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.

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

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
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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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Copyright © 2019 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
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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.

 

Four Twenty Seven Opens a Tokyo Office |フォー・トゥエンティー・セブンが東京オフィスを開設

OCTOBER 23, 2019 – BERKELEY, CA – Four Twenty Seven announces opening of Tokyo office and hires senior country representative.

Four Twenty Seven, an affiliate of Moody’s and the leading publisher of climate data for financial markets, is pleased to announce the opening of its office in Tokyo, Japan. Four Twenty Seven’s Tokyo office opens as investors and businesses in Japan and across the Asia-Pacific region face increasing market pressure to assess and disclose the risks physical climate hazards pose to their investments.

In conjunction with the opening of its office in Tokyo, Four Twenty Seven is also pleased to announce that Toshi Matsumae will serve as its Director of Japan. Toshi brings 30 years of experience leading financial services organizations in Japan. He leverages this expertise to lead Four Twenty Seven’s effort to provide climate risk screening to investors, asset managers, banks and corporations striving to understand their risk to physical climate hazards throughout Japan.

“We’ve seen growing demand from Japanese markets over the past year for transparency around exposure to physical climate risks in corporate assets, investment portfolios and in credit portfolios,” says Emilie Mazzacurati, Four Twenty Seven’s Founder and CEO.  “Four Twenty Seven’s on-the-ground presence in Japan will allow us to bring asset-level risk data to support this demand and inform global resilience-building.”

“The opening of Four Twenty Seven’s Tokyo office comes at a time when the financial sector is calling for better integration of forward-looking climate data into decision-making,” says Toshi Matsumae, Four Twenty Seven’s Director of Japan. “I look forward to working with investors and businesses throughout Asia to better understand and serve the needs of this evolving market.”

Download the Press Release.


2019年10月23日 –カルフォルニア、バークレー拠点の フォー・トゥエンティー・セブンが東京オフィスを開設

ムーディーズの関連会社で、気候変動に関するデータを金融業界に提供する業界のリーダー的存在のフォー・トゥエンティー・セブンは、この度東京オフィスの開設を発表した。これは日本及びアジア太平洋地域の投資家及び事業主が、彼らの投資物件と運用資産に対して日増しに増大する気候変動に伴う災害リスクと、それに対処するためのリスク評価及びディスクロージャーへの市場の要望に対応したものだ。

東京オフィスの開設に伴い、フォー・トゥエンティー・セブンは、この度、松前俊顕を日本事業の代表として起用することになった。松前は金融情報サービス業界での30年余りの経験を活かし、日本の投資家、資産運用会社、銀行、あるいは一般企業が今日抱える気候変動からの物理的リスクに対する科学的な理解と対応が可能となる気候リスクスクリーニングを提供していくことになる。

フォー・トゥエンティー・セブンの創業者で社長のエミリー・マザキュラティは「この一年日本の市場からは、企業資産、運用ポートフォリオ、債券ポートフォリオの気候変動の物理的リスクへの感応度に関する透明性を求める声が日増しに拡大してきた。」とコメントしている。さらに、「日本の市場でのフォー・トゥエンティー・セブンの存在で、銘柄レベルで提供される予想リスクデータにより、こうした要望に答え、他の主要地域での事例を伝えることができる。」と語っている。

さらに松前は「この度のフォー・トゥエンティー・セブンの東京オフィス開設は、まさに今日の金融業界からの要望のタイミングにマッチしている。日本及びアジア地域にて、気候変動インパクトに対するアプローチが確立されていなかった従来の状況から、気候データと科学的な対応が統合した意思決定に導かれる一助にフォー・トゥエンティー・セブンがなれることを希望する。」と付け加えている。

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Real Estate Climate Risks: How Will Europe be Impacted?

Introduction: Increasingly Severe Impacts

Extreme weather events driven by climate change are having severe impacts that are increasingly being seen across Europe. Between 1980 and 2017, weather and climate-related extremes caused approximately €453 billion of total economic losses. Among those losses, it is estimated that only 35% were insured. Climate change has a substantial impact on real estate markets. It can directly damage individual buildings, decrease their value or even lead to assets being rendered unusable. In Europe, floods from extreme rainfall and sea level rise represent a major threat to real estate markets. As climate change leads to more frequent and severe extreme weather events it is increasingly important for real estate investors to understand the climate risk exposure of key assets and prepare for impacts.

Assessing Exposure to Climate Change in Real Estate

To provide a view on physical climate-related risk for the real estate industry in Europe, Four Twenty Seven used a proprietary model that leverages global climate data to provide asset-level risk assessments to physical climate hazards. We analyzed the exposure of 20,816 retail spaces and 16,188 offices in Four Twenty Seven’s database of one million corporate facilities. The real estate sites are owned by over 900 listed companies, out of the 2,000 companies included in our database. We used our climate risk scoring methodology to assess each facility’s exposure to climate hazards, with a focus on floods, sea level rise and heat stress looking out to mid-century.  Flood risk and sea level rise are assessed with a precision of 90x90m. Heat stress is evaluated at a 25x25km scale.

We found that 19% of retail spaces and 16% of offices are exposed to floods and/or sea level rise, with floods representing the highest risk for both types of asset. Heat stress also presents significant risk to these facilities.

Inland Floods: A Major Threat for a Warming Europe

Floods are one of the most prominent risks for real estate in Europe. In most European cities, climate change is increasing the frequency and the intensity of heavy precipitation events, threatening urban infrastructure and increasing flooding.

Floods can inundate facilities directly, leading to disrupted operations and equipment damage and can also have indirect impacts on operations by damaging regional transportation, power and communication infrastructure. Fluvial and pluvial floods can increase costs associated with maintenance and repair of buildings, lead to higher insurance premiums, and reduce revenue due to business disruptions.

Figure 1. Retail spaces’ exposure to floods. A dot represents a city and its size represents the number of retail spaces in the city. The dot’s color represents the percentage of retail spaces exposed to floods, with red representing the highest percentage. Source: Four Twenty Seven

Floods also have wider impacts on real estate markets. For example, studies looking at the residential market in Germany and Finland show that properties in flood-prone areas are sold at lower prices compared to properties without flood risk.

Retail spaces in the United Kingdom are particularly exposed to flood risks, based on our analysis (Fig. 1). Climate change is likely to contribute to more events like the winter storms of 2015-2016 which resulted in around £1.6 billion of total economic damages in the United Kingdom. Over 20% of Edinburgh, Glasgow and Sheffield’s retail assets are located in flood-prone areas.

Figure 2. Retail spaces exposed to flooding in the Greater Glasgow area. A dot represents a retail space and the dot’s color represents its flood risk. Source: Four Twenty Seven

The amount of rain during heavy precipitation events in Glasgow (Fig. 2) is projected to double by 2030-2040 compared to 1975-2005. London is also exposed to surface, fluvial and tidal floods. In our analysis, London is the city with the highest number of retail spaces in flood-prone areas (Table 1). Its most exposed sites have a 20% probability of being flooded each year, and a 1% probability that the flood depth will be higher than one meter, based on Four Twenty Seven’s data.

Without adaptation measures at the site-level and the city-level, these assets will likely suffer from increasing property damages and potential business disruptions due to more frequent and severe rainstorms. For example, floods can reduce business at retail sites such as clothing stores when consumers may prefer to stay home or be prohibited from shopping by inundated infrastructure. Likewise, grocery stores and other retail sites may experience supply chain disruptions or damaged goods with impacts on sales and revenues.

England, Scotland, Wales and Northern Ireland all have a Climate Change Adaptation Program. The English program pledges to construct additional hard defenses and to support communities and businesses in increasing their properties’ and investments’ resilience.

Table 1. Cities with the highest percent of retail spaces exposed to floods, out of those cities with over 70 retail spaces. Source: Four Twenty Seven

Sea Level Rise: When Beach Front No Longer Means Value

Several recent studies have found that there is potential for severe sea level rise if certain tipping points are reached. For example, East Antarctica is warming faster than previously expected, with immense implications for global sea levels. According to opinions gathered from experts, there is a possibility of sea levels rising to two meters by 2100 under a 5˚C scenario. Without coastal adaptation investment, it is estimated that annual damages, due to storm surges and king tides, could reach up to almost €1 trillion by the end of the century in Europe.

The real estate industry is at the front line of sea level rise risk. Properties can suffer from severe damages leading to maintenance and repair costs. Even if a facility itself is not permanently inundated, it may be rendered unusable if its closest rail and road infrastructure experience chronic disruptions. Sea level rise can also have far-reaching market impacts such as increasing insurance costs and higher local taxes to fund adaptation efforts. The perception of sea level rise risk can also impact an asset’s value. For example, French coastal properties suffered from substantial damages after coastal flooding caused by storm Xynthia in 2012. At the Ile de Ré, a touristic French island close to La Rochelle, material losses had a longer-term effect on the real estate market. Home prices dropped in the most exposed part of the island. Fields previously sought after by developers became classified as non-constructible areas after the storm.

Figure 3. Corporate offices’ exposure to sea level rise. A dot represents a coastal city and its size represents the number of offices in that city. The dot’s color represents the percentage of offices exposed to sea level rise, with red representing the highest percentage. Source: Four Twenty Seven

Our assessment found that corporate offices are highly exposed to sea level rise in Europe (Fig. 3). Increasing floods and chronic inundation from sea level rise can affect employee commutes, with implications for business continuity at offices. Assets in Ireland, France, Sweden and the United Kingdom have particularly high exposure.

Copenhagen is highly exposed to sea level rise, with 81% of its offices exposed to coastal flooding. In its Climate Adaptation Plan, the city acknowledges that it will be at high risk of flooding in 2040, stating that if no adaptation measures are undertaken, sea level rise will cause “unacceptable” damage. An asset’s risk to sea level rise will be largely driven by regional adaptation efforts to prepare for flooding from higher tides and storm surge.

Copenhagen has defined a long-term adaptation strategy, including the creation of green infrastructure and flexible spaces that can be inundated during high tides, such as sports fields and parks. The city also constructed dikes and quays to protect it from up to 2 meter storm surges. However, the construction of hard protective infrastructure is leading to very high expenditure for local authorities, which can have impacts on local taxes and the strength of other government services. Adaptation policies may also affect building permit requirements and add restrictions to real estate development. Dublin is the city with the highest number of corporate offices from our database exposed to sea level rise (Table 2). This exposure is concentrated in Dublin’s business district (Fig. 4). Floods in the business district can impact the transportation system, electric grid and telecommunications networks, which all impact local businesses.

Figure 4. Corporate offices exposed to sea level rise in Dublin. A dot represents an office and the dot’s color represents its sea level rise exposure. Source: Four Twenty Seven

Dublin is aware of its risk and has developed a 2019-2024 adaptation plan that budgets the construction of new flood defenses and includes a flood risk management strategy. Property managers and real estate investors can engage with the surrounding community to support these regional resilience-building efforts that will also mitigate the risk to their own assets.

Table 2. Cities with the highest percent of corporate offices exposed to sea level rise, out of those cities with more than twenty corporate offices. Source: Four Twenty Seven

Heat Stress: Shattered Records Becoming the New Norm

Heat stress is a growing concern for Europe. The region experienced two recording-breaking heat waves within two months during summer 2019,  affecting public health, hindering productivity and contributing to train delays, with implications for economies across the continent. The decade from 2009-2018 was the warmest on record, with temperatures around 1.7°C above the pre-industrial level in Europe.

Figure 5. Retail spaces’ exposure to heat stress. A dot represents a retail space and the dot’s color represents its heat stress risk. Source: Four Twenty Seven

Our analysis shows that offices and commercial spaces throughout Europe will experience heat waves that are 21 days longer on average compared to 1975-2005. Based on Four Twenty Seven’s data, Southern Europe is expected to experience the highest increase in the duration of heat waves, with projections showing an additional month of temperatures above the 90th percentile every year in Madrid (Fig. 5). Heat waves will also bring higher temperatures, with an 8% average increase in maximum temperatures by mid-century, and over 10% in Paris, for example. This will manifest in cities experiencing climates typically associated with locations significantly further south. For example, a recent study noted that “Madrid’s climate in 2050 will resemble Marrakech’s climate today, Stockholm will resemble Budapest, London to Barcelona.”

The urban heat island effect and worsening air quality will exacerbate the impacts of increasing average temperatures in many European cities, with implications for human health and economies. Heat stress can create new cooling needs for buildings and thus increase operations costs at real estate assets. This is particularly true for assets such as data centers and retirement residences, with significant cooling needs. Extreme heat can also affect consumer behavior, reducing the desire to window shop outside, for example, but increasing the visitors to air-conditioned facilities such as shopping malls. In the long run, increasing average temperatures could have indirect effects on real estate markets as consumer preferences shift.

To reduce their vulnerability, many cities are adapting to extreme heat by increasing green spaces and the use of reflective materials to reduce the albedo effect, for example. Property managers can model on-site adaptations after these examples, while also contributing to wider regional efforts that reduce the urban heat island effect to preserve public health and economic activity.

Conclusion: Understanding Risk to Build Resilience

Real estate assets are already experiencing the impact of extreme heat and floods across Europe and the real estate industry will continue to be impacted by climate change in the near-term. There is an urgent need for resilience-building across assets to ensure business continuity and reduce financial losses. Understanding asset risk is an essential first step towards building resilience. Asset owners and managers can leverage asset-level risk exposure data, alongside awareness of regional adaptation efforts, to improve the resilience of their assets and engage communities around shared resilience priorities.

[1] This analysis does not capture coastal flooding for areas further than five kilometers inland from the coast. This limitation may under-represent risk in coastal-adjacent, low-lying areas that extend inland like Amsterdam.

Download the analysis.

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Four Twenty Seven’s ever-growing database now includes close to one million corporate sites and covers 2000 publicly-traded companies. We offer equity risk scoring and real asset screening services to help investors and corporations leverage this data.

Newsletter: Keeping Up with Regulatory Developments on Climate Risk

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we feature factsheets on regulatory action for financial climate risk, news from Four Twenty Seven and an update on the latest extreme heat.

In Focus: Financial Regulators Take on Climate Risk

Factsheets: Financial Climate Risk Regulation - What You Need To Know

Our new series, Financial Climate Risk Regulation, provides a summary of key recent and upcoming regulatory actions related to climate risk. From the European Union's directive on disclosure and the Bank of England's insurance stress tests, to France's surveys of its insurance and banking markets and the consultations of the European Supervisory Authorities around integrating sustainability into oversight requirements, regulators are moving quickly on climate risk with global implications for financial actors.

Staying up-to-date on these developments will provide early indications of regulatory action to come and give insight into potential rippling market impacts. Four Twenty Seven's factsheets on regulatory developments in the European Union, France and the United Kingdom, summarize each nation's stance on the financial risk of climate change, outline key actions and highlight upcoming dates to remember.
Read the Factsheets

NGFS Releases Technical Supplement on Climate Risk Assessments

Last week, the Network for Greening the Financial System published an overview of current approaches to assessing climate change's macroeconomic impacts and summarized key topics for further research. The supplement outlines ways for central banks and supervisors to assess climate-related risks through macroeconomic modeling, scenario analysis, stress testing, risk indicators and financial stability assessments.
"This is a Big Deal" - Media Coverage of Four Twenty Seven's Acquisition by Moody's
“This means the old paradigm of discussing climate change as part of so-called ESG (Environmental, Social and Governance) risks is inappropriate. The risks are increasingly physical and specific – the heat waves, the tsunamis, phenomena like the effect on Germany’s economy of two consecutive years’ low water in the Rhine. Models need to be adapted to them, new hedging opportunities created and ratings adjusted. It’s not a matter of fashion or reputation management but of basics like sales, cash flow and profit. Moody’s acquisition is a sign that the financial industry is beginning to take this on board," Leonid Bershidsky writes in a Bloomberg op-ed.

"Moody’s Corporation has purchased a controlling stake in a firm that measures the physical risks of climate change, the latest indication that global warming can threaten the creditworthiness of governments and companies around the world." The New York Times' Christopher Flavelle writes. 

Read more stories below and in our In the News page:
Heat Records Broken...Again

Extremely Hot Days are Expected to Continue

Last week, Belgium, Germany and the Netherlands all experienced their highest temperature ever recorded. Paris also hit a record high of 109°F (43°C), after France had its highest ever temperature 45.9°C (114.6°F) during a June heatwave made at least five times more likely due to climate change. Meanwhile, Anchorage, Alaska's 90°F temperatures surpassed previous records by five degrees. The city had at least 34 consecutive days of above average temperatures, with ice melt negatively impacting fishing and hunting and wildfires threatening human health. The eastern and midwest U.S. endured their first heat wave of the season this month, as thunderstorms and record heat disrupted power and took lives.

“There is likely the DNA of climate change in the record-breaking heat that Europe and other parts of the world are experiencing. And it is unfortunately going to continue to worsen,” Marshall Shepherd, professor of meteorology at University of Georgia told the AP. Earlier this month, the Union of Concerned Scientists released data projecting the number of days that will surpass extreme heat indices by mid-century and late century for every U.S. County. Under a 2.4°C (4.3°F) scenario, Los Angeles County may experience an average of 55 days annually with a heat index above 90°F, Dallas County would average 133 days and Broward County, FL 179 days. 

Extreme Heat Has Extreme Impacts on Economies and Human Health

The total cost of lost output due to extreme temperatures is projected to be $2.4 trillion annually according to the International Labor Organization's recent report. Agriculture and construction are expected to lose 60% and 19% of global working hours by 2030, with southern Asia and western Africa expected to experience the greatest losses.

Increasing average temperatures are already affecting industries around the world, as the alpine tourism sector takes a hard look at its climate risks and opportunitiesFrance declares a water shortage and water restrictions affect agriculture and industry across Europe.
Inside the Office at Four Twenty Seven

Meet Chief Revenue Officer, Lisa Stanton


Four Twenty Seven welcomes Lisa Stanton as our Chief Revenue Officer. Lisa oversees sales, client support, marketing and professional services globally. She brings over 25 years of experience in sales and client services for data analytics and investment products in the financial sector. 
Previously, Lisa spent twelve years with Barra, Inc. leading their client service, sales, consulting and partner relationships globally.  She has also led investment strategy and client relationship teams for Blackrock, AXA Rosenberg and, most recently, Grantham, Mayo, Van Otterloo, Inc., working with many of the world's leading institutional investors.

Four Twenty Seven Wins Wealth & Finance Award

Wealth & Finance Magazine recognized Four Twenty Seven with a Best in Climate-Related Economic Risk Reporting award. For six years the Alternative Investment Awards have acknowledged firms and individuals that positively shape the industry’s growth. “Historically considered an undervalued industry, the alternative investment has grown over the past few years. Behind this prominent growth and success, are the leading lights whose innovation, dedication and inventive ways has delivered some award-worthy results,” Wealth & Finance writes.

The award highlights Four Twenty Seven’s climate risk scores for listed instruments and on-demand scoring of real assets, that assess financial firm’s exposure to physical climate risk and inform risk reporting.

Upcoming Events

Join the Four Twenty Seven team at these events:

  • Aug 5 Climate Risk and Sovereign Risk in Southeast Asia, Singapore: Editor, Natalie Ambrosio, will present on sovereign climate risk. Invite-only.
  • Sept 10 - 12 – PRI in Person 2019, Paris, France: Stop by the Four Twenty Seven booth to meet with Chief Development Officer, Frank Freitas, Chief Revenue Officer, Lisa Stanton, Director Europe, Nathalie Borgeaud and other members of the team. 
  • Sept 16 – Insurance & Climate Risk Americas 2019, New York, NY: Lisa Stanton will attend.
  • Sept 23 - 29 – Climate Week NYC, New York, NY: Lisa Stanton and Senior Analyst, Lindsay Ross, will attend.
  • Nov 7-8 – Building Resilience 2019, Cleveland, OH: Director of Advisory Services, Yoon Kim, will speak on a panel about public-private partnerships.
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Factsheet — Financial Climate Risk Regulation in France

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.

Key Takeaways

  • Banque de France was the first central bank to release an assessment of its climate risks in line with the TCFD and Art. 173, aiming to set an example of best practice for the French financial sector.
  • ACPR’s fall 2018 survey of the French insurance sector found that disclosures in Art. 173 reports varied between firms and lacked reporting on long-term climate strategies and yearly progress. ACPR made suggestions for insurers to improve their climate risk management based on this review.
  • In summer 2018, ACPR surveyed its banking sector on banks’ climate risk management, identifying “advanced institutions,” larger banks with ample resources that have integrated climate into risk management, and “wait-and-see” institutions, which are largely domestic, retail-oriented banks still focused on a corporate responsibility approach to climate change.
  • France’s stock market regulator, AMF, released a report asserting that climate change has been identified as a financial risk, it is still not sufficiently assessed by the market, and the regulator’s role is to inform and raise awareness on the topic.

Read the Factsheet.

Read Four Twenty Seven’s other Factsheets on Financial Climate Risk Regulation.