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.”
Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we feature analysis on climate risk in European real estate, Moody's research on credit quality and heat stress and the first climate resilience bond.
In Focus: Real Estate Climate Risk in Europe
Four Twenty Seven Analysis - Real Estate Climate Risks: How Will Europe be Impacted?
From this summer's record-breaking heat waves to storm-surge induced flooding, Europe is increasingly experiencing the impacts of climate change. Extreme events and chronic stresses have substantial impacts on real estate, by damaging individual buildings, decreasing their value and potentially leading to unusable assets. These asset-level impacts also have wider market implications.
New Principles Support Integration of Resilience into Bond Markets
CBI Releases Climate Resilience Principles
Last Week the Climate Bond Initiative released Climate Resilience Principles, integrating forward-looking climate risk assessment and resilience considerations into bond markets. The guidance document is meant to inform investors', governments' and banks' reviews of how projects and assets contribute to a climate-resilient economy. The principles will be integrated into the Climate Bonds Certification of green bonds, signaling a valuable step toward the consistent use of resilience standards for debt projects. Four Twenty Seven is proud to have contributed to the Adaptation and Resilience Expert Group that developed the principles.
EBRD Issues First Climate Resilience Bond
The European Bank for Reconstruction and Development (EBRD) issued the first bond to solely finance climate resilience projects. This is the first bond to fulfill the requirements of the new Climate Resilience Principles. Craig Davies, head of climate resilience investments at the EBRD, told Environmental Finance "The climate resiliency principles that the CBI has developed are a really important landmark because they very clearly set out eligibility criteria, and some very simple but clear and robust methodologies for defining a climate-resilient investment." The EBRD's four year bond raised $700 million to finance "climate-resilient infrastructure, business and commercial operations, or agricultural and ecological systems."
The EBRD also released a consultation draft of a Framework for Climate Resilience Metrics in Financing Operations this week. The report, published jointly with other multilateral development banks and the International Development Finance Club, outlines a vocabulary to facilitate consistent discussion and measurement of resilience investment.
Global Commission on Adaptation Launches Year of Action
The Global Commission on Adaptation presented its flagship report, Adapt Now: A Global Call for Leadership on Climate Resilience this week at the United Nations Climate Summit. This report emphasizes the return on investment of climate adaptation, noting that "investing $1.8 trillion globally in five areas from 2020 to 2030 could generate $7.1 trillion in total net benefits." It focuses on early warning systems, climate-resilient infrastructure, improving dryland agriculture, mangrove protection and increasing the resilience of water resources. This kicks off the Commission's Year of Action, during which it will advance recommendations, accelerate adaptation, promote more sustainable economic development and collate findings to present at the Climate Adaptation Summit in October 2020.
The Commission's report was informed by a paper called Driving Finance Today for the Climate Resilient Society Tomorrow by the UNEP Finance Initiative and Climate Finance Advisors. It outlines financial barriers to the acceleration of adaptation investment and recommends six actions to unlock adaptation finance. These actions include accelerating climate-relevant policies, implementing climate risk management, developing adaptation metrics, building financial sector capacity, highlighting investment opportunities and leveraging public institutions to accelerate adaptation investment.
Retailers Prepare for Physical Climate Risk
Women's apparel store, A'gaci, filed for bankruptcy in January 2018 after most of its stores were hit by hurricanes in Texas, Florida and Puerto Rico. Hurricanes can affect retail operations by causing building damage, merchandise loss and supply chain disruptions, and Hurricane Irma caused an estimated $2.8 billion loss for the sector. Retail Dive explores the implications of climate change for the retail sector at large, using Four Twenty Seven's data on retail site exposure. With over 17,000 retail facilities exposed to floods in the U.S., some businesses are beginning to prepare, reorganizing their distribution patterns and supply chains. Some retail stores, such as Home Depot, can also see increases in demand after extreme events, and will particularly stand to benefit if their facilities are resilient to climate hazards and can accommodate the associated surge in business.
New research by a Federal Reserve Board Economist, finds that weather variability impacts retail sales. On average, sales tend to increase with temperature and decrease with rain and snowfall. Overall there is not a clear shift in shopping habits from outdoor stores to indoor venues during extreme weather, but these patterns do show regional variation, suggesting that the impacts of extreme weather events vary by region. The impact of extreme events on sales will have an impact on retail employees and local economies depending on these companies. Businesses can leverage this research, alongside data on climate risk exposure, to plan for these shifts in consumer behavior.
Inside the Office at Four Twenty Seven
Meet Operations Coordinator, Naoko Neishi
Four Twenty Seve welcomes Naoko, who supports senior management and works with the Operations Manager to achieve operational excellence. Naoko has over 16 years of experience as a sales assistant and office manager in the United States and Japan, working in the financial and engineering industries.
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.
"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.
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 Sevenwith 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.
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.
We’re excited to announce that Four Twenty Seven has received a majority investment from Moody’s Corporation. The acquisition bolsters Four Twenty Seven’s mission to help investors and corporations integrate climate change risk into investment decisions.
Four Twenty Seven will continue to be headquartered in Berkeley, CA, operating under its existing brand, and will be an affiliate of Moody’s Investors Service.
“Four Twenty Seven’s climate risk analytics, combined with Moody’s global coverage and extensive analytical capabilities, provides an ideal path to help market participants integrate climate impacts into risk management and investment decisions,” said Emilie Mazzacurati, Founder and CEO of Four Twenty Seven.
Four Twenty Seven scores physical risks associated with climate-related factors and other environmental issues, including heat stress, water stress, extreme precipitation, hurricane and typhoons and sea level rise. Its scores and portfolio analytics feature extensive global coverage and quantify climate risk exposures across asset classes, with detailed data covering over 2,000 listed companies, one million global corporate facilities, 320 REITs, 3,000 US counties, and 196 countries. Four Twenty Seven’s data and indicators are used by asset owners, asset managers, banks, corporations and government agencies to understand and evaluate the potential climate risk they hold in their portfolios and activities.
The addition of Four Twenty Seven enhances Moody’s growing portfolio of risk assessment capabilities and underscores the company’s work to advance global standards for assessing environmental and climate risk factors. Four Twenty Seven will also strengthen Moody’s growing thought leadership and research on incorporating climate risk into economic modeling and credit ratings. The deal complements Moody’s recent acquisition of Vigeo Eiris, a leading provider of ESG research, data, and assessments.
“Four Twenty Seven has built a strong platform for quantifying climate-related exposures and producing actionable risk metrics, which are essential to understanding and informing climate risk and resilience measures,” said Myriam Durand, Global Head of Assessments at Moody’s Investors Service. “Moody’s is committed to offering global, transparent standards for assessing environmental risk, and the acquisition of Four Twenty Seven advances our objective of integrating climate analytics into our offerings.”
About Four Twenty Seven
Four Twenty Seven (427mt.com) is the leading provider of market intelligence on the impacts of climate change for financial markets. We tackle physical risk from the ground up by identifying the locations of corporate production and retail sites around the world and their vulnerability to climate change hazards such as sea level rise, droughts, floods and tropical storms, which pose an immediate threat to investment portfolios.
Four Twenty Seven’s ever-growing database includes over one million corporate sites and covers over 2000 publicly-traded companies. Four Twenty Seven also produces climate risk scores for Real Estate Investment Trusts, U.S. Munis and Sovereigns. We offer data products and software solutions to access these unique data offerings, as well as reporting services, scenario analysis and real asset portfolio risk assessments .
Four Twenty Seven has won multiple award for its innovative work on climate risk and resilience and our work has been featured by Bloomberg, Reuters, NPR and the Financial Times. Four Twenty Seven was founded in 2012 and is headquartered in Berkeley, California with offices in Washington, DC, Paris, France, and soon, Tokyo, Japan
JULY 8, 2019 – LONDON, UK – Four Twenty Seven receives Wealth & Finance Magazine’s Alternative Investment Award for Best in Climate-Related Economic Risk Reporting 2019.
Wealth & Finance Magazine recognized Four Twenty Seven among the winners of their 2019 Alternative Investment Awards. For six years these 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 Best in Climate-Related Economic Risk Reporting 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. Our analysis leverages best-in-class climate data at the most granular level and scores assets on their exposure to physical climate impacts based on their precise geographic location. Investors use this data to drive investment strategies, forward-looking risk management and TCFD/risk disclosures.
Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we feature developments in scenario analysis for physical risks, highlight the European Union's guidance on climate risk disclosure and share the latest on financial climate risk and the need for resilience.
In Focus: Scenario Analysis for Physical Risk
Bank of England Publishes First Climate Risk Stress Test
The guidance lays out potential impacts by providing sector-specific percentages of potential loss under three scenarios by sector and by region. These quantitative financial impact assumptions are not a projection but a starting point for the insurance industry to explore potential impacts of climate change on their portfolios.
The Bank of England leveraged Four Twenty Seven's analytics on climate risk exposure in equity and real estate markets to inform its assumptions about which sectors will experience the largest impacts. We explain how data on risk exposure in equities can be leveraged for this type of analysis in our new blog series on scenario analysis.
Blog Series: Scenario Analysis for Physical Climate Risk
Our new blog series provides our reflections on how corporations and financial institutions can integrate physical climate risk into scenario analysis. Scenario analysis for physical risk is fundamentally different from transition risk. Corporations and investors increasingly recognize the need to integrate physical risk into scenario analysis but are looking for guidance and best practices on how to proceed.
Our first blog focuses on the foundations, demonstrating how characteristics of climate science affect how climate data can be used to inform scenario analysis. We argue that because physical risks over the next 10-20 years are largely independent from policy decisions and emission pathways, investors would be better served by scenario analysis that focuses on the inherent uncertainty of projected impacts, independent from assumptions on GHG emission scenarios.
The next blog focuses on Equity Markets, with concrete examples of how available data can inform financial stakeholders ready to start putting scenario analysis into action. We look at data on climate risk exposure by sector to explore how climate risk analytics can inform early developments of stress test assumptions, as done by the Bank of England.
The EU also released the Technical Expert Group (TEG) report on a taxonomy for activities that contribute to climate adaptation and mitigation. The taxonomy aims to help investors and policymakers understand which economic activities contribute to the transition to a low-carbon economy, through both mitigation and resilience. It outlines qualitative screening criteria to identify adaptation of economic activities and adaptation by economic activities, providing activity-specific examples for a range of sectors. The proposed taxonomy is still under legislative review.
Second TCFD Status Report
While more firms are releasing TCFD disclosures, investors call for an increase in informative disclosure of the financial impact of climate risks. The Task Force on Climate-related Financial Disclosures (TCFD) released its second progress report earlier this month, emphasizing that the quality of risk disclosures must continue to improve as firms build their understanding and capacity to address climate risks. 91% of surveyed firms said they plan to at least partially implement the TCFD recommendations, but only 67% plan to complete implementation within the next three years. This progress must be accompanied by continued knowledge sharing and research on financial risk pathways for climate impacts, meaningful exposure data and best practices for reporting.
Even as TCFD reporting increases, quantitative assessment of physical risk exposure lags behind. Explore physical climate risk reporting by French firms in our analysis of physical risk in Article 173 reports and stay tuned for Four Twenty Seven's forthcoming analysis on physical risk disclosure in TCFD reports.
Catastrophic Midwest Flooding Has Rippling Impacts
At the end of May only 58% and 29% of the U.S. corn and soy crops had been planted respectively. After persistent flooding beginning in Mid-March, inundated fields delayed planting. This means that some farmers will miss the planting window, which closes in June due to the heat and dryness of later summer months.
Those crops that do get planted will have to overcome soggy soil conditions and will remain at the peril of the summer's weather. It's already clear that this will be a below average crop yield, which translates into more expensive corn in cattle feed and higher prices in grocery stores.
From floods and heat waves to fires and hurricanes, federal recovery efforts for extreme events have cost almost half a trillion dollars since 2005. As disasters become more common and costs increase, there is an urgent need to invest in resilience proactively rather than spending billions on recovery. Last fall's Disaster Recovery Reform Act made an
"There is a silver lining to our climate challenges — economic growth. Americans are very good at innovating and building and we can leverage our need to be more resilient by growing the economy with good resilient and sustainable jobs," Sawislak wrote.
Join the Four Twenty Seven team at these events:
June 19 – Columbia University and PRI Private Round Table, New York, NY: Founder & CEO, Emilie Mazzacurati, will discuss scenario analysis for physical climate risk at this workshop.
In this second installment of our blog series of scenario analysis, we focus on how investors can start exploring impacts on portfolios of listed equities/fixed income with existing climate risk analytics. The series provides our current reflections on how corporations and financial institutions can integrate physical climate risk into scenario analysis. The first installment, on foundations, focuses on important characteristics of climate science that affect how climate data can be used to inform scenario analysis for economic and financial risk. A forthcoming post will discuss scenario analysis at the asset level for real asset investments and corporate facilities.
Scenario Analysis Serves Different Purposes
Scenario analysis serves different purposes for real asset investors and for equity or fixed income investors. When looking at a single real asset, scenario analysis can be used to inform very concrete decisions regarding the asset, working directly with the asset operator: whether and what flood protections to put in place, insurance requirements, anticipated impacts on operational costs from water and energy consumption, etc.
In contrast, for an equity or fixed income portfolio, investors’ influence on the resilience of the underlying asset (e.g. a corporation or a sovereign entity) is much more limited. In a previous publication we discussed the importance of shareholder engagement with corporations as a key channel for investors to help raise awareness of rising risks from climate change, and encourage companies to invest in responsible corporate adaptation measures. Investors, however, would be hard pressed to run scenario analysis on individual portfolio companies themselves, and disclosures from corporations on scenario analysis remain weak and fragmented.
Meanwhile, prudential authorities in Europe have been signalling expectations that insurers and banks perform scenario analysis on their portfolio to examine potential impacts of climate change, to understand how different climate-driven outcomes might prevent the insurers and lenders from meeting their financial obligations. Most recently, in April, the Bank of England Prudential Regulatory Authority (PRA) released a proposed set of specifications for scenario analysis that includes some simplified assumptions on climate impacts on financial portfolios.
In this piece we examine how available climate risk analytics can be leveraged to inform early attempts at developing stress test assumptions and simulate potential outcomes on investment portfolios aligned with the relative exposure of corporations by sectors and by regions.
Climate Risk Analytics for Equities/Fixed Income
We leverage our data on corporate physical risk exposure to determine what assumptions can be made in this type of early stress test. In this piece, we analyze the climate risk scores for 1730 of the largest companies in MSCI All Country World Index (ACWI). This physical risk assessment is based on the exposure of the underlying database of about a million facilities globally.
We score each company on three components of physical climate risk: Operations Risk, Supply Chain Risk and Market Risk.
A company’s Operations Risk is based on its facility-level exposure to hurricanes & typhoons, sea level rise, floods, extreme heat and water stress. The analysis also considers the sensitivity of different types of facilities. For example, manufacturing plants with their high energy demands are more sensitive to extreme heat than offices.
Supply Chain Risk is based on the risk in countries that export commodities that the company depends on and a company’s reliance on climate-sensitive resources such as water, land and energy, based on its industry.
Market Risk is based on where a company’s sales are generated and how its industry has historically been impacted by weather variability.
In line with considerations of relevant time horizons and of impacts being locked in over the climatic short term (detailed in Part 1), our standard equity risk score data considers projected climate impacts in the 2030-2040 time period under a single RCP scenario, RCP 8.5 (the worst case scenario, also known as business as usual), but leverages several climate models.
From Climate Hazard Exposure to Financial Impacts
Studies of how physical climate hazards translate into financial impacts at the company level are scarce. While a growing body of research explores the complex relationships between climate hazards and economic impacts, which vary by sector and by region, academic research on the relationship between climate events and corporate/stock performance, at scale, is still limited.Our approach focuses on leveraging what can be estimated in a robust, data-driven way: relative exposure of companies to climate hazards.
Our analysis of global corporations shows the relative exposure of industries to climate related risks across all three dimensions: operations risk, market risk and supply chain risk (Table 1). This table shows the sectors with the highest exposure, including manufacturing, infrastructure (utility, energy, transportation), and industries with high dependency on natural resources (food, apparel).
Table 1. Industries most exposed to physical climate risks . Source: Four Twenty Seven.
Services, not shown in the table, are not only less exposed, they’re also far less sensitive to changes in climatic conditions, with the exception of the financial sector, which holds the risk of all the other sectors in its investment, lending or insurance portfolios. Note that real estate is not included in this analysis, but data on regional exposure in that sector can be found in our white paper on climate risk in real estate.
These differentiated impacts by sectors can lay the foundations for a stress test, as industry risk levels can be used to set initial assumptions on sector-wide impacts. Following the example set out by the Bank of England’s PRA, for example, investors could assume that sectors with high exposure might see a 10% or 20% drop in value, whereas sectors with medium exposure would see half of that impact. These assumptions are not intended to substitute for financial impact modeling, but provide a shortcut to test how a portfolio might perform under climate-driven duress.
Drivers of Exposure to Physical Climate Risk
While some sectors overlap with those examined in scenario analysis exercises for transition risk, such as utilities and energy, other sectors with high exposure are not typically included in scenario analysis, like tech manufacturing or pharmaceuticals. Understanding the nuances of the risk pathways in each sector and their relative exposure to different hazards is critical to refining assumptions and developing models that can quantify value-at-risk by sector with some accuracy.
Manufacturing companies in the tech sector rely on complex value chains that can be interrupted by extreme weather events, particularly in Asia, which is a region highly exposed to typhoons and extreme precipitation. They also often produce expensive and water sensitive products using costly machinery and can incur costs and damages from extreme events on site. Pharmaceuticals are particularly exposed because of the prevalence of their manufacturing in water-stressed regions (India, California) and regions highly exposed to hurricanes & typhoons. For example, damaged manufacturing sites in Puerto Rico had rippling impacts on pharmaceutical operations globally during Hurricane Maria in 2017. Pharmaceuticals is also one of the groups with the most weight in the MSCI ACWI, making this exposure particularly significant (Fig 2).
Figure 2. The average company risk score by GICS Industry Group, with Operations Risk on the y-axis and Market & Supply Chain Risk on the x-axis. Red represents those industries with the highest exposure, green represents those with the lowest exposure and the size of the bubble signifies an industry’s weight in the MSCI ACWI. Source: Four Twenty Seven.
In the utility sector, the nature of the exposure is very different from that observed in transition risk analysis: carbon neutral power generation can be as exposed as thermal generation – for example due to water stress or floods for hydro facilities. In addition, utilities rely on expensive equipment, such as cables, poles, fuel storage and pipes that are often exposed to severe weather and sensitive to extreme conditions. Their operations are also resource-intensive, relying heavily on energy and water for cooling. They can experience operations disruptions during peak energy demands or due to equipment damage during storms.
The exposure of the automobiles & components sector has been illustrated by recent flooding in Japan. Automobile companies rely on manufacturing processes and machinery that can be interrupted due to flooding or hurricane damage, but their reliance on employee labor also makes these companies vulnerable to the wider regional impacts of extreme events. For example, during Japan’s extreme flooding in July 2018, Mazda was forced to halt operations at some of its facilities that were not physically damaged themselves, because its employees could not travel safely to work.
Climate change calls for a better understanding of impacts of physical hazards on financial markets, which remains a topic largely unexplored. Yet as regulators push insurers and banks towards the integration of climate scenarios into stress testing, robust, data-driven views on the relative exposure of sectors or regions provide a helpful foundation from which to explore the potential impacts on equity and fixed income portfolios.
Over time, better data will become available as academic and industry providers develop models that capture the nuances of climate impacts on different industries and geographies, but also as companies make a concerted effort to disclose better data on their past and anticipated financial exposure to extreme weather and climate-related events.
Four Twenty Seven’s data products and portfolio analytics support risk reporting and enable investors and businesses to understand their exposure to physical climate risks across asset classes.
Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we explore the second year of Art. 173 reports, highlight regulators' action on climate risk and share new findings on financial climate risk in Asia.
In Focus: Lessons Learned from Art. 173 Reporting - An Update
Physical Risk Analysis is Stronger in Art. 173's Second Year
The second year of reporting under Article 173 in France saw increased analysis of physical climate risk, but there is still substantial room for improvement. We reviewed disclosures from 49 asset owners in France, finding that almost half of the respondents conducted more substantial physical risk analysis compared to last year. Insurance companies AXA and Generali provided the most detailed analysis for property portfolios, adding to their previous methodology. FRR and Comgest provided the most thorough assessment of physical climate risk in their investment portfolios and BPCE Group was the only bank with a complete analysis of physical risk.
Many firms still cite lack of data and tools as a barrier to adopting thorough analysis of physical risks. Those firms that are on the forefront of climate risk reporting disclose asset-level risk exposure and are beginning to explore how to assess value at risk and scenario analysis for physical climate risks, which are emerging as key research topics.
While French firms are refining their climate risk disclosures, other companies across Europe are beginning to report on climate risk. 30 out of the top 80 companies in Europe made statements in support of TCFD and/or released disclosures, according to the Climate Disclosures Standard Board's review, First steps on climate-related financial disclosures in Europe. Only seven of these firms addressed physical risks.
ClimINVEST reviews developments in physical climate risk assessment in the financial sectors of France, the Netherlands and Norway, finding that common needs across these countries include in-house capacity building, improved risk assessment tools, increased understanding of the impacts of extreme events & guidance on corporate engagement. The report also reviews the landscape of physical risk data providers, including Four Twenty Seven.
How do these developments in TCFD reporting affect the greater landscape of financial risk disclosure and management? In its winter issue the Climate Change Business Journal interviewed Founder & CEO, Emilie Mazzacurati, about the history of the TCFD, it’s uptake to-date and how the recommendations influence other developments on risk disclosure. Emilie says, “The market is in exploratory mode: this is an emerging issue, and the collective understanding of impacts on corporations and financial markets is fast evolving. What is clear, however, is that this is a very material issue, and that is here to stay.”
Central Banks and Regulators Take Action
A Call for Action: Climate Change as a Source of Financial Risk
example by assessing risks in central bank portfolios, promote the growth of publicly available data and encourage continued research and knowledge sharing on climate risks. The report makes two final recommendations for policy-makers: encourage continued uptake of climate risk disclosures, in line with the TCFD and develop a taxonomy of activities that support the transition to a resilient low-carbon economy and those that are highly exposed to climate and environmental risks.
Integrating Physical Climate Risks into Insurance Stress Tests
The draft outlines three scenarios, including a sudden disorderly transition, a long-term orderly transition and a "hot house" scenario without transition and lists metrics of physical risk hazards and transition risk for each scenario. Feedback from industry participants is requested by May 31.
Survey of French Banks and Insurers on Climate Risk
While banks and insurers have made significant progress on assessing transitition risk, progress in undertanding physical and liability risks is much slower. In response to these findings ACPR will establish two working groups with the financial sector, one on governance of climate-change related risks and another on risk metrics and scenario analysis.
Climate Change: Awareness to Action
The Australian Prudential Regulation Authority (APRA) surveyed 38 regulated entities including authorized deposit-taking institutions, superannuation firms and insurers on their risk perceptions, governance, strategy, risk management, metrics and targets and disclosures. Firms identified several opportunities associate with climate risk response: positioning themselves as
industry leaders, developing new products and promoting community resilience. Over 50% of respondents are conducting financial analysis of key risks. Many cite data limitations, resource constraints, regulatory uncertainty and lack of defined terms and methods as barriers to conducting scenario analysis.
Climate Change and the Federal Reserve
"In short, climate change is becoming relevant for a range of macroeconomic issues, including potential output growth, capital formation, productivity, and the long-run level of the real interest rate," writes Glenn D. Rudebusch of the Federal Reserve Bank of San Francisco. His economic research letter highlights the ways that climate risks are pertinent for monetary policy, encouraging continued research on the financial impacts of climate change hazards.
Asian Investors Exposed to Water-Related Climate Risk
Are Asia's Pension Funds ready for Climate Change?
They found that public pension funds, sovereign wealth funds and central banks tend to have portfolios concentrated in their domestic markets, which are also highly exposed to climate risks. The export economies of India and China are particularly vulnerable to water stress, and businesses must prepare for the shift in economic policy towards more resilient industries. In light of high exposure to climate impacts that are already locked in, financial actors should promote adaptation finance, assess their portfolios' physical risk exposure and engage with companies and industry initiatives.
Yale 2019 Symposium on Sustainable Finance Call For Papers
The Yale Initiative on Sustainable Finance is seeking papers for its 2019 Symposium on "The State of Play in ESG Investing.” They will consider empirical research papers, literature reviews or position papers from scholars, practitioners and industry experts. Selected authors will be asked to present at the symposium in November. Specific focal topics within the broad theme of ESG investing include: environmental and social impact metrics; portfolio-level ESG assessment and metrics; ESG in financial disclosures; future reporting frameworks for ESG information; private equity and ESG; and social- and green-impact bonds. Abstracts are due by May 17.
Join the Four Twenty Seven team at these events:
April 30 - May 1 – Ceres Conference 2019, San Francisco, CA: Meet with Founder & CEO, Emilie Mazzacurati on Wednesday.
April 30 – NAREIM Sustainability & Investment Management, Chicago, IL: Chief Operating Officer, Colin Shaw, will present on climate risk data for real estate at this gathering of the National Association of Real Estate Investment Managers.
May 1 – Addenda Capital Investor Day, Toronto, Canada: Colin Shaw will present on physical climate risk.
May 9 – Addenda Capital Investor Day, Montreal, Canada: Emilie Mazzacurati will present on physical climate risk.
April 30, 2019 – 427 ANALYSIS. The second year of reporting under Article 173 in France saw increased uptake of disclosures of physical risk. Our review of 2018 disclosures from 49 asset owners in France shows that almost half of the respondents conducted more substantial analysis of their exposure to physical impacts of climate change compared to last year. We find insurance companies Axa and Generali provided the most detailed analysis for property portfolios, while FRR and Comgest provided the most thorough assessment of physical climate risk in their investment portfolios and BPCE Group was the only bank with a complete analysis of physical risk.
Art. 173: A Second Year of Mandated Climate Risk Reporting
2018 was the second reporting year under Art. 173 of the French Law on Energy Transition and Green Growth, which was passed in August 2015. It requires major institutional investors and asset managers to explain how they take Environmental, Social and Governance (ESG) criteria, including climate change, into account in their risk management and investment policies.
Art. 173 covers publicly traded companies, banks and credit providers, asset managers and institutional investors (insurers, pension or mutual funds and sovereign wealth funds). In addition, asset managers managing funds above 500 M€ and institutional investors with balance sheets above 500 M€ are subject to extended climate change-related reporting obligations, including reporting on both physical impacts of climate change and transition risks (impact of the transition to a low-carbon economy).
We carried out a desktop analysis of the 2018 reports (applying to 2017 portfolios) to understand how financial institutions responded to the requirements laid out by Art. 173 and how their reporting has evolved since last year. We reviewed 49 asset owners in France, including public pension funds, asset managers and insurance companies, with an aggregate €5.5 trillion euro ($6.8tn) under management. Our analysis included all public entities covered by the Art. 173, as well as private insurers with over €2bn in assets under management. Insurance companies play a particularly important role as asset owners in France, where individual savings are massively invested in life insurance savings products. French pension funds, on the other hand, are relatively small due to France’s pay-as-you-go retirement system.
Art. 173 Reporting Trends in Year Two
We were able to find Art. 173 reports for 36 out of 49 organizations. It is possible that, in spite of our best efforts, we failed to locate reports. However, Art. 173 has a ‘comply or explain’ provision which also makes it acceptable for companies to not publish reports if they can justify that climate change is not a material risk, or to solely file their reports with the regulator rather than releasing them.
We found twenty five Art. 173 reports from insurance companies, five from pension funds, two from asset managers and four reports issued by banking institutions. We also found a press statement from HSBC that mentioned an Art. 173 report but we were unable to find the report itself and did not include it in the analysis.
Did Firms Change Their Disclosure Strategy?
Overall, 23 companies (47%) have made significant improvements in their disclosure since last year. These companies have either kept the same methodological framework and refined it or have published substantially more comprehensive reports than last year. Among them, two firms, Groupe Macsf and Carac, have published a report for the first time. Only four companies (8%) have provided reports which were less complete than last year, including one company for which we found a report last year, but not this year. 45% of the firms published reports which were very similar to last year.
How Did Firms Report This Year?
Table 1 presents a detailed breakdown of how insurance companies and asset managers have taken physical climate risks into account in 2018 reports.
12 organizations (25%) only discussed their carbon footprint or their exposure to energy transition risk, without including physical risk disclosures. A small group of organizations (10%) mentioned physical risk as a topic they were exploring without being able to provide a complete analysis for the moment, many citing the lack of tools and models as a major impediment to reporting physical risks.
11 institutions (23%) used a thorough methodology to analyze their exposure to physical risks, compared to only seven companies last year. Several firms released noticeably improved disclosure this year. Out of those firms that did asses their exposure to physical climate risk, nine (19%) carried out a bottom-up analysis of physical risks by assessing the asset-level risk exposure of at least some of their portfolio. Two institutions (4%) performed a “top-down” analysis, carrying out a multi-asset class, sector-level analysis of physical climate risk.
Finally, eight firms (17%) were classified in the “work in progress” category. These companies studied physical climate risk at the company-level among many other criteria as part of a broader analysis of the sustainability of their portfolio. Many of these companies acknowledge that they have not yet been able to develop a complete methodology for assessing physical risks.
Axa is one of France’s leading multinational insurance firms holding 905B€ of assets. While Axa’s 2018 Art. 173 disclosure is very similar to last year, with a bottom-up approach and an internal analysis, the study has increased in accuracy and scope. Like last year, the methodology considers European natural disasters as well as the geographical location of individual assets and the destruction rate of building materials.
In addition to the traditional report about Art. 173 which lays out the principles and commitments of the firm regarding the ESG criteria, Axa released its first report aligning with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. Axa’s analysis covered $34 billion worth of assets, compared to $15 billion last year, encompassing commercial real estate debt, infrastructures debt, and property debt. Unlike last year, the assessment was not limited to the financial impact of windstorms but also included the potential impact of floods on the infrastructure in its portfolio. Like last year, the analysis considers 100% of the infrastructure portfolio but this year it also covers 88% of the real estate portfolio in 14 countries, compared to 41% last year.
Figure 4 demonstrates the physical risk exposure to windstorms and floods for the analyzed infrastructure. On the left, the graph displays the annual average destruction rate, which is linked to the average loss generated every year (3.3M€ on average). The map on the right shows the destruction rates due to a 100-year event, with an estimated loss of 27.2 M€. In 2019, Axa plans to expand its internal model to evaluate the financial losses resulting from floods in more European countries.
Axa used a value at risk methodology to assess the potential costs and revenues associated with climate change for each company in its equity and corporate bond portfolios, but this assessment largely focused on transition risks.
Generali France is a French insurance company with 521B€ worth of assets. Generali also provided a more detailed evaluation of the potential impact of physical risks on its property assets than last year. It analyzed 268 assets, compared to 112 last year. Unlike last year, the analysis was not limited to the Paris area, but was expanded to all real estate assets held by the company. 89% of the assets are located in Paris, 7% outside Paris and 4% in the overseas department. They carried out a broader analysis of physical risks by adding earthquakes and avalanches to the study, in addition to flood and drought. The assessment rates assets from “high” to “very low” risk, finding that 5.4% of assets or 18 sites are classified as “high risk” for flood, 2% of assets (11 buildings) are classified as “medium risk” to drought and four of these 11 buildings are concentrated in the same building zone near Paris.
Comgest is an international asset management group with 25.7 B€ worth of assets. The firm released physical risk disclosure reports for its three largest funds: global, European, and emerging market. Four Twenty Seven conducted the physical risk analysis for Comgest, splitting physical risks into three categories: operations risk, market risk, and supply chain risk. The analysis also included a comparison of portfolio risk scores to relevant benchmark indices to highlight the holdings’ relative risk exposure. This asset-level assessment included exposure to storm, drought, extreme rainfall, floods, sea level rise, and heat stress. The analysis resulted in an aggregate score reflecting the portfolio’s exposure to physical climate risks, based on the sectors in the portfolio and the geographic distribution of companies’ assets.
Regionally, the portfolio companies in Asia are most exposed to physical climate risks. Half of the sites are located in Japan and China, which makes the portfolio vulnerable to cyclones and extreme rainfall. The rest of the portfolio is located in the United States and Europe, which have relatively low exposure to physical risks. The risk of rising sea level is relatively low for the portfolio, with only 15% of the sites being exposed.
Overall, 2018 showed an increase in the inclusion of physical climate risks assessment by French financial institutions. However, reporting on physical climate risk remains a challenging task for investors. Many organizations lack the tools, models and data to perform a comprehensive assessment of their portfolios, and for many firms, physical risks appear to still be a lower priority than transition risks. Those firms that are on the forefront of climate risk reporting disclose asset-level risk exposure and are beginning to explore how to assess value at risk and scenario analysis for physical climate risks. 2019 reporting is ongoing and has already brought some new high profile reporters, including the French Central Bank, Banque de France. The positive trends in 2018’s Art. 173 reports, along with continued uptake of TCFD recommendations, ongoing pressure from central banks and regulators, and increasing losses from extreme weather events, suggest that we will see continued growth in physical climate risk disclosures during the third year of Art. 173 reporting.
This analysis was written with support from Roman Dhulst and Natalie Ambrosio.
Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we highlight the French Central Bank's climate risk assessment, discuss climate risk in real estate and share progress updates on the EU action plan.
In Focus: Banque de France Publishes First Art. 173 Report
This report is part of a broader effort by a number of central banks to lead by example and demonstrate how financial institutions need to assess their portfolios' exposure to climate risk. Banque de France is a founding member and provides the Secretariat for the central bank and supervisor Network for Greening the Financial System (NGFS), which focuses on strengthening the global response required to meet the goals of the Paris agreement and manage climate-related risks.
Climate Risk and Real Estate Investment Decision-Making
This report explores the evolving understanding of climate risk in real estate, sharing current best practices for measuring and managing risk. The Urban Land Institute and Heitman, a real estate investment management firm, surveyed over 25 investors and investment managers globally on their efforts to integrate climate risk into their investment decisions. Their strategies include mapping physical risk for current portfolios, integrating climate risk into due diligence efforts, exploring ways to mitigate risk and engaging with policy makers on resilience-building efforts.
Respond to the European Commission's Consultation on Disclosure
The European Commission has released a consultation soliciting expert feedback on their draft supplement integrating climate change into the Non-Financial Reporting Directive (NFRD), based on the Technical Expert Group (TEG) on Sustainable Finance's final recommendations. This is an important step towards increasing the transparency and resilience of the financial system by creating legislation that includes physical climate risk disclosure by companies and investors. The deadline for feedback is March 20.
Respond to the TEG Preliminary Green Bond Standard Recommendations
In another of its workstreams the TEG is helping the EC create an EU green bond standard. Earlier this month the TEG released its interim report, explaining the purpose of the proposed green bond standard and its suggested content. The TEG is inviting feedback which will be considered in the development of its final recommendations scheduled to be presented to the EC this June. The deadline for feedback is April 3.
Four Twenty Seven in the News
Business and the Effects of Global Warming - The Economist
Facing Up to Climate Change - The Bond Buyer Podcast
Do bond ratings reflect governments’ and businesses’ exposure to physical climate change? Founder & CEO, Emilie Mazzacurati, joins the Bond Buyer’s Chip Barnett to discuss physical climate risk for investors, businesses and governments. Emilie describes the financial sector’s growing awareness of material climate risk in their bond and equity portfolios and shares efforts being taken to understand and address these risks.
March 21-22 – San Giorgio Group, Venice, Italy: Founder & CEO, Emilie Mazzacurati, will chair a panel on adaptation and resilience and will speak during a breakfast panel on adaptation finance during this gathering of climate finance experts.
April 2-3 – Climate City Expo: Business, Asheville, NC: Senior Analyst, Lindsay Ross, will join this gathering focused on innovation in climate resilience.
April 10-12 – RI Asia Japan, Tokyo, Japan: Hear Emilie Mazzacurati present on scenario analysis for physical climate risk and meet with Chief Development Officer, Frank Freitas, at Four Twenty Seven's booth.
April 8 - 19 – Japan and Australia: Meet with Emilie Mazzacurati and Frank Freitas while they're in Japan and Australia.
April 13-16 – APA National Planning Conference, San Francisco, CA: Yoon Kim, and Director of Analytics, Nik Steinberg, will speak on a panel called, "Beyond Vulnerability: Innovative Adaptation Planning."
April 23-25 – National Adaptation Forum, Madison, WI: Yoon Kim will speak about integrating public health into climate adaptation and Editor, Natalie Ambrosio, will present on local adaptive capacity from a private sector perspective.
April 29 - May 1 – Ceres Conference 2019, San Francisco, CA: The Four Twenty Seven team will join investors and corporations at this annual gathering.
June 11 - 12 – RI Europe, London, UK: Hear Emilie Mazzacurati present on scenario analysis for physical climate risk and meet with Director, Europe, Nathalie Borgeaud, at Four Twenty Seven's booth.