July 29, 2019 – 427 FACTSHEET. Regulation on climate risk in Europe is likely to have a rippling effect across markets globally. There has been key legislation in the past few months, with more action on the agenda. Staying up-to-date on these developments will provide early indications of regulatory action to come. This factsheet on regulatory developments in the EU provides key background to the EU’s sustainable finance agenda, outlines key actions and highlights upcoming dates to remember.
Since establishing the High-Level Expert Group on Sustainable Finance (HLEG) in 2016, the European Union (EU) has positioned itself as a leader in sustainable finance. It has made rapid progress on integrating climate change into its financial sector, simultaneously addressing it from several angles, including risk disclosure, green bond labels, a taxonomy for adaptation and mitigation, and risk management oversight directives. As global financial actors operate, and are regulated, in Europe, EU regulations are likely to propel a development in best practices for addressing climate risk that reaches beyond the EU. Likewise, regulators and financial actors across the world are watching carefully as EU regulation may influence their own action. This factsheet, Financial Climate Risk Regulation in the European Union, summarizes the EU’s stance on the financial risk of climate change, notes key regulatory players and highlights recent and upcoming regulatory action applicable to financial markets.
July 29, 2019 – 427 FACTSHEET. In 2015 France laid the groundwork for legislating climate risk disclosure with Article 173 of its Energy Transition Law, mandating that publicly traded companies and asset managers report on their physical and transition risks from climate change. Building on its track record as an early mover, France’s financial regulators are now actively involved in national and international endeavors to frame climate risk as a financial risk and determine the most effective response. Staying up-to-date on these developments will provide early indications of regulatory action to come. This factsheet on regulatory developments in France provides background on France’s sustainable finance agenda, outlines key actions and highlights upcoming dates to remember.
France’s Art. 173 helped build support for the Taskforce on Climate-related Financial Disclosures recommendations, prompted firms to begin disclosing climate-related risks early and set an example for other nations considering regulation on climate risk disclosure. Since this landmark legislation, French financial regulators have become engaged on addressing financial risks from climate change and the Banque de France was a co-founder and provides the Secretariat for the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), which is focused on propelling the transition to a low-carbon and sustainable economy. By providing the Secretariat for the NGSF, the Banque de France identifies itself as a key player in international efforts to address climate risk. This factsheet, Financial Climate Risk Regulation in France, summarizes France’s stance on the financial risk of climate change, notes key regulatory players and highlights recent and upcoming regulatory action applicable to financial markets.
July 29, 2019 – 427 FACTSHEET. The Bank of England’s views on climate risk provide an indication of how the broader financial sector will likely approach the issue. The Bank propels this conversation by framing issues and convening stakeholders around the challenges and uncertainties of climate risk. With the integration of climate change into its insurance stress tests, the Prudential Regulatory Authority (PRA) has shown that the Bank’s declarations are starting to influence regulatory requirements. Staying up-to-date on these developments will provide early indications of regulatory action to come. This factsheet on regulatory developments in the United Kingdom (UK) provides background on the Bank of England’s approach to climate risk, outlines key actions and highlights upcoming dates to remember.
The Bank of England has been on the forefront of acknowledging climate change as a material financial risk since before it was commonly discussed in the financial sector. Its Governor Mark Carney coined the term the “tragedy of the horizon” in 2015 referring to the economic risks of climate change. Since then, the Bank has become known for emphasizing climate change as an urgent threat to financial stability and financial regulation in the UK is beginning to reflect this stance. Paying close attention to developing perspectives at the Bank will help prepare financial actors for future regulatory changes to come. This factsheet, Financial Climate Risk Regulation in the United Kingdom, summarizes the UK’s stance on the financial risk of climate change, notes key declarations and highlights recent and upcoming action applicable to financial markets.
Why do climate risks matter for real assets and how can we invest in a more resilient future? There is a growing need to ensure that infrastructure assets and real estate are built to withstand the increasingly severe weather events we experience in a changing climate. Four Twenty Seven Strategic Advisor, Josh Sawislak, discusses how different types of uncertainty will influence physical climate impacts and transition risk outcomes, and how asset design can consider these impacts. Innovating in climate resilience is essential to reduce risk management costs, but it also provides economic opportunities around job creation and product development.
Four Twenty Seven offers real asset screenings and data on climate risk in real estate to inform climate risk mitigation and investments in resilience. Read our paper on Climate Risk, Real Estate, and the Bottom Line or our blogs on scenario analysis for physical climate risk to learn more about these topics.
The TCFD Status Report published early June 2019 reiterates the need for corporations and financial institutions to perform scenario analysis in a context of uncertainty over climate risk. It notes that while about 56% of companies use scenario analysis, only 33% perform scenario analysis for physical risk. Even fewer firms (43% of those using scenario analysis) disclose their assumptions and findings. The report contains useful case studies, but most focus on transition risk.
Yet a growing number of corporations and financial institutions recognize the need to integrate physical risk into scenario analysis and to develop resilience strategies that address imminent challenges from climate impacts. For example, the most recent IPCC report illustrating the impact of 1.5˚C increase in global temperatures on mean temperatures, extreme temperatures, extreme precipitation and sea levels shows that there will be significant implications for economies even with a 1.5˚C increase in global temperatures. This is still a best case scenario compared to impacts of 2˚C or 2.5˚C warming.
Scenario analysis for physical risk is fundamentally different from transition risk in its challenges and assumptions. This blog series provides our current reflections on how corporations and financial institutions can integrate physical climate risk into scenario analysis. This first blog presents the Foundations, focusing on important characteristics of climate science that affect how climate data can be used to inform scenario analysis for economic and financial risk. The next blog focuses on Equity Markets, with concrete examples of how available data can inform financial stakeholders ready to start putting scenario analysis into action. A forthcoming post will discuss scenario analysis at the asset level for real asset investments and corporate facilities.
The physical impacts of climate change encompass a range of direct and indirect hazards caused or exacerbated by the concentration of greenhouse gases in the atmosphere. Previous publications such as Advancing TFCD Guidance for Physical Risks and Opportunities, for which Four Twenty Seven was a lead author, provide background on these hazards as they pertain to corporate value chains and economic activities. Further information is also available in Cicero’s excellent report, Shades of Climate Risk. Categorizing climate risk for investors.
Rapid developments in atmospheric and climate science over the past 30 years enable us to understand how these physical hazards will evolve over time due to climate change. Sophisticated global climate models project expected changes in key physical phenomena affected by greenhouse gas (GHG) concentration: heat, humidity, precipitation, ocean temperature, ocean acidification, etc. Like any other models, climate models have limitations in their accuracy and ability to correctly simulate complex and interrelated phenomena. However, it is worth noting that since 1973 models have been consistently successful in projecting within the range of warming that we have experienced in the past twenty years. More details on climate data and uncertainties from global climate models can be found in our report, Using Climate Data.
The Bad News: Impacts Are Locked In
Global climate models project different possible outcomes using scenarios called Representative Concentration Pathways (RCPs). RCP scenarios capture differing GHG emissions trajectories based on a representation of plausible global policy outcomes, without specifying the details of the underlying policies that could generate this outcome. These scenarios show that GHG emissions generated over the coming decades will influence the severity of impacts in the long-term, but also that we are already committed to some impacts through 2100 and beyond.
This is particularly noticeable over the “short term.” When looking at the next 10 to 20 years, projections for temperature and other physical hazards do not present significant differences under different emissions scenarios (Fig 1). This is due to the massive inertia of the Earth’s systems, and the life expectancy of the stock of greenhouse gases already in the atmosphere. To put it simply, significantly reducing GHG emissions is akin to applying the brakes on a rapidly moving truck. It won’t stop instantaneously. Even if we were to stop emitting GHG altogether, climate change would persist. In the words of the Intergovernmental Panel On Climate Change (IPCC), climate change “represents a substantial multi-century commitment created by the past, present, and future emissions of CO2.”
This is by no mean an invitation to give up on reducing GHG emissions. Quite the opposite. Emission reductions are critical to curbing long term impacts and avoiding irreversible effects to our environment (Fig. 2). But for organizations looking at climate data and scenario analysis for risk management and strategy, with a focus on the coming decade(s), this is a critical fact to understand.
Aside from RCP-driven scenarios, there is, of course, a broad range of possible increases in temperature (and other climate hazards) even when looking at the 2030-2040 time frame. These plausible differences are not so much policy-driven as science-driven, demonstrating the different possible responses from the Earth’s systems to the existing stock of GHG.
These differences have significant implications for businesses and investors. For example, a model of sea level rise developed in 2018 incorporates accelerated rates of melting and recent advancements in modelling ice-cliff dynamics to capture extreme risk of coastal flooding. The model shows the Atlantic rising by 1.2m (3.9ft) by 2060 on the Florida coastline, which would equate to widespread flooding of coastal properties with potential domino effects on real estate prices across the state (Fig 3). The ‘intermediate’ scenario, however, most often used for planning, predicts only a 55cm (1.8ft) rise in water levels. While reducing GHG emissions does reduce the risk of more extreme sea level rise millennia into the future, year after year, scientists find that the Antarctic is warming faster than anybody predicted, and there is increasing concern that the process of ice sheet melt may be too far advanced to be stopped.
Thus, performing scenario analysis where the key variable is GHG emission reduction targets may not be an accurate representation of the range of possible outcomes for the near future. Rather, looking at high and low warming projections across a large set of models to understand the range of potential outcomes (independent of the underlying RCP scenario) is a better way to understand potential risk. In other words, physical risks over the next 10-20 years are largely independent from policy decisions and emission pathways, and a rapid, orderly, effective transition to a low-carbon economy could still come with massive physical impacts as these processes are already under way, fueled by the past 150 years of GHG emissions.
The Worse News: Tipping Points
Another challenge is that climate scientists are not currently able to model certain possible impacts from climate change, commonly known as “tipping points.” Tipping points is a catch-all term for a wide range of phenomena that may accelerate feedbacks due to climate change, though the timing or probability of their manifestation is currently not well understood. The phenomena are known as tipping points because past a certain threshold, they may not be reversible, even with a dramatic reduction in GHG emissions. Tipping points of most concern to the scientific community are presented in this report from the Environmental Defense Fund.
Some tipping points catalyze “feedback loops” which can worsen and dramatically accelerate climate change beyond human control. Such is the case, for example, with melting ice sheets, which would not only lead to catastrophic sea level rise, but would also further heat up the planet as the poles’ albedo (reflectivity) is reduced after the ice disappears. Thawing permafrost could lead to massive amounts of methane, a particularly powerful GHG, to be released from the frozen tundra into the atmosphere (in addition to many direct impacts for local communities, infrastructure and ecosystems in the region) (Fig. 4).
Tipping points further reinforce uncertainty about severity and timing of these extreme impacts and the limitations of using RCP scenarios to understand the range of outcomes for physical risk.
Another source of uncertainty for physical climate impacts are knock-on effects, or ‘indirect hazards,’ from the primary expression of global warming (rising temperature and humidity), ranging from biodiversity losses and ecosystem collapses, human health impacts, impacts on crop yields, pests and soil, impacts on human society, increased violence, and rates of war and migration, etc. (Fig 5)
These indirect or second-order hazards are as relevant as first-order impacts to understand the implications of physical climate change on economic outcomes, but they’re not captured by RCP scenarios and many require stand-alone models that cannot easily be integrated into one clean set of scenarios.
Scenario analysis is often approached from the perspective of transition risk, where policy developments and GHG emission targets are the key drivers of risk pathways over the next 10 to 30 years. Physical risk, however, requires a different approach. Impacts over the coming decades are largely locked-in and are only marginally influenced by GHG emission pathways. In contrast, uncertainty looms large regarding how severe these physical hazards will be, and exploring a range of possible outcomes for physical risk, including looking at tail-risks, provides important insights for risk management and financial analysis. In summary, the current state of scientific knowledge and the nature of the Earth’s atmospheric systems call for the developments of scenarios that are decoupled from transition/policy scenarios and instead focused on key scientific drivers of uncertainty and risks that may be experienced regardless of policy decisions over the short to medium term (2020-2040).
While efforts to develop easy-to-use tools for physical risk analysis are nascent, organizations can still extract important insights from climate data and leverage estimates of risk exposure across portfolios. Our next blog in this series provides examples of how financial institutions can leverage data on physical risk exposure in equities to inform some early scenario analysis in equity markets.
Four Twenty Seven’s data products and portfolio analytics support risk reporting and enable investors and businesses to understand their exposure to physical climate risks across asset classes.
I couldn’t seem to turn on the TV this week without being inundated with coverage of the ongoing floods and tornadoes in the Midwest. The dearth of other content is not just due the doldrums of the sports and political seasons — things are genuinely getting worse on the disaster front. Much worse.
The horrible scenes of twister damaged homes across the Midwest and continuing flooding along the entire Mississippi River merely displaced the stories on recovery efforts from the Hurricanes Maria, Irma, Harvey, Michael as well as the Camp Fire and other drought inflamed disasters in California and the Western U.S.
The Fourth National Climate Assessment predicts more frequent and severe storms, longer and more severe droughts, and the continued and likely accelerating rise of sea levels. All of this will only add to the challenges faced by states, counties and municipalities that are on the front lines of these disasters and to the taxpayers who foot the bill for the hundreds of billions in recovery and rebuilding costs.
The Government Accountability Office found that the increasing frequency and scale of disasters as well as the federal government’s role in funding recovery and flood and crop insurance, make climate disaster a high risk for federal fiscal exposure. GAO reported that the federal recovery efforts alone have cost nearly half a trillion dollars since 2005. To put that spending in context, it represents approximately $4,000 out of the pockets of every American family. Congress will either have to put our nation further into debt or shift the burden to our taxpayers. Addressing climate change is not only an environmental imperative, it’s critical to our nation’s economic security.
It is clear that we have learned a lot about how to respond to, and recover from, major disasters. In the past 40 years. federal agencies, state and local governments, and the extensive network of volunteer organizations such as the American Red Cross, Habitat for Humanity and the Cajun Navy deserve much credit for their growing ability to save lives and help rebuild communities.
It is also clear that just getting better at response and recovery will keep us on the defensive, always playing catch-up. More importantly, the focus and investment post-disaster does little to keep us safe in the first place. We have to retire the old approach that we can just come in after the storm or fire and rebuild — even if we rebuild stronger. Ask anyone who lost their home, business, community or especially a loved one to one of these disasters. They will tell you that as appreciative as they are for the world-class support from governments and volunteers, it’s small comfort for the trauma and years of personal recovery they face. We need to get ahead of the curve by investing in resilient communities and infrastructure so fewer families have to live in devastation.
Congress is beginning to address this. While some members seemed locked in a partisan fight that is keeping funding from storm and fire ravaged communities in Texas, Florida, Puerto Rico, and California, Congress did add a program in the 2018 Disaster Recovery Reform Act that shines a ray of hope on efforts to be more proactive in disaster mitigation. The creation of a National Public Infrastructure Pre-Disaster Mitigation fund, which FEMA plans to implement through a new program called Building Resilient Infrastructure and Communities allows FEMA to invest in communities before a disaster strikes. Research by the National Institute of Building Sciences found that just building to the current resilient building codes returns 11 times the cost of the initial investment. FEMA’s new program will allow several hundred million dollars in resilient investments to move forward each year without having to run the congressional appropriations gauntlet, but this is really just a small start.
FEMA’s new pre-disaster fund represents only six cents for every dollar spent on reactive recovery. We need to help communities rebuild, but we also need to be serious about investing to make our communities safe from the coming storms, fires, and other climate threats. While construction to current resilient building codes is the right answer for new construction, it doesn’t address the vast balance of structures built on codes that are old and don’t address the new science and technology of climate resilience. We need to invest in fixing or replacing our failing infrastructure and ensuring that all new construction is resilient to future risks — or we will face this problem all over again.
This doesn’t mean that the federal government alone shoulders the entire responsibility. A successful resilience strategy will only work if we bring both the public and the private sectors into the fight. Resilient building codes are one example, but we also need to value and incentivize resilient investments for everyone.
There is a silver lining to our climate challenges — economic growth. Americans are very good at innovating and building and we can leverage our need to be more resilient by growing the economy with good resilient and sustainable jobs. Some of these jobs are found in building, upgrading and maintaining our new and existing infrastructure to make it resilient to the increasing risks from a climate-impacted world.
Not only can we put Americans to work building our resilient future, we can take the lessons we learn in that effort and export it to the rest of the world. This is an approach that works for all Americans and provides a strong economic as well as environmental future for people in all parts of our nation and the world.
This is what we did to become world leaders in democracy, agriculture, manufacturing and technology in the previous centuries, and we can do it with climate in the 21st century. Climate change is real and addressing it is literally an opportunity we can’t afford to ignore.
This story was first published on The Hill.
What does the future hold?
New research on sea level rise emphasizes the potential for dire changes over the course of the century. Recent satellite data suggests that warming water is causing East Antarctica to melt more quickly than previously thought and a study released in early May found that almost a quarter of West Antarctica’s ice is thinning, with its largest glaciers shrinking five times faster than in 1992. A study based on expert opinion found that there is the possibility of sea levels rising by 2 meters (6.5ft) under an extreme scenario of 5˚C global temperature increase. This would mean an area of land as big as Libya would be lost, and up to 2.5% of the population globally could be displaced.
Extreme scenarios of sea level rise will have severe impacts on our cities and economies. Sea level rise is happening today to a lesser extent; however it is already having tangible impacts on real estate values. This means increasing costs for property owners and tenants, but it also has far-reaching market impacts on access to and cost of insurance, fluctuations in market values and potential increase in local taxes to fund adaptation efforts.
Of all U.S. states, Florida is expected to experience the greatest consequences of sea level rise. Between 1960 and 2015, sea levels along the Florida coast rose by 10-15 cm (4-6 in), and the range of projections vary wide looking a few decades out, with projections ranging from 33 to 122cm (13-48 in) by 2060.
Widespread flooding risk in Florida
65,000 homes in Florida worth $35 billion are expected to be underwater or impacted daily by high tides in 2040. From soaring insurance premiums and increasing risk of disclosure to declining property value and diminishing tax revenue, sea level rise is already challenging property owners, investors and banks. Among other impacts, the value of single-family homes in Miami-Dade County that are exposed to sea level rise declined by about $465 million between 2005 and 2016.
Furthermore, climate change is predicted to increase the number of strong hurricanes in the region. These stronger storms will combine with sea level rise to exacerbate the impacts of extreme floods. Storm surge flooding damages buildings and landscaping, destroys merchandise, and can also have wide-reaching economic impacts due to damaged power and transportation infrastructure.
Last but not least, tidal flooding, also called “nuisance” or “sunny day” flooding increased from 1.3 to 3 days per year in the Southeast from 2000-2015. By the end of the century tidal flooding could happen daily. Even with no rainfall, these floods have significant impacts – halting traffic, overburdening drainage systems and damaging infrastructure.
Investors and businesses have a responsibility to understand these risks: using best available science to measure exposure to sea level rise and other flood risks, getting informed on adaptation efforts by local governments, and engaging with local industry associations or other groups to promote further investments in resilience.
Four Twenty Seven works with investors to provide portfolio hotpot screenings and real time due diligence with site-specific data on sea level rise and other climate risks. Contact us for more detailed analysis and site-specific data on sea level rise exposure and detailed analysis of local jurisdictions’ response.