Financial model: transforming impacts into change in CapEx/OpEx/revenue

[joemoorhouse]

For modelling the potential impact of physical climate risk on a company, we can split into steps:

1. Obtain the impacts of climate hazards (via an event or change in climate parameter) on company assets and operations.
2. Translate the impacts into changes in:

• Capital Expenditure (CapEx),
• Operating Expenses (OpEx),
• Revenue.

3. Model the effect of any mitigations, e.g. insurance.
4. Translate the result into changes in financial measures of interest.
   In step 3 the financial measures might be the change in EBITDA (Earnings before interest, taxes, depreciation and amortization), or more complex quantities such as probability of default (PD).

This issue is concerned with step 2. The assumption is that the physical effects of climate change can be captured through changes in these 3 quantities: CapEx/Opex/revenue. As examples:

CapEx is affected by: asset damage (damage to company assets)
OpEx is affected by: operating expenses (e.g. utilities, increased cooling needs
Revenue is affected by: operations downtime; operations efficiency reduction (e.g. productivity reduction)