A new way to assess physical climate risks in today’s portfolios

With climate change risks intensifying, there’s more scrutiny than ever over the long-term value of investments. Asset managers are under pressure from both investors and regulators to identify, manage and disclose climate change risks. But there’s a problem. A lack of forward-looking data and methodologies means asset managers are struggling to assess physical risks of their portfolio.

This critical issue was the inspiration for Finastra hackathon winner PRAAM: Physical Risk Analytics for Asset Managers. Integrated into Fusion Invest, Finastra’s front-to-back investment management solution, PRAAM provides both portfolio and asset-level analytics. This enables asset managers to evaluate and monitor physical climate risks alongside traditional financial risk metrics, report and disclose their actions, whilst supporting long-term investment decisions.

PRAAM is of particular value in today’s context, when Assets Under Management (AUM) are shifting to alternatives such as private equity, real estate and infrastructure – asset classes not covered by large climate analytics providers. It is the result of a partnership between analytics developer XDI and IMPACTplus, a start-up that helps financial institutions implement climate change and sustainability regulations in origination, risk management and disclosures.

XDI’s analytics are scientifically reviewed and use award-winning technology coupled with powerful climate risk engines. Its forward-looking models provide detailed, high-resolution analytics for different asset types and climate hazards. Analytics available include portfolio heatmaps of high-risk areas and a variety of climate hazards such as flooding, damage projections up to 2100, VaR and materials vulnerability assessments.

Fusion Invest’s open architecture makes it easy to integrate any third-party analytics, such as those from XDI. This allows portfolio managers to have both financial and climate risks in one single view, thus facilitating decision making and reporting.

In short, PRAAM gives asset managers a powerful tool to protect the long-term value of their investments, which is especially relevant as climate risks are growing in scale and complexity.