition to a low-carbon economy could impact entire sectors. These insights are becoming essential for decision-making across financial and insurance markets, informing underwriting, investments, and strategic planning. This is why at Allianz Trade we have been developing climate risk intelligence in a way that informs how we assess credit risk, how we support our customers’ decarbonization objectives, and how we make progress on our own Net Zero commitment.

What is climate risk intelligence, and how does it inform credit assessments?

Our Group Sustainability Office (GSO) has identified two categories of climate-related risks facing organizations today. ‘Physical risks’ describes the direct impact on businesses of climate events, such as wildfires or floods. ‘Transition risks’ are the economic changes that follow the shift to a low-carbon economy: regulation changes, technological disruption and evolving market expectations are just some of the destabilizing forces affecting businesses today. Understanding the interplay between physical risks and transition risks is fundamental to evaluating whether a business will thrive or struggle.

At Allianz Trade, we protect our clients by providing credit assessments and grades on their customers – it’s a core part of our offer. We compile these using financial data, as well as insight into a company’s operations, strategy, and goals. This can be non-proprietary, as in publicly available, or proprietary and obtained directly from companies by our global network of analysts who are in contact with companies daily. Overall, we have instant access to data on 289 million corporates worldwide so we can help our clients make the best business decisions.

In light of the physical and transition risks associated with climate change, we are enhancing our credit assessment process with insight into companies’ climate resilience. We are doing this by using a framework co-developed between Group Sustainability Office and our Credit Assessment team. It consists of four different workstreams:

1. Creating a series of questionnaires covering detected vulnerabilities to transition and physical risks ready for consultation of the credit analysts community. For our top industries, the analyst has an exhaustive list of areas to explore related to technology, geographic location, policy, legal and market risks, connecting the dots between physical and transition risks and the traditional levers of financial analysis, i.e. demand, profitability, liquidity and business environment. Recent internal surveys showed that almost one-third of credit analysts were already using this tool just after its release.
2. Initiating a series of trainings on low carbon industries by internal and external experts in order to help credit and commercial underwriters in their understanding of the inherent risks of these new emerging technologies
3. Creating a sustainability regulation risk monitoring tool with Ecofact dedicated to credit analysts for estimating credit impact of sustainability-related regulatory initiatives across the world
4. Developing tools with which to analyze non-financial determinants of credit risk

Sector risk analysis related to climate risk was also analyzed by our economic research team by integrating the NGFS scenarios (Network for Greening the Financial System) into traditional financial analysis. It was demonstrated that corporate valuations depend on both physical and transition risks, revealing both vulnerabilities and opportunities across sectors. For example, it has shown that technology and healthcare² companies in the US and Europe are well-positioned to weather climate transitions. Energy companies, meanwhile, face ever-increasing challenges from rising costs and tightening regulations. Strandet assets, i.e. assets or investments losing value due to changes related to higher environmental standards, play a decisive role in this area.

Delivering on climate commitments to give confidence in a better tomorrow

Climate risk intelligence is key to demystifying climate commitments and making clear, concrete steps towards decarbonization. Without this information, companies can be left vulnerable to environmental and economic changes, but also may miss important opportunities. By identifying low-carbon technology-related businesses, clients and prospects, we can better engage in a collective effort for decarbonization via the creation of new sustainability-driven insurance products and the support of the transition economy. Better understanding the interconnected dimension of our carbon footprint allows us to better accompany the Net-Zero transformation of global value chains.