Newsletter: Coronavirus and Climate Change

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we discuss the implications of the COVID-19 crisis for climate change and share a new Moody's report on scenario analysis.

COVID-19 and Climate: Multifaceted Impacts

427 Analysis - A Public Health Emergency with Dire Economic Consequences and Several Implications for Climate

The unprecedented global public health crisis from COVID-19 has led to fears of a global recession, but also presents a range of implications for climate change. While COVID-19’s immediate impacts include emissions reductions, the longer-term impacts on climate action and resilience-building are more complex. Likewise, COVID-19 may provide insight into how prepared communities are for the increasing frequency of disasters and how financial institutions can prepare for sudden disruptions. Four Twenty Seven's new analysis explores several of these impacts, outlining topics to watch as we strive to understand the long-term implications and ensure the safety of communities and businesses.

The analysis highlights that short-term emissions reductions may be followed by economic stimulus packages favoring polluting industries. Yet, as companies adapt to remote work, there is the potential for longer-term behavior shifts that help reduce emissions. Meanwhile, communities around the world face various levels of restrictions, with impacts on climate negotiations and research. The COVID-19 pandemic increases the risk of business disruptions and compounds the public health risks of extreme weather events, making businesses and communities more vulnerable to climate impacts. The crisis also underscores the need for preparedness. The ways policy-makers, businesses and individuals respond to today’s public health emergency and the resulting successes and failures may provide lessons for responding to other multifaceted disasters, applicable to extreme weather events and natural disasters. 
Read the Analysis
Moody's on Climate Scenario Analysis

Using Scenario Analysis to Assess Credit Impact of Climate Risks

Climate-driven extreme weather events and the transition to a low-carbon economy are expected to have material impacts on companies, with increasing significance for credit analysis. However, both physical and transition risks have a wide range of potential outcomes. In its new report, Climate scenarios vital to assess credit impact of carbon transition, physical risks, Moody’s Investors Service describes a conceptual approach to scenario analysis, leveraging Four Twenty Seven’s methodology for physical risks.

The transition risk approach is to explore sector-specific credit implications for two IEA emissions scenarios. For physical risk scenarios Moody’s will use data from Four Twenty Seven to provide a uniform starting point from which to explore the range of credit implications of different climate hazards across sectors. Since the climate takes years to fully respond to greenhouse gases in the atmosphere, in the near-term the uncertainty in physical outcomes is not driven by policy changes, but rather by scientific uncertainty within the climate models. By grouping the outcomes of climate models within a single RCP into low, medium and high tiers one can explore the range of potential severity in climate hazards such as extreme temperature and precipitation. Register for free to read the analysis:

Read the Report
Inside the Office at Four Twenty Seven

Meet Frontend Developer - Akiyo Marukawa

Four Twenty Seven welcomes Akiyo as Frontend Developer. Akiyo works on the climate risk application’s user interface, building out the platform and systems to serve a diverse client base. Previously, Akiyo developed web applications at the Lawrence Berkeley National Laboratory and has worked with Python and Flask on the backend. Her diverse background also includes process automation and systems engineering.

Four Twenty Seven is Here to Serve our Clients

As COVID-19 has led to widespread disruption in businesses and personal lives, Four Twenty Seven remains committed to ensuring the safety of our staff and clients while also continuing to provide the same data, analysis and client support that we are known for. Our business remains open globally, with teams in the U.S., Paris and Tokyo working remotely. Please do not hesitate to reach out to us via email or on our cell phones. 
Upcoming Events

An Update on Postponements and Cancellations:

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Four Twenty Seven sends a newsletter focused on bringing climate intelligence into economic and financial decision-making for investors, corporations and governments. Fill in the form below to join our mailing list. As data controller, we collect your email address with your consent in order to send you our newsletter. Four Twenty Seven will never share your mailing information with anyone and you may unsubscribe at any moment. Please read our Terms and Conditions.
 

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COVID-19 and Climate: Multifaceted Impacts

March 18, 2020 – 427 ANALYSIS.  The spread of the coronavirus (COVID-19) has created a global public health emergency and catalyzed an economic recession.  The crisis also has important implications for climate action and resilience-building. This analysis highlights several of these interacting factors.

The unprecedented global public health crisis from COVID-19 has led to a deteriorating global economic outlook, but  also presents a range of implications for climate change. While COVID-19’s immediate impacts include emissions reductions, the longer-term impacts on climate action and resilience-building are more complex. Likewise, COVID-19 may provide insight into how prepared communities are for the increasing frequency of disasters and how financial institutions can prepare for sudden disruptions. This article will explore several of these impacts, outlining topics to watch as we strive to understand the long-term implications and ensure the safety of communities and businesses.

COVID-19 and Emissions

The rapid spread of COVID-19 has led some of the world’s largest economies to grind to a halt as social distancing measures prohibit non-essential business. The resulting emissions reductions provide a small silver lining to this unprecedented global crisis. In mid-February China’s emissions were 25% lower than a few weeks prior and Italy’s nitrogen dioxide emissions have dropped significantly. However, these may be short-term victories for the planet.

There is much more uncertainty on long term effects. On the one hand, this period of disruption will likely be followed by economic stimulus efforts, providing credits to industries with large emissions, such as steel, cement, and airlines, driving a rapid rebound in emissions. On the other hand, experts note that there is potential for the outbreak to shift travel patterns for the long-term, leading to more telecommuting as companies get acclimated to remote work. There is potential for permanently behavior changes that would have long term impact on oil demand and emissions. Whether or not governments focus on promoting a rebound in traditional energy or use this as an opportunity to catalyze a systemic shift to reduce emissions could be a key determinant in the impact on long-term greenhouse gas emissions.

Setbacks to Climate Action

It is evident that in the short-term ambitious climate policies are not a priority, as the attention of citizens and legislators turns to safeguarding communities and economies from the multifaceted impacts of COVID-19. Numerous climate-related events have been canceled, and in-person negotiations planned ahead of COP-26 have been delayed through at least April. The U.K. changed its generous environmental budget allocations and Spain stopped all legislative activity, with implications for climate action. While the European Union has announced a continued commitment to its Green Deal, meant to make the European Union climate neutral by 2050, the news has gotten limited attention due to the circumstances.

As increasingly severe travel and gathering restrictions begin to have rippling impacts, ongoing climate research is disrupted, including arctic research expeditions and several NASA projects. These studies include research on the ocean-atmosphere heat exchange, seasonal hydrology in the Mississippi River, and thunderstorms across the U.S. While NASA does not expect the delays to be detrimental to the projects, delays may range from several months to over a year. This may challenge efforts to ensure that the most current science underpins resilience-building efforts and climate progress.

Lessons Learned in Preparedness

A global pandemic is a well-rehearsed scenario in risk management, and institutions that had prepared and thought through implications of such an occurrence are faring better than those with less preemptive planning. For example, last October banks in Hong Kong underwent a stress test that simulated a pandemic, cyberattack and telecom breakdown happening concurrently. Now facing an actual pandemic, some banks are grateful for additional preparedness measures they had implemented due to the stress test. The COVID-19 crisis may in turn lead banks, other businesses and governments to identify opportunities for additional preparedness measures for future risk.

Reduced Resilience

As communities around the world face various levels of restrictions and concern for large gatherings grow, supply chains are threatened and manufacturing grinds to a halt, vulnerability to climate impacts increases. If a devastating storm or wildfire forced residents from their homes into crowded evacuation centers, the typical damage, loss and public health costs would compound upon the danger and challenges already being faced due to COVID-19. Likewise, the costs of recovery from a climate disaster would be dire on top of the increasing economic uncertainty.

Similarly, as companies face the impacts of the pandemic, including adapting to remote work if possible, an extreme weather event would complicate their efforts. While office buildings and key facilities may be prepared with generators in case of power outages and water proofing for floods, business’ operations are now particularly dependent on public power and communication infrastructure, as well as the resilience of each employee’s home. In addition to the disruption if employees are ill, many businesses are more vulnerable to disruptions from climate hazards during this time, which in turn increases macroeconomic vulnerability. Of course, the pandemic itself has many multifaceted economic and business impacts.

Conclusion: Underscoring the Need for Resilience

COVID-19 has understandably pushed climate action to the back burner as the public health crisis unfolds and fears of a long-term economic recession are pressing. However, the ways policy-makers, business and individuals respond to today’s public health emergency and the resulting successes and failures may provide lessons for responding to other multifaceted disasters, applicable to extreme weather events and natural disasters. Likewise, the COVID-19 crisis may reinforce the value of preparedness for businesses and communities and help highlight opportunities to invest in adaptation and resilience.

 

Using Scenario Analysis to Assess Credit Impact of Climate Risks

Climate-driven extreme weather events and the transition to a low-carbon economy are expected to have material impacts on companies, with increasing significance for credit analysis. However, both physical and transition risks have a wide range of potential outcomes. To better understand the credit implications and prepare for climate risks it is important to assess the rage of possible outcomes for a given sector or company.

In its report, Climate scenarios vital to assess credit impact of carbon transition, physical risks, Moody’s Investors Service describes a conceptual approach to scenario analysis, leveraging Four Twenty Seven’s methodology for physical risks. The transition risk approach begins by assessing the sector-specific credit implications of national commitments to the Paris Agreement based on the IEA Stated Policies Scenario (STEPS). The second step is to assess the implications of a more ambitious transition scenario to see how firms may be affected by more rapid decarbonization.  This step leverages the IEA’s Sustainable Development Scenario.

For physical climate risk, Moody’s leverages Four Twenty Seven’s approach for exploring the range of potential outcomes in the next 30 years. It’s important to note that in the near-term the uncertainty in physical outcomes is not driven by policy changes, but rather by scientific uncertainty within the climate models. The climate takes a long time to fully respond to greenhouse gases in the atmosphere, so physical climate events in the next few decades will be driven by carbon dioxide that’s already been released. By grouping the outcomes of climate models within a single RCP into low, medium and high tiers one can explore the range of potential severity in climate hazards such as extreme temperature and precipitation. Moody’s will use data from Four Twenty Seven that follows this approach to provide a uniform starting point from which to explore the range of credit implications of different climate hazards across sectors.

Register for free to read the full report.

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To learn more about scenario analysis for physical climate risks read Four Twenty Seven’s paper, Demystifying Climate Scenario Analysis for Financial Stakeholders and check out solutions for investors, banks and corporations to manage their climate risk.

Newsletter: New On-Demand Climate Risk App

 

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we announce our new on-demand climate risk scoring application, discuss RCP 8.5 and highlight developments in climate risk disclosure.

In Focus: Four Twenty Seven Announces its On-demand Climate Risk Application

Score thousands of assets in minutes with Four Twenty Seven’s new on-demand physical climate risk application.

We're delighted to announce that our new on-demand climate risk scoring tool is now live! This application responds to the financial sector’s growing call for the integration of granular, forward-looking climate data into investment decisions and risk management practices. Users enter addresses and facility types to receive information on their assets’ exposure to floods, sea level rise, hurricanes & typhoons, heat stress and water stress to mid-century. Detailed facility scorecards include data on the underlying risk drivers for each hazard and users can toggle between maps and tables to identify regional trends and multi-hazard exposure. This tool informs due diligence, risk management, enhanced portfolio construction, resilience investment and pre-loan evaluations to support the integration of climate risk into financial decision-making across use cases. “We are excited to bring our on-demand physical climate risk application to the market. Our app provides access to sophisticated climate model outputs in easily understandable metrics with just a few clicks,” says Founder & CEO Emilie Mazzacurati. “Real-time access to forward-looking, location-specific data on climate risk enables investors, banks and corporations to manage their risk and invest in resilience.”
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Moody's ESG and Climate Risk Businesses

Moody's Announces Global Head of ESG and Climate Risk Businesses

Moody's Corporation announced yesterday that Andrea Blackman has been appointed Moody's Global Head of ESG and Climate Risk Businesses. Andrea comes from a leadership position in Moody's Analytics CreditView. In her new position Andrea will lead Moody's strategy and vision for long-term growth in line with market demands for ESG and climate risk services. Moody's ESG and climate risk affiliates, including Four Twenty Seven and Vigeo Eiris will be part of this new business unit. Learn more about Moody's broad ESG and Climate Risk offering here.
RCP 8.5 - Still a Valid Possibility

Extracting the Scientific Uncertainties from the Policy Uncertainties

An article published in Nature last month sparked confusion about the legitimacy of Representative Concentration Pathway (RCP) 8.5, but there are compelling reasons RCP 8.5 remains an important part of scenario analysis. The study's authors explain that the initial design of RCP 8.5 was to capture growing rates of coal production in China. They assert that since the rate of coal production has actually slowed, it's not appropriate to continue using this scenario as the "business-usual" scenario and rather it should be considered a highly unlikely extreme scenario. However, the article focuses on the policy drivers, rather than the scientific drivers, of warming. The authors do not explore the physical phenomenon, such as sudden release of methane (a powerful greenhouse gas) due to thawing of permafrost. This is one of several tipping points that could lead to RCP 8.5 outcomes by 2100, independent of how coal production evolves.

While the initial design of RCP 8.5 was intended to capture growing rates of coal production, it doesn’t mean the scenario can’t be a stand-in for other sources of emissions that could quickly accelerate due to tipping points. Bob Kopp, a climate scientist at Rutgers University, has previously pointed out on Twitter that "from a climate science perspective, RCP 8.5 is very useful, since we would like to know how models simulate a 5C world.”

It's important to note that under any scenario, we are committed to a certain amount of physical climate impacts to mid-century, regardless of RCP scenario. Temperature outcomes don't differ significantly under different RCP scenarios until after mid-century. For longer-term projections it is valuable to model impacts under several scenarios, such as RCP 4.5, RCP 7 (forthcoming in the latest generation of climate models) and RCP 8.5.
New Survey on the Quality of Climate Risk Reporting

Climate Risk Disclosures Lack Transparency

Companies tend to disclose more details on their exposure to transition risk than physical risk and disclosures still lack transparency on which models and assumptions companies use to assess risk, according to the recent European Financial Reporting Advisory Group report on How to Improve Climate-related Reporting. The report highlights that when firms approach disclosures solely from a compliance perspective, they miss an opportunity to genuinely identify their risk and improve their resilience. It also identifies best practices and current maturity of disclosures in line with the Task Force on Climate-related Financial Disclosures (TCFD) and the EU Non-financial Reporting Directive's non-binding guidelines on climate risk. The Climate Disclosure Standards Board also released an EU Environmental Reporting Handbook sharing examples of environmental and climate disclosures under the EU Non-Financial Reporting Directive.
Regulatory Action & Oversight on Climate Risk Disclosure

Australia and UK Each Announce Plans for New Disclosure Regulation

The Australian Prudential Regulation Authority joins regulators calling for climate stress tests, announcing that its banks will be required to conduct stress tests for climate risks under several scenarios. After a devastating bushfire season followed by damaging floods, regulators are increasing the urgency around implementing stress tests and plan to release more details within the next few weeks. Earlier this month the UK's Department for Work and Pensions announced its consideration of an amendment to the Pension Schemes Bill that would mandate that pensions disclose their approaches to climate change in line with the TCFD.

European Union Opens Public Consultation on Non-Financial Reporting Directive

Meanwhile the European Commission opened a public consultation on updates to its Non-Financial Reporting Directive. This is part of the EU's commitment to increasing sustainable investment in Europe under the European Green New Deal and the review will explore how adjusting disclosure guidelines can support these goals. Feedback is due by April 28.

UK's Financial Reporting Council to Review Climate Disclosures & Audits

Amid concerns that firms are not complying with increased regulations around climate risk disclosure, the UK's financial watch dog, the Financial Reporting Council, will review corporate disclosures and audits to ensure that they address reporting requirements. “Auditors have a responsibility to properly challenge management to assess and report the impact of climate change on their business,” FRC Chief Executive Jon Thompson said in a statement.
Financial Risks of Climate Change are Underpriced
Australia's bushfires are expected to reduce national GDP by 0.1-0.4 percentage points through this March. Meanwhile the UK confronts damaging floods, Europe had its warmest January on record and sea level rise threatens to inundate airports around the world. These are just a few of the many multifaceted impacts that climate change has on global economies. Recent commentaries published in Nature Energy discuss the global implications of climate change's potential impact on the energy sector, which drives much of the interconnected global economy. One commentary by UC Davis Professor Paul Griffin, highlights the particular exposure of this sector to physical climate risks, with fossil fuel infrastructure in the Gulf Coast and the exposure of California's utilities to wildfires, as noteworthy examples. Authors assert that if these risks continue to be underpriced, we risk a recession on par with the 2008 housing crisis.
Inside the Office at Four Twenty Seven

Meet Director, Financial Data Systems - Oren Israeli

Four Twenty Seven welcomes Oren as Director, Financial Data Systems. Oren leverages his 20 years of experience in the fintech industry to guide Four Twenty Seven’s product development agenda for financial and business data.

Oren is a strategic data and content expert, adept at launching and overseeing products and solutions to serve the top investment firms globally.

Upcoming Events

Join the Four Twenty Seven team at these events:

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Copyright © 2020 Four Twenty Seven, All rights reserved. Four Twenty Seven sends a newsletter focused on bringing climate intelligence into economic and financial decision-making for investors, corporations and governments. Fill in the form below to join our mailing list. As data controller, we collect your email address with your consent in order to send you our newsletter. Four Twenty Seven will never share your mailing information with anyone and you may unsubscribe at any moment. Please read our Terms and Conditions.Our mailing address is: Four Twenty Seven 2000 Hearst Ave Ste 304 Berkeley, CA 94709
   
 

Four Twenty Seven Announces its Physical Climate Risk Application

February 27, 2020 – BERKELEY, CA – Four Twenty Seven, an affiliate of Moody’s and the leading publisher of climate data for financial markets, today announces the release of a new on-demand climate risk scoring tool. This application responds to the financial sector’s growing call for the seamless integration of granular, forward-looking climate data into investment decisions and risk management practices.

Users are able to enter location and other data via an intuitive interface and immediately receive information on their assets’ exposure for floods, sea level rise, hurricanes & typhoons, heat stress and water stress to mid-century. The application allows users to browse and download detailed facility scorecards that include data on the underlying risk drivers for each hazard. The application also enables users to toggle between maps and tables to identify regional trends and multi-hazard exposure. Users can perform analyses for large volumes of locations via an API and integrate the outputs into downstream risk management and portfolio analysis applications.

As the material financial impacts of climate change become increasingly evident, understanding and preparing for climate risks is essential.  Real estate investors can use Four Twenty Seven’s physical climate risk app for due diligence and proactive risk management across their portfolio of properties. Portfolio managers can leverage the application to report climate risk exposure and enhance portfolio decision-making. Asset owners can evaluate long-term risk exposure and engage with corporations and managers to improve resilience. Banks can score thousands of locations at once to identify risk in commercial and residential lending portfolios. Corporations can identify risk hotspots and opportunities to build resilience in their global operations.

“We are excited to bring our on-demand physical climate risk application to the market.  Our app provides access to sophisticated climate model outputs in easily understandable metrics with just a few clicks,” says Four Twenty Seven’s  Founder & CEO, Emilie Mazzacurati. “Real-time access to forward-looking, location-specific data on climate risk enables investors, banks and corporations to manage their risk and invest in resilience.”

Learn more about the app or request a demo.

Download the Press Release.

Climate Change: An Economic Risk for Canadian Municipalities

Introduction

The planet has just finished its hottest decade on record, leaving municipalities and businesses wondering how best to prepare for the future. As climate change increases the frequency and intensity of both extreme weather events like storms and heat waves, and chronic stresses like drought and sea level rise, the past is no longer an accurate prediction of the present.

While Canada’s latitude and geography makes it less exposed to widespread threats such as heat stress and hurricanes, its exposure to water stress and floods, alongside its economic dependency on water-heavy industries such as extraction, refining and manufacturing, does present significant risks. From striving to keep their residents safe, to supporting regional businesses, maintaining economic prosperity and minimizing costs, there are many reasons that municipal leaders need to understand and prepare for climate impacts.

This article outlines how climate risk presents economic risks to municipalities, as well as the investors with assets in the jurisdictions, and describes case studies of economic risk exposure in Canadian cities.

Why it Matters

Climate change poses economic risks to municipalities by impacting key companies, reducing the tax base, and affecting the budget. When companies that make up significant portions of a municipality’s economy — by way of revenue, taxes and employment —are disrupted by climate change, this has negative implications for the municipality. If these events happen repeatedly, it’s likely that jobs and, potentially the population, will decline, reducing the municipality’s revenue from taxes.

For example, low snowfall and a record dry summer in 2013 and 2014 led to reduced hydropower generation in Canada’s Northwest Territories, with implications for businesses with high power demands such as manufacturing and mining. These industries make up significant portions of Canada’s economy and an increase in water stress is likely to have enduring impacts.

Extreme weather events also lead to increased costs for municipalities in the form of emergency relief and rebuilding. For example, in Spring 2019 thousands were evacuated during flooding in Eastern Canada due to high snow melt combined with heavy rainfall, with costs expected to be in the hundreds of millions. At the time there was relatively low overland flood insurance coverage, so there were significant uninsured costs. These events also disrupt transit infrastructure, with implications for commutes and regional business operations.

Increasing expenditures on emergency relief can have implications for municipalities’ other budget items, debt reserves and ultimately their ability to repay loans. Likewise, persistent regional disruptions can have material impacts on businesses with key assets in the area.

Read the full article at Public Sector Digest.

Newsletter: The Economic Costs of Wildfires

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we feature an analysis of the economic risks of wildfires, highlight a Moody's report on climate risk of US utilities and share recent action by central banks.

In Focus: Impacts of Australia's Bushfires

427 Analysis - What California's Wildfires May Foreshadow in Australia

As Australia’s bushfires rage on, questions arise on the long-term impacts on human health, biodiversity and the economy. Four Twenty Seven's newest analysis highlights lessons learned from the recovery from recent wildfires in California and how they may apply in Australia. While immediate economic impacts include emergency relief bills, business interruptions, costly loss of goods and reduction in tourism, the long-term impacts vary based on municipalities’ financial resources, economic make-up and preparedness.

The analysis discusses wide-ranging outcomes in real estate markets, ranging from Santa Rosa, CA's increasing housing costs and mini economic boom after the 2017 fires to Paradise, CA's transformation from a town of 26,000 to a town of 2,000 and nearby Chico's associated 20% population grown and real estate boom due to fire evacuees.

A municipality's ability to rebound after a fire is largely determined by insurance penetration, percent of housing stock lost and whether or not there was long-term emigration from the area. However, cities not themselves touched by flames are also affected, from evacuees to toxic smoke. Preparing for this new normal is challenging, with many considerations to balance. California's costly "Public Safety Power Shutoffs" in the Bay Area last fall highlight the progress that still needs to be made in developing effective preventative measures for wildfires. 
Read the Analysis
Utilities Exposed to Increasing Climate Risk

Moody's Investors Service Analysis - US Regulated Electric Utilities Face Varied Exposure to Climate Hazards

Moody's new analysis leverages Four Twenty Seven's physical climate risk data to explore the exposure of regulated electric utilities to climate hazards, finding that there is varying exposure to climate risk which may be mitigated by adaptation. Changing temperature and humidity trends can lead to drastic changes in energy demand, while higher temperatures can reduce production capacity. These hazards are particularly prevalent in the Midwest and in southern Florida. Water stress is typically credit-negative for electric utilities which depend on water for cooling. Utilities in California and the Colorado River region are particularly exposed to water stress. The report highlights the utilities most exposed to these and other hazards, discusses the implications for their credit and emphasizes the importance of resilience investments to mitigate these risks.
New Warnings on the Material Risks of Climate Change

Financial Actors and Corporate Leaders Urged to Take Climate Seriously

The World Economic Forum for the first time identified climate-related risks as the top five most likely business risks, and also cited these risks among the most impactful for 2020. Climate change was a key topic at the annual meeting of business leaders in Davos last week, underscoring the urgent need to prepare for its impacts. Meanwhile, the CEO of the world's largest asset manager, BlackRock, wrote to CEOs emphasizing the systemic threat posed by climate change and urging corporations to show they are prepared. Climate risk will be enormously disruptive to markets, with short-term price corrections and long-term reallocation of value. Better transparency will ensure risk is priced accurately, and will motivate investments in adaptation and resilience at the corporate and municipal level.

Climate Risk as a Credit Risk

While physical climate risks are expected to occur on a longer time frame than many credit maturities, recent extreme weather events have made banks and other financial actors increasingly aware of the need to factor physical climate risks into decision-making. In their article, "The Changing Climate of Credit Risk Management,"  Four Twenty Seven's Chief Development Officer, Frank Freitas and Moody's Head of Portfolio and Balance Sheet Research, Amnon Levy, also highlight that "as a rule, more than half a firm’s value can be attributed to cash flows beyond 20 or 30 years." This underscores the materiality of climate risks that become increasingly prominent in the next several years.
Central Banks Move on Climate Risk Analysis

Climate Change - The Green Swan

"Traditional backward-looking risk assessments and existing climate-economic models cannot anticipate accurately enough the form that climate-related risks will take. These include what we call 'green swan' risks: potentially extremely financially disruptive events that could be behind the next systemic financial crisis." The Bank for International Settlements in collaboration with the Banque de France, released a new book on climate change, financial stability & the role of central banks.

Bank of England Consultation Paper on Climate Risk Scenarios

The Bank of England announced plans to integrate transition and physical climate risk into its Biennial Exploratory Scenario exercise in 2021. Building on the climate risk stress test for insurers released last year, this exercise will apply to both banks and insurers in 2021. The Bank welcomes feedback on its approach by March 18, 2020.

The French Central Bank's Climate Risk Stress Tests

Earlier this month the Banque de France announced that it will release scenarios for climate risk stress tests for its banks and insurers in March and aggregated results will be shared in December. Governor François Villeroy de Galhau emphasized the goal of the stress tests is to identify the resilience of France's financial sector while also improving climate risk assessments.
Webinar: Climate Risk in Real Estate

Moody's Analytics REIS Network Webinar: Feb. 4 at 2pm EST. 

Join this live webinar to learn about the Moody’s REIS Network and Four Twenty Seven’s physical climate risk data for real estate. The REIS Network is an ecosystem of connected applications joining extensive real estate data sets with investment and risk assessment workflows. 
During this webinar, FourTwenty Seven Senior Analyst, Lindsay Ross, will provide a demo of Four Twenty Seven’s on-demand physical climate risk application. Register here.
Inside the Office at Four Twenty Seven

Meet Controller, Yang Jing

Four Twenty Seven welcomes Yang as Controller. Yang implements efficient processes and policies in compliance with US and international accounting standards and Moody’s accounting policies. She is a Senior Vice President in Accounting for Moody’s, where she works with business leaders to ensure compliance with SEC and international accounting regulations while providing near real-time financial data to enable executive decision-making. 

Join the Team! Four Twenty Seven is Hiring

There are several opportunities to join Four Twenty Seven's dynamic team in offices across the U.S. and Europe. See the open positions below and visit our Careers page for more information.
  • Climate Risk Analyst with expertise in translating applied climate change science for a wide range of stakeholders
  • Regional Sales Directors (North America and United Kingdom), with extensive experience selling and supporting data products and services for large commercial, financial and government institutions
Upcoming Events

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Four Twenty Seven sends a newsletter focused on bringing climate intelligence into economic and financial decision-making for investors, corporations and governments. Fill in the form below to join our mailing list. As data controller, we collect your email address with your consent in order to send you our newsletter. Four Twenty Seven will never share your mailing information with anyone and you may unsubscribe at any moment. Please read our Terms and Conditions.
 

Our mailing address is:
Four Twenty Seven
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Berkeley, CA 94709









Economic Impacts of Bushfires: What California’s Wildfires May Foreshadow in Australia

January 29, 2020 – 427 ANALYSIS. As Australia’s bushfires rage on, questions arise on the long-term impacts on human health, biodiversity and the economy. This analysis shares lessons learned from the recovery from recent wildfires in California to offer some pointers of what might happen when the bushfires finally subside. While immediate economic impacts include emergency relief bills, business interruptions, costly loss of goods and reduction in tourism, the long-term impacts vary based on municipalities’ financial resources, economic make-up and preparedness.

Real Estate Markets

Over the past three years wildfires have razed thousands of buildings across California, destroying multiple communities. The impacts on real estate markets varies depending on the share of properties destroyed in a local community, as well as insurance penetration. After five percent of Santa Rosa’s housing stock burned in 2017, the city experienced an increase in property prices and rents following the fire: displaced households needed new dwellings, construction workers and emergency relief officials needed housing and amenities, and local businesses found new clientele. Although an estimated 3,300 people left Sonoma County after the 2017 fires, in Santa Rosa, CA, rebuilding has occurred more rapidly than expected. The areas affected by the fires had relatively high insurance rates, and families were able to pay for the reconstruction of their houses. Irreplaceable personal items were lost, but the city experienced a mini-economic boom due to construction in the area.

In contrast, the city of Paradise went from 26,000 residents before the Camp Fire down to 2,000. More than one year later, only a handful of houses have been rebuilt, and many residents struggle with whether they should move back. Insurance penetration was much lower in Paradise, and many low-income households cannot afford to rebuild their lives there.

Aside from short-term shortages in housing stock, long-term impacts on real estate and local economies depend on two main factors: whether the area experienced a permanent or long-term population loss, and whether insurance companies continue to offer policies for the area. This phenomenon has also been at play after other climate-related events, such as when Hurricane Maria hit Puerto Rico. The storm led to a four percent decrease in the island’s population.

Impacts can also indirectly touch other communities near wildfires: the same Camp Fire that devastated Paradise narrowly missed the neighboring city of Chico, CA. While Paradise’s economy has yet to recover, within three months of the fire, Chico’s population grew by 20%, with the addition of about 20,000 people. While Chico became the nation’s hottest real estate market the month after the fire, it also missed relief funds offered to towns touched by flames. From a sewer system now tasked with transporting 600,000 more gallons per day, to the need for more police force and a higher hospital demand, a year after the event, the city struggled to accommodate a population the city planners hadn’t expected for a decade.

Business Impacts

In California, the biggest impact was on the utility sector. As power lines and electric equipment were found to have started the wildfires, the liability ultimately resulted in Pacific Gas & Electric’s (PG&E) bankruptcy, coined “the first climate-change bankruptcy.” In Australia fires are most often started by dry lightning so utilities are not so exposed to liability risk, but may still be exposed to significant costs from disruptions and repairs associated with wildfires.

The insurance sector is also very exposed. Merced Property and Casualty local insurance company went bankrupt after California’s Paradise fire. The company had USD23 million (AUD34 million) in assets and owed USD64 million (AUD94 million)  in liabilities after the fire, which the state of California took over after the company defaulted. Insurance claims for the bushfires have already reached around AU939 million (USD646 million). Australian insurance companies could face material losses, particularly those with concentrated portfolios of properties or companies in regions affected by the fires.

For example, insurer IAG is the primary insurer in New South Wales and is thus expected to face the most financial risk from the current fires. IAG and Suncorp have both temporarily stopped selling wildfire insurance in exposed areas of Australia, to prevent last-minute insurance purchases. The final bill may be absorbed by reinsurance companies, which also need to contend with multiple, costly events globally. Increased losses, even if they do not lead to a bankruptcy, can also open the door to liability. In 2019 insurance giant QBE saw a shareholder resolution regarding its lack of preparedness for climate impacts.

Beyond utilities and insurance, businesses across sectors face several short-term risks from wildfires, including business interruptions, labor shortages and reduced consumer activity due to evacuations or smoke which can affect urban centers not themselves touched by flames. Businesses may also face increased costs due to equipment and property damage or loss.  In the long term, recurring wildfires could decrease attractiveness of certain parts of Australia, which would reduce companies’ hiring pool and decrease tourism revenues.

Municipal Resources

Residents’ decisions to stay in a recovering area is largely affected by whether insurance companies choose to provide coverage or pull out after wildfires. This in turn, is a key factor in the viability of long-term development and the strength of cities’ tax bases. Faced with potential population loss, local governments may attempt to provide public insurance if private insurers leave a city or region, such as the National Flood Insurance Program (NFIP) in the U.S. However, as seen with the NFIP, this mechanism can lead to unsustainable development and a moral hazard, encouraging unwise economic decisions by shifting risks from the individual buying property, to the government and therefore the public.

The desire to help an area rebuild needs to be balanced against a forward-looking perspective on the new realities of climate change. As temperatures increase, droughts become more common and wildfire conditions become more frequent, climate change will make some areas no longer suitable for human settlement. In California some insurers have stopped offering wildfire insurance to certain fire-prone counties. After careful deliberation the state recommended the creation of a Wildfire Victims Fund to help pay claims to wildfire victims, while also supporting wildfire mitigation. However, this comes alongside recommendations to require home and community fire risk reduction standards, establish a development fee for new construction in the wildland-urban interface, and mandate that new development must be reachable by firefighters within a maximum amount of time.

The impact of wildfires on a city’s credit rating may also affect its economic prospects after an event. Issuers in Sonoma County were not downgraded after the 2017 fires, because of their strong credit quality, insurance coverage, commitment to rebuilding and long-term economic viability. The County has an emergency reserve fund, which helped make up the shortfall in property taxes for destroyed properties, assuaging any concern from rating agencies on their balance sheet post-disaster.

However, a Moody’s credit analyst noted that smaller, less well-resourced communities like those burned during the 2018 fires in rural Shasta County, will face less rapid rebuilding, which means less revenue and more difficulty repaying their debt. This highlights the need for proactive preparedness efforts, particularly as those municipalities in particular need of financing may see credit declines if they experience wildfire loss.

Hidden Costs: Health Impacts

Image Credit: NASA Earth Observatory/Aqua/MODIS

Wildfires’ impacts on human health can be long-lasting and widespread. While Paradise, CA burned down in 2018 San Francisco, about 200 miles away, had the worst air quality in the world. This led to school closures and business disruptions during the event, but its impacts are still being felt. Three to five months after Sonoma County’s 2017 fires there was a 20% increase in emergency room visits for breathing challenges, as well as a 20% increase in visits for cardiac problems three months after those fires. While populations are advised to stay inside to shelter from smoke, many evacuation victims do not have that option.

Suburban wildfire smoke is particularly dangerous because burning gas stations, buildings, cars and other man-made materials releases many toxins, along with tiny PM 2.5 particles. The long-term impacts of inhaling countless chemicals are not yet fully understood but will likely exacerbate the well-documented damage to lungs and hearts caused by PM 2.5 particles. As public health costs increase, municipalities’ expenses may rise and human productivity may decline, posing additional risk to economies and communities made fragile by wildfire.

Preparing for a New Normal

Recent attempts at risk mitigation highlight the challenges to improve prevention. In October and November 2019 over a million Californian’s lost power during multiple PG&E “Public Safety Power Shutoffs,” meant to reduce the risk of wildfire during “red flag” conditions, with high winds and warm temperatures. With less than a day’s notice in some cases, residents, businesses and schools around San Francisco’s Bay Area spent days without power. Elderly and those relying on medical equipment faced life threatening hardship, local businesses experienced significant loss, long-term, high-profile research was disrupted, and costs of the event were expected to be around USD2 billion (AUD3 billion).

Australia and California used to share firefighting resources since they didn’t need them at the same time, and firefighting contractors built their businesses around staggered fire seasons. Now, Australia and California fight fires concurrently, business models must shift and municipalities must reallocate resources.

As climate change increases the occurrences of wildfires across the globe, policymakers and communities will need to balance these considerations and invest in adaptation and resilience to limit the impact of future fires.

This article was also published on The Fifth Estate and Which-50.

Natalie Ambrosio contributed to this analysis.

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Four Twenty Seven works with investors and businesses to provide portfolio hotpot screenings and real time due diligence with site-specific data on heat stress, water stress and other climate risks. Wildfire analytics are forthcoming. Contact us for more detailed analysis and site-specific data on climate risk exposure and its economic impacts.

Newsletter: Scenario Analysis for Physical Climate Risks

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we feature a report on scenario analysis for physical climate risks, share technical elements of climate risk assessments and highlight new research on sea level rise.

In Focus: Scenario Analysis for
Physical Climate Risks

427 Report: Demystifying Scenario Analysis for Financial Stakeholders

Scenario analysis is an essential yet challenging component of understanding and preparing for the impacts of climate change on assets, markets and economies. Many climate impacts are already locked in to mid-century, so when focusing on the next few decades scenario analysis should focus on the scientific phenomenon driving uncertainty, rather than the climate policies which have a greater impact over the longer term. Four Twenty Seven's new report, Demystifying Climate Scenario Analysis for Financial Stakeholders, explores which impacts are already locked in, identifies how Representative Concentration Pathway (RCP) scenarios fit into the conversation, and describes an approach to setting up scenario analysis for near-term physical climate risks.
 
Our atmosphere will continue to warm for many decades even if we stop emitting carbon dioxide tomorrow.  The oceans will continue to rise, heat waves will become more severe and droughts will intensify. For example, the most water stressed areas  are anticipated to experience reductions in dry season rainfall equivalent to the two decades surrounding the American dust bowl. This report outlines an approach called percentile-based analysis, which allows users to explore the range of potential outcomes based on climate model outputs within a single RCP.
 
Read the Report
Technical Drivers of
Climate Risk Assessments

Leveraging the Cloud for Rapid Climate Risk Assessments

"Providing location-specific risk assessments requires accessing and processing the best climate data available. Climate data poses processing challenges due to the raw file size of climate model outputs, where a single file can be hundreds of megabytes or more, and an entire dataset can be anywhere from tens of terabytes to multiple petabytes." Four Twenty Seven Senior Data Analyst, Colin Gannon, writes about leveraging Amazon Web Services (AWS) for data storage and processing.

The Next Generation of Climate Models

Forty-nine modeling organizations are working on the next generation of climate models, known as Coupled Model Intercomparison Projects, or CMIP 6. Some of these models have already been released, but others are still forthcoming. CMIP 6 explores a larger range of potential futures and released models tend to project more warming than previous climate models. Although CMIP 6 is behind schedule, the Intergovernmental Panel on Climate Change's Sixth Assessment Report plans to incorporate these updated models into its analysis. 
Sea Level Rise - What's at Stake?

Global Vulnerability to Sea Level Rise Worse than Previously Understood

Many global coastlines are lower than previously known, meaning that hundreds of millions more people than expected are vulnerable to sea level rise, according to recent research by non-profit Climate Central. Leveraging a new digital elevation model, Climate Central found that by mid-century "land currently home to 300 million people will fall below the elevation of an average annual coastal flood." While scientists continue to explore the timing and implications around ice sheet collapse, this new research provides improved understanding of global coastal elevations and the potential for dire impacts on economies and communities. 

The space industry is particularly vulnerable to sea level rise. There is little redundancy built in to the industry and the Kennedy Space Center and Cape Canaveral Air Force Station are both exposed to significant coastal flooding. "Complex 39A is estimated to face a 14% annual risk of flooding next year and it’s projected to flood at least once a year on average during the 2060s unless additional measures are taken to protect it according to Climate Central's analysis. By 2100, parts of the launch site could experience near monthly flooding." NASA is building a 17ft high sand dune to protect the launchpads from the rising ocean, but experts wonder if this is a meaningful solution. 
Inside the Office at Four Twenty Seven

Meet Senior Software Engineer, Alix Herrmann 

Four Twenty Seven welcomes Alix, who leverages over 25 years of experience in software engineering to expand Four Twenty Seven’s climate risk scoring capabilities. Previously, Alix developed big data analytics for financial market trading at Instinet. She also has experience building neural network compilers, developing DSP-oriented mathematical libraries and creating ground-based radar signal processing pipelines.

Join the Team! Four Twenty Seven is Hiring

There are several opportunities to join Four Twenty Seven's dynamic team in offices across the U.S. and Europe. See the open positions below and visit our Careers page for more information.
  • Climate Risk Analyst with expertise in translating applied climate change science for a wide range of stakeholders
  • Regional Sales Directors (North America and United Kingdom), with extensive experience selling and supporting data products and services for large commercial, financial and government institutions
  • Director of Financial Data Systems with significant experience in the development and management of financial data processing, storage and retrieval
Upcoming Events

Join the Four Twenty Seven team at these events:

  • Dec 4 - 5 – RI New York 2019, New York, NY: Stop by Four Twenty Seven's booth to meet the team and hear Global Director of Client Services, Yoon Kim, speak about climate risk stress tests. Senior Analyst, Lindsay Ross, and Editor, Natalie Ambrosio, will host Four Twenty Seven's booth.
  • Dec 10 – Sustainatopia, Sunnyvale, CA: Natalie Ambrosio will speak on integrating physical climate risk into investment strategies.
  • Dec 9 - 12 AGU Fall Meeting 2019, San Francisco, CA: Director of Analytics, Nik Steinberg, and Senior Data Analysts, Josh Turner and Colin Gannon, will attend.
  • Jan 6 - Jan 9NCSE 2020 Annual Conference, Washington, DC: Yoon Kim and Lindsay Ross will speak about cross-sector resilience-building and resilient infrastructure, respectively.
  • Jan 12 - Jan 16 2020 AMS Meeting, Boston, MA: Josh Turner will attend.
  • Jan 27 –  Cleantech Forum, San Francisco, CA: Natalie Ambrosio will speak.
  • Feb 10 - 12 – Americatalyst 2020: Entropy, Dallas, TX: Director of Analytics, Nik Steinberg, will speak.
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Four Twenty Seven sends a newsletter focused on bringing climate intelligence into economic and financial decision-making for investors, corporations and governments. Fill in the form below to join our mailing list. As data controller, we collect your email address with your consent in order to send you our newsletter. Four Twenty Seven will never share your mailing information with anyone and you may unsubscribe at any moment. Please read our Terms and Conditions.
 

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Demystifying Climate Scenario Analysis for Financial Stakeholders

December 4, 2019 – 427 REPORT. Scenario analysis is an essential yet challenging component of understanding and preparing for the impacts of climate change on assets, markets and economies. When focusing on the short term, the warming and related impacts we have already committed to calls for scenarios that are decoupled from economic and policy activities and instead focus on the impacts that are already locked in. This report explores which impacts are already locked in, identifies how Representative Concentration Pathway (RCP) scenarios fit into the conversation, and describes an approach to setting up scenario analysis for near-term physical climate risks.

Download the report.

As the effects of climate change increasingly threaten financial stability, investors and regulators are seeking to understand what impacts lie ahead, and calling for an increase in physical climate risk assessment and disclosure in line with the Task Force on Climate-related Financial Disclosures (TCFD). To assess the scale of financial risk posed by physical climate change it is important to quantify risks under different climate scenarios. How will changes in extreme weather patterns, longer droughts and rising seas differ under various scenarios? Answering these questions through scenario analysis helps uncover the range of risks, allowing investors to identify assets and markets that are more likely to become stranded over time and to begin developing forward-looking resilience strategies. However, science-driven, decision-useful scenario analysis poses many challenges for businesses and financial stakeholders today, due to complex feedback loops, varying timescales, and multiple interacting factors that ultimately determine how global climate change manifests.

 

Figure 2. Distribution of daily extreme temperature changes in 2030-2040, expressed as a percent change, relative to a baseline of 1975-2005 under RCP 8.5. This map shows statistically downscaled global climate models averaged together, for this time frame and scenario. NASA Earth Exchange Global Daily Downscaled Projections statistically downscales climate model outputs to a ~25 kilometer resolution (see full details here) White areas are excluded because they lack potential for significant economic activity.

This new report, Demystifying Climate Scenario Analysis for Financial Stakeholders, explores which physical impacts are already locked in, identifies how Representative Concentration Pathway (RCP) scenarios apply, and describes an approach to setting up scenario analysis for near-term physical climate risks. Scenario analysis is often approached from the perspective of transition risk, where policy developments and greenhouse gas (GHG) emission targets are the key drivers of risk pathways over the near-term, in the next 10 to 30 years. Physical risk, however, requires a different approach.  Impacts over the coming decades are largely locked in, making the emissions scenarios less relevant. Unlike transition risk, GHG emission pathways play a minimal role in the behavior of the near-term climate and GHG emission pathways only begin to meaningfully influence global temperatures near mid-century. The uncertainty in physical climate risks in the near-term is driven by uncertainty in physical processes, rather than in policy decisions.

For organizations looking to construct physical climate risk scenarios for risk management and strategy purposes, it is critical to understand the scientific phenomena driving our plausible climate futures. This report outlines an approach called percentile-based analysis, which allows users to explore the range of potential outcomes based on climate model outputs within a single RCP. This offers a flexible, data-driven approach, suitable for portfolio-level screenings, reporting, and in some cases, direct engagement with asset managers.

Key Takeaways:

  • Quantifying climate risks under different scenarios is a key element in understanding how physical climate risks pose financial risks.
  • Scenario analysis is often approached from the perspective of transition risk, where policy developments and greenhouse gas emission targets are the key drivers of risk pathways in the next 10 to 30 years. However, physical climate impacts over the coming decades are largely locked in, so physical risk requires a different approach.
  • Even if we stopped emitting carbon dioxide tomorrow, many physical climate impacts, such as increasing temperatures, more severe droughts, and rising sea levels, would already be locked in because of the time carbon dioxide stays in the atmosphere and the time it takes the atmosphere to respond.
  • The uncertainty in how physical climate risks may manifest in the next few decades is driven by model uncertainty, which should therefore be the focus of scenario analysis for physical climate risks in the near-term.
  • Percentile-based analysis offers a flexible, data-driven approach, suitable for portfolio-level screenings, reporting, and in some cases, direct engagement with asset managers.

Download the report.

Download the press release.