May 22, 2018 – 427 REPORT. Cities and counties are bearing the costs of the sixteen billion-dollar disasters in the United States in 2017, raising concerns over the resilience of municipalities to the impacts of climate change and associated financial shocks. Credit rating agencies are increasingly integrating physical climate risk into their municipal rating criteria; however, they lack concrete metrics that compare and assess which municipalities are exposed to climate impacts. Four Twenty Seven’s new local climate risk scores provide comparable, forward-looking data to fill this gap. This report discusses our approach to measuring exposure to climate hazards and highlights cities and counties most exposed to the impacts of climate change.
Following Hurricane Harvey, Moody’s downgraded Port Arthur from A1 to A2 due to its “weak liquidity position that is exposed to additional financial obligations from the recent hurricane damage, that are above and beyond the city’s regular scope of operations.” (Moody’s). This follows the recent trend of rating agencies increasingly considering climate change and past extreme weather events in their evaluations of U.S. cities. While this consideration is an important step, their evaluations could be better informed by incorporating forward-looking comparable data on the climate risks that impact these municipalities.
Featuring Four Twenty Seven’s new local level exposure scores, our report Assessing Exposure to Climate Change in U.S. Munis, shares key findings from our scoring of all 3,143 U.S. counties and the 761 cities over 50,000 in population. The research results are based on Four Twenty Seven’s market-leading expertise in five major climate categories, including cyclones/hurricanes, sea level rise, extreme rainfall, heat stress, and water stress. “This new dataset provides a comprehensive suite of risk scores to better inform rating and pricing decisions,” says Emilie Mazzacurati, Founder & CEO. “We believe that our analytics will be very helpful for all market participants, including muni bond investors, local governments, and ratings agencies.”
This report highlights specific cities and counties most exposed to each climate hazard and also discusses regional trends and economic sensitivities that may exacerbate a muni’s vulnerability. “Climate risk is increasingly a part of our credit analysis for municipal issuers across the country,” said Andrew Teras, senior analyst at Breckinridge Capital Advisors. “The climate risk scores developed by Four Twenty Seven provide a comparable way to evaluate climate exposure and will give us another factor for assessing our investment universe.”
April 25, 2018 – 427 TECHNICAL BRIEF. Financial institutions, corporations, and governments increasingly strive to identify and respond to risks driven by physical climate impacts. Understanding the risks posed by climate change for facilities or infrastructure assets starts with conducting a risk assessment, which requires an understanding of the physical impacts of climate change. However, climate data in its raw form is difficult to integrate into enterprise risk management, financial risk modelling processes, and capital planning. This primer provides a brief introduction to climate models and data from a business or government perspective.
The first of several reports explaining the data and climate hazards analyzed in Four Twenty Seven’s equity risk scores and portfolio analytics, Using Climate Data unpacks the process through which raw climate data is transformed into usable metrics, such as future temperature projections, to help financial, corporate and government users productively incorporate climate-based analytics into their workflows. Beginning by explaining what a global climate model is, the report explains climate data’s format, computational choices to hedge uncertainty and resources for aggregated climate projections tailored to specific audiences.
Climate change poses multifaceted physical risks for infrastructure investors, affecting revenue, maintenance costs, asset value and liability. According to the New Climate Economy report, global demand for new infrastructure investment could be over US$90 trillion between 2015 and 2017. It is becoming increasingly clear that climate change must be considered in all infrastructure investment and construction.
Four Twenty Seven, in collaboration with our partners Acclimatise and Climate Finance Advisers, published a “Lenders’ Guide for Considering Climate Risk in Infrastructure Investments” to explain the ways in which physical climate risks might affect key financial aspects of prospective infrastructure investments.
The guide begins with a discussion of climate risk, acknowledging that climate change can also open opportunities such as improving resource efficiency, building resilience and developing new products. It provides a framework for questioning how revenues, costs, and assets can be linked to potential project vulnerability arising from climate hazards.
Revenues: Climate change can cause operational disruptions that lead to a decrease in business activities and thus decreased revenue. For example, higher temperatures alter airplanes’ aerodynamic performance and lead to a need for longer runways. In the face of consistently higher temperatures, airlines may seek airports with longer runways, shifting revenue from those that cannot provide the necessary facilities.
Costs/Expenditures: Extreme weather events can cause service disruptions, but can also damage infrastructure, requiring additional unplanned repair costs. For example, storms often lead to downed power lines which disrupts services but also necessitates that companies spend time and money to return the power lines to operating conditions.
Assets: Physical climate impacts can decrease value of tangible assets by damaging infrastructure and potentially shortening its lifetime. Intangible assets can be negatively impacted by damages to brand image and reputation through repeated service disruptions.
Liabilities: Climate change is likely to pose increasing liability risk as disclosure and preparation requirements become more widespread. As infrastructure is damaged and regulations evolve, companies may face increased insurance premiums and costs associated with retrofitting infrastructure and ensuring compliance.
Capital and Financing: As expenditures increase in the face of extreme weather events, debt is also likely to increase. Likewise, as operations and revenues are impacted and asset values decrease, capital raising may become more difficult.
The guide also draws attention to the potential opportunities emerging from resilience-oriented investments in infrastructure. There are both physical and financial strategies that can be leveraged to manage climate-related risks, such as replacing copper cables with more resilient fiber-optic ones and creating larger debt service and maintenance reserves.
The guide includes ten illustrative “snapshots” describing climate change considerations in the example sub-industries of Gas and Oil Transport and Storage; Power Transmission and Distribution; Wind-Based Power Distribution; Telecommunications; Data Centers; Commercial Real Estate; Healthcare; and Sport and Entertainment. Each snapshot includes a description of the sub-sector, an estimation of its global potential market, examples of observed impacts on specific assets, and potential financial impacts from six climate-related hazards: temperature, sea-level rise, precipitation & flood, storms, drought and water stress.
Commercial real-estate, for example, refers to properties used only for business purposes and includes office spaces, restaurants, hotels, stores, gas stations and others. By 2030 this market is expected to exceed US $1 trillion per annum compared to $450 billion per annum in 2012. Climate impacts for this sub-sector include hazard-specific risks and also include the general risk factor of climate-driven migration which drives shifts in supply and demand in the real estate market.
As heat waves increase in frequency, people will likely seek refuge in cool public buildings, leading to increasing property values for those places such as shopping malls that provide air-conditioned spaces for community members. Increasing frequency and intensity of storms may damage commercial infrastructure, leading to recovery costs and increased insurance costs. Real estate managers may have to make additional investments in water treatment facilities to ensure the viability of their assets in regions faced with decreased water availability. An example of the financial impacts of climate change on this sub-sector can be seen in Houston after Hurricane Harvey. After the hurricane hit Texas in August 2017, approximately 27% of Houston commercial real estate was impacted by flooding and these 12,000 properties were worth about US$55 billion.
For more guidance on investing for resilience, read the Planning and Investing for a Resilient California guidance document and the GARI Investor Guide to Physical Climate Risk and Resilience.
On September 29th, Mark Carney, recently appointed Governor of the Bank of England, gave a speech on the risks of climate change to financial stability at a Lloyd’s insurance event. Carney referred to climate change as the “tragedy of the horizon,” citing outcomes like the impact of rising seas on the world’s coastlines and infrastructure as one of the largest risks to financial stability around the world. Carney cited three major risks to financial stability from climate change.
First risk: “The impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade.”
In the context of sea level rise, the impacts of climate change on infrastructure and property along the world’s coastlines are readily apparent. Carney referenced a Lloyd’s study that “estimated that the 20 cm rise in sea-level at the tip of Manhattan since the 1950’s, when all other factors are held constant, increased insured losses from Superstorm Sandy by 30 percent in New York alone.”
Rising seas already compounded the impact of hurricane Sandy, knocking out power grids, flooding subways and causing financial damages estimated to be between $30 billion to $50 Billion. Under current projections of sea level rise up to a 6.6 foot increase is possible by 2100; and as oceans rise so will the physical impact of superstorms.
Second risk: “The impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible. Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest”
Carney suggests that those who suffer the majority of asset loss from climate change could look to hold polluters, governments or private firms accountable for risk exposure.
Nestle is now being sued for the use of water in Southern California and their impact on the California drought. Lawsuits against corporations, governments or private land owners who have shifted the true costs of their behavior onto the commons have the potential to be held accountable for their behavior as extreme weather events become more common and impactful.
Liability for the loss of property and adverse health affects due to climate change are not only held by private firms, but also my American taxpayers. In Alaska, the town of Kivalina is already being displaced by sea level rise and melting sea ice. In response the Obama administration has proposed $50.4 Million in federal aid for relocation costs.
Third risk: “The financial risks which could result from the process of adjustment towards a lower-carbon economy. Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.”
What Carney is getting at here is the fact that an assessment of liability will change the valuation of an asset. This includes what is commonly referred to as “stranded assets”, in particular fossil fuel reserves — and the plants that process and burn them — will become useless is a world focused on carbon-free energy. But it also includes a much greater class of assets that could become stranded, for example real estate on properties that experience frequent and increasing flooding. After the world has seen enough primary property loss and secondary liability loss due to impacts like rising seas our markets will compensate by devaluing at risk assets.
Climate science has been warning us for decades that the impacts of unbridled emissions are on the horizon, but what Carney adds to the conversation is the translation of the risks into financial terms. As acceptance and information about climate change increase so too does the desire to find innovative solutions that build resilience into how we do business and navigate the risks. Being informed about the potential impact of sea level rise and extreme weather events can help industry and government adapt and keep out of the deep waters of rising seas.
By Sam Irvine
On October 3rd, the Obama administration declared a state of emergency in South Carolina in the wake of Hurricane Joaquin, which dumped a foot and a half of rain in approximately 24 hours on the Carolinas, caused floods from New Jersey to Georgia and sunk cargo ship El Faro and its crew. While the Charleston and many other cities were battling the floods, with a cost estimated at over $1 billion, France was also experiencing unexpected flash floods near Nice, which caused 17 death. Landslides in Guatemala also claimed the lives of 186 people and were catalyzed by a strengthened El Nino. When considering each event in isolation, it may be possible to overlook the connection between the storms intensity and climate change. Together these extreme weather events are indicative of a larger trend; while we can’t predict where the next big storms will hit, we do know they are becoming more frequent and stronger.
These serve as yet another wakeup call to remind us that we are already experiencing the impacts of climate change, and that our communities, cities and business need to be prepared for the stormy weather. But, as humans, do we require a crisis to mobilize us into action? Or can the same results be sparked through other methods without the loss of life, property and human well-being?
Climate scientists have warned for years of how climate change will increase the intensity of hurricanes, and the Southeast U.S. is a highly exposed region for such hurricanes. Yet many of us act as if the storm was always going to hit next door, and fail to apply our rational understanding of risk to better preparedness.
At Four Twenty Seven, we created Climate War Games to put executives and decision-makers into the context of the increasing risks presented by climate change. Gaming and simulation provide teachable moments, which we can apply to our real world behavior.
In game play, we assign the players to companies and task them with running their business while getting through a number of rounds in which they experience unpredictable extreme weather events. We break down uncertainty by type of event and their varying impacts to supply chains and infrastructure that can be damaged by extreme precipitation or temperature.
While the specific outcomes are unpredictable, because they hinge on a dice roll, the risk profile of each player’s hand is clearly laid out, so as to enable teams to understand their company’s risk profile and adopt the most cost-effective portfolio of adaptation measures. The winner is the company that earns the most profit – and limits its losses — that way, game play reflects the same challenges organizations face in the real world.
The game emulates the escalating risk of climate volatility and simulates through dice rolls the increasing likelihood of “black swan events” with low probability of occurrence, but high consequences and subsequent costs.
Players have to make the same tough choices they would in the real business world between saving or spending, and we see teams approach the choices in both creative and conventional ways. While there are different ways to play, the real value of the game comes from knowing that the risks actually create business opportunities, and acting through an informed strategy pays out over the long run. The game also helps participants reflect upon the potential human implications of their risk mitigation strategy.
Confronting the reality of what climate change is going to bring upon us can feel overwhelming at times. By providing a safe environment with clearly delineated risk profiles, and challenging players to make decisions and take action in a context of uncertainty, we help break down mental and cultural barriers to corporate adaptation, and set participants on track to build climate resilience. We do not know where the next storm will hit, but we can and should prepare to the best of our ability using climate science and probabilities.
Learn more about Climate War Games and our training courses offering here.
By: Sam Irvine