A location’s "Impact Coefficient" is determined by two factors: Relative Risk Profile and Climate Sensitivity.
The "Relative Risk Profile" measures the deviation of a location’s risk from the national mean. It is calculated by taking the Z-score (number of standard deviations by which an event is above or below the mean value) of a location against the risk scores of all locations in the country. The more positive the Z-score, the more negative the physical climate impact. Conversely, the more negative the Z-score, the more positive the physical climate impact.
Climate Sensitivity measures the estimated accumulative economic damage as a percentage of GDP from future climate hazards. Based on existing scientific studies on the damage of climate change on local GDP1, each type of climate hazard costs roughly 1.2% of GDP per +1°C in average temperature.
We apply this value to calculate the climate sensitivity of a location in the year 2050, linearly interpolating downward to 0% in 2020. In the year 2050, if a location is exposed to a certain climate risk (with a score larger than 0), its sensitivity is increased by 1.2%, reflecting a -1.2% impact for each risk category. Thus, if a location is exposed to all 6 climate perils, its climate sensitivity is 6 * -1.2% = -7.2%. Similarly, a location exposed to 5 risks will have a climate sensitivity of 5 * -1.2% = -6%.
Putting the two factors together, if the Relative Risk Profile of a location has a Z-score of 2 with an estimated Climate Sensitivity of -6%, the Location Impact Coefficient for this location in the year 2050 will be (-6) * 2 = -12%. Therefore, if the estimated value of a property is forecasted to be $10M in 2050, an impact of –12% yields a total reduction of $10M * 12% = $1.2M in asset value, leading to a risk-adjusted value of $8.8M.