Measuring What Matters: A New Approach to Assessing Sovereign Climate Risk

December 3, 2020 – Four Twenty Seven Report.  More frequent and severe extreme events driven by climate change pose a significant threat to nations around the world and understanding who and what is exposed to climate hazards is essential to pricing this risk and preparing for its impacts. This new report and underlying analytics assess sovereign exposure to floods, heat stress, hurricanes and typhoons, sea level rise, wildfires, and water stress based on the only known global dataset matching physical climate risk exposure to locations of population, GDP (Purchasing Power Parity) and agricultural areas within countries. 

Read the full report.

Globally, increasingly severe climate conditions impose growing pressure on populations and economies. The implications on economic growth, welfare, production, labor, and productivity are large, with potential material impacts on sovereign credit risk. However, assessing sovereign climate risk presents significant challenges. While most approaches to quantifying future climate risk exposure for sovereigns measure the average exposure over the entire territory of a country, this doesn’t capture whether the populated or economically productive areas are exposed to extremes. Likewise, averages of exposures to several climate hazards can mask extreme exposure to a particular hazard in a certain area of a country.

We’ve mapped the co-occurrence of hazards and exposures, explicitly factoring in the spatial heterogeneity of both climate hazards and people and economic activities across a country. This new report, Measuring What Matters – A New Approach to Assessing Sovereign Climate Risk, provides an analysis of the data. We find that all nations face meaningful risks despite their variation in size and resources. Explore sovereign climate risk in the interactive map below, based on both total and percent of a nation’s population, GDP (PPP) and agricultural areas exposed to climate hazards in 2040.

 

Key Findings:

  • By 2040, we project the number of people exposed to damaging floods will rise from 2.2 billion to 3.6 billion people, or from 28% to 41% of the global population. Roughly $78 trillion, equivalent to about 57% of the world’s current GDP, will be exposed to flooding.
  • Over 25% of the world’s population in 2040 could be in areas where the frequency and severity of hot days far exceeds local historical extremes, with negative implications for human health, labor productivity, and agriculture. In some areas of Latin America, climate change will expose 80-100% of agriculture to increased heat stress in 2040
  • By 2040, we estimate over a third of today’s agricultural area will be subject to high water stress. In Africa, over 125 million people and over 35 million hectares of agriculture will be exposed to increased water stress, threatening regional food security.
  • By 2040, nearly a third of the world’s population may live in areas where the meteorological conditions and vegetative fuel availability would allow for wildfires to spread if ignited.
  • Over half of the population in the most exposed small island developing nations are exposed to either cyclones or coastal flooding amplified by sea level rise. In the United States and China alone, over $10 trillion worth of GDP (PPP) is exposed to hurricanes and typhoons.

Read the full report.

Read the press release.

Contact us to learn more about accessing this unique dataset or explore our other physical climate risk data for banks and investors.

 

*Erratum: In Table 1 of a previous version of this report the “Agriculture Area at High Risk” column was said to be in units of 1 billion hectares. However, it is in units of 100 million hectares. 

Podcast: Banks are Getting Interested in Big Data to Figure out Their Climate Risk

How are banks, investors and financial regulators addressing climate risk?  Founder & CEO, Emilie Mazzacurati, joins Molly Wood in the Marketplace Tech podcast series, “How We Survive,” to discuss climate risk assessment and risk mitigation. The conversation covers regulatory developments, increased transparency on climate risks, resilience investment and the impact of COVID-19 on climate change conversations.

Moody’s ESG Solutions Group Appoints Global Head of Climate Solutions

Moody’s appoints Four Twenty Seven Founder & CEO, Emilie Mazzacurati, as Global Head of Moody’s Climate Solutions, with Moody’s ESG Solutions Group. Read the press release from Moody’s:

LONDON- (BUSINESS WIRE) – Moody’s announced today that it has appointed Emilie Mazzacurati as Global Head of Moody’s Climate Solutions. In this newly-established role, Ms. Mazzacurati will oversee the climate solutions suite within Moody’s ESG Solutions Group, a new business unit formed earlier this year to serve the growing global demand for ESG and climate analytics. Ms. Mazzacurati will report to Andrea Blackman, Global Head of Moody’s ESG Solutions. 

As global awareness and recognition of the financial risks posed by climate change increase, Moody’s is committed to meeting market needs for forward-looking, science-driven climate analytics that help advance a resilient financial system, responsible capitalism, and the greening of the economy,” said Ms. Blackman. “Emilie’s extensive climate expertise will be vital to our continued development of climate solutions and to ensuring that Moody’s is a leading voice in this important area.” 

As part of its climate solutions suite, Moody’s ESG Solutions provides risk measurement and evaluation tools to understand, quantify and manage climate risks for physical and transition risk, informing due diligence and risk disclosure in line with the recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).  

Climate risk analytics from Moody’s ESG Solutions are also integrated into Moody’s Analytics risk management tools, translating climate risk exposure into financial impact and credit risk metrics for banks, insurers, and investorsSimilarly, the group’s climate data and insights are increasingly being leveraged in Moody’s Investors Service credit analysisBy offering data and analytics across asset classes, including listed and unlisted companies, real estate, infrastructure, sovereigns and municipalities, Moody’s ESG Solutions supports the integration of climate-related risks into financial decision-making and risk management. 

Moody’s ESG Solutions climate offerings build on the award-winning physical climate risk analytics from Four Twenty Seven, leading provider of climate risk data and market intelligencefounded by Ms. Mazzacurati in 2012. Moody’s acquired a majority stake in Four Twenty Seven in 2019 and recently took full ownership. Moody’s climate solutions suite also leverages data from V.E, a Moody’s affiliate with expertise in transition risk, ESG, and corporate disclosures. 

ABOUT MOODY’S ESG SOLUTIONS 

Moody’s ESG Solutions Group is a business unit of Moody’s Corporation serving the growing global demand for ESG and climate insights. The group leverages Moody’s data and expertise across ESG, climate risk, and sustainable finance, and aligns with Moody’s Investors Service (MIS) and Moody’s Analytics (MA) to deliver a comprehensive, integrated suite of ESG and climate risk solutions including ESG scores, analytics, Sustainability Ratings and Sustainable Finance Reviewer/certifier services. 

For more information visit Moody’s ESG & Climate Risk hub at www.moodys.com/esg 

Report: Climate Change and Sovereign Risk

This joint report provides a comprehensive analysis of the ways in which climate risks affect sovereign risk, demonstrating new empirical evidence of how climate risk and resilience influence the costs of capital. It also explores the implications for Southeast Asia in particular, where countries are highly exposed to climate change risks and their economic consequences. Lastly, the report outlines five policy recommendations based on these findings. The report was a collaboration between the Centre for Sustainable Finance at SOAS University of London, the Asian Development Bank Institute, the World Wide Fund for Nature Singapore and Four Twenty Seven.

Download the full report.

Download the Executive Summary.

Watch the launch event.

“Climate Change and Sovereign Risk” outlines six transmission channels through which climate change affects sovereign risk and in turn the cost of capital, providing examples of each and explaining how they’re connected. It uses empirical analysis to demonstrate the significant impacts of climate risk exposure on the cost of capital. Using a sample of 40 developed and emerging economies, econometric analysis shows that higher climate risk vulnerability leads to significant rises in the cost of sovereign borrowing. Premia on sovereign bond yields amount to around 275 basis points for economies highly exposed to climate risk. This risk premium is estimated at 113 basis points for emerging market economies overall, and 155 basis points for Southeast Asian economies.

To further explore these channels, the report provides a closer look at Southeast Asia, a region with significant exposure to climate hazards such as storms, floods, sea level rise, heat waves and water stress. Physical risks are expected to considerably affect economic activity, international commerce, employment and public finances across Southeast Asian countries. Transition risks will be prominent as exports and economies become affected by international climate policies, technological change and shifting consumption patterns. The implications of climate change for macrofinancial stability and sovereign risk are likely to be material for most if not all countries in Southeast Asia.

The report highlights the need for governments to climate-proof their economies and public finances or potentially face an ever-worsening spiral of climate vulnerability and unsustainable debt burdens. It outlines five policy recommendations, emphasizing the importance for financial authorities to integrate climate risk into their risk management processes and for governments to prioritize comprehensive climate vulnerability assessments and work with the financial sector to promote investment in climate adaptation.

The report was originally posted by SOAS University of London.

Racial Justice and Climate Change: Adaptation

Introduction

Black communities and other people of color are disproportionately exposed to the impacts of climate change and also tend to have fewer financial and healthcare resources to prepare for and respond to these impacts. Adapting to climate change without an explicit focus on racial justice can further reinforce inequalities; hence, building systemic resilience to climate change must include investment in communities that are on the frontlines of climate impacts, including Black communities.

For the Local and Regional Government Alliance on Race & Equity, “racial equity means that race can’t be used to predict success, and we have successful systems and structure that work for all.” Equity means that different groups are provided with the resources they need to address their distinct challenges, acknowledging that these will not necessarily be equal. Thus, adaptation must include equity in every step of the process, from risk assessment and decision-making to planning, implementation, monitoring and evaluation. Key elements of equitable adaptation include conducting vulnerability assessments that account for place-based vulnerabilities, integrating consideration of social and cultural value within budgeting decisions, involving frontline communities in the decision-making from the start, and investing in the resources and policies these communities need to thrive. While by no means exhaustive, this article highlights the importance of racial equity for several phases in the climate adaptation process and shares some emerging best practices.

Risk and Vulnerability Assessment

The first step in the climate adaptation process is identifying risk exposure and vulnerability. Climate risk is not based solely on exposure to climate hazards like floods and extreme heat, but also on vulnerability, driven by a community’s specific characteristics. Vulnerability is shaped by the sensitivity of a given population and its adaptive capacity. Thus, the impact of a climate hazard, such as a storm or drought, will depend upon the resources and sensitivities of exposed communities.

Adaptive capacity is multifaceted, including both tangible resources such as access to transportation, air conditioning and green spaces and intangible elements such as social capital. Effective risk and vulnerability assessments explore these characteristics of a community, to identify how risks may manifest, and serve as the foundation for determining what adaptation measures are needed. For example, members of low-income communities with low vehicle ownership and greater dependence on public transportation will be less likely to be able to evacuate during an extreme event, experience longer-term impacts if subway stations are flooded or damaged, and be more likely to face economic hardship if they cannot get to work or lose their jobs. For extreme heat, communities with more urban green spaces, widespread access to air conditioning, or access to public cooling centers such as libraries, are likely to be less vulnerable than communities in dense urban centers with little greenery and/or those without access to safe public cooling centers.

Social capital is built through regular interaction, shared values or culture, and human connections, which build trust and lead individuals to look out for one another. In some cases, high social capital has increased communities’ resilience, helping to counterbalance a lack of tangible resources. For example, during Chicago’s deadly 1995 heat wave, while Black communities were hit hardest, the Black community of Auburn Gresham stood out with lower death rates than Chicago’s most affluent neighborhoods. The distinguishing factor was the way Auburn Gresham’s infrastructure was conducive to building social capital—its sidewalks and restaurants promoted opportunities to get to know each other and interact. Assessing the social elements of adaptive capacity in climate vulnerability assessments is critical to understanding a community’s needs and ensuring that adaptation efforts build on and leverage existing social capital.

Sensitivity refers to the characteristics of individuals and communities that affect how a climate hazard may impact them. For example, Black communities often have high sensitivity to climate hazards, due to preexisting health conditions, which are driven by disproportionate exposure to environmental toxins. Likewise, agricultural communities are particularly sensitive to water stress due to the water-intensive nature of agricultural activities, with those that lack financial resources and political influence likely to experience the greatest impacts. Engaging with a community to assess its exposure to physical climate hazards, the resources it has to respond, and its residents’ particular sensitivities lays the groundwork for equitable adaptation.

Budgeting

A climate risk assessment centered on concerns for social equity can inform an equitable planning and budgeting process. Traditional cost benefit analysis can undervalue the needs of low-income communities or communities of color, due to its emphasis on ensuring adaptation costs do not exceed  property values. While this approach is often used to determine the best locations for adaptation investment, it can perpetuate inequitable distribution of impacts and investment. For example, in Cedar Rapids, IA, a flood mitigation study found that a region on the Cedar River’s West Bank did not qualify for investments in flood barriers due to relatively low property values. However, hundreds of these homes were destroyed by flooding in 2008. Policy makers can integrate a consideration for equity and improve the longer-term return on investment by replacing the current cost benefit analysis to account for vulnerability and longer-term community impacts and savings, rather than only up-front economic impacts.

The distribution of disaster recovery funds will dictate the resources available for community rebuilding and, in many instances, Black communities do not receive the funds they need. For example, after Hurricane Harvey, Taylor Landing, TX received $1.3 million in recovery funds—about $60,000 per affected resident. Taylor Landing is a town of 228, which had a median household income of about $69,000 in 2017 and, according to the Census, had no Black residents. Meanwhile, nearby Port Arthur, a town of 54,000 residents, with a median household income of $32,000 and a population that was over a third Black, received $4.1 million from the same funding—about $84 per affected resident. This inequitable distribution of funds is due to an unrepresentative regional fund allocation system. The members of the council that distributes the funds disproportionately represent the region’s smaller, primarily white towns, rather than the region’s largest cities, including Port Arthur. Moreover, the Small Business Administration approves disaster loan applications from primarily white communities at almost twice the rate that it does for applications from majority Black communities. This discrepancy is largely because disaster loan applications are based on credit scores, which are typically lower for minority populations and are more likely to remain low if these communities lack the resources to recover. This exemplifies the need for Black communities most exposed to climate impacts to be represented in decisions about resource allocation to support climate resilience and for reconsidering financing structures.

Acknowledging that many Black communities face compounding challenges due to a historic lack of investment in their communities, investing in these communities, and reducing the loss and costs that come with repeated impacts are important steps in ending this cycle. This calls for a restructuring of federal disaster response funding processes, moving beyond rigid frameworks based on home value and including advisory committees composed of members of the frontline communities. Financial institutions also have an opportunity to increase the flow of financial capital to Black communities. Strategies can include building advisory offerings meant to foster financial literacy and savings, shifting to key performance indicators focused on client financial health rather than promoting indebtedness and creating new models to reach those typically excluded. For example, accepting proof of current employment instead of requiring credit history to allow individuals to begin building credit would help those typically unable to access capital begin to obtain financing. Building equity in budgeting and promoting equitable lending practices would play a role in breaking the cycle of disenfranchisement.

Integrating Equity into Adaptation

Maladaptation and the Need for Change

There are many different types of adaptation measures, including structural measures, land-use policies and capacity-building. The impacts and efficacy of any adaptation measure is highly context-dependent. One common point of failure is the exclusion of certain stakeholders or when planners, consultants, and policy-makers make their own judgements of what is important and may ignore important characteristics of the community. In this case, there is often high potential for maladaptation, or unintended consequences that end up perpetuating existing social inequities by increasing the exposure of those who are already on the frontline.

For example, levees and other flood barriers often worsen downstream flooding as they force the water through a narrower channel, so there is more volume to inundate surrounding areas that do not have flood protection. The cost benefit calculations discussed above drive these engineering decisions and lead to protection for more affluent communities while nearby low-income towns endure the consequences. Likewise, while increasing flood insurance premiums may help provide incentives to move from flood-prone areas, for those who cannot afford to leave it also leads to increased affordability challenges and potentially the decision to forgo flood insurance, compounding challenges when flooding does occur.

As governments begin to invest in adaptation measures, there is a risk of climate gentrification, or the pricing out of Black residents and low-income communities. For example, in Norfolk, VA, part of the sea level rise strategy is to demolish several public housing units, replacing them with mixed-income buildings and transforming the rest of this exposed area into a green space that can absorb floodwater. The city provides some assistance and vouchers for relocation, but the burden largely falls on the low-income residents. In some cases, their only options are to live farther away from the city center, paying more money for gas to commute to work and making the daily efforts of providing for their families even more challenging.

Many factors influence the efficacy of adaptation outcomes, including whether or not the adaptation is responsive to the community’s needs. For example, if a new cooling center is built, but residents lack transportation or feel uncomfortable meeting in public spaces with few amenities, the cooling center will do little good. Likewise, evacuating ahead of hurricanes saves lives and warning systems can help prompt more thorough evacuations. However, residents that are not informed about the importance of evacuations or those who do not trust public authorities are unlikely to heed evacuation warnings, particularly if evacuations are challenging due to resource and transportation constraints. The long history of racism and exclusionary government programs have weakened trust of public authorities in some communities. Creating adaptation strategies that are truly equitable and effective requires understanding the community’s needs and tailoring a climate response that can be fully embraced by the community at risk.

Changing Policies

Policy makers must start exploring alternatives to adaptation guidelines that perpetuate inequity, such as the Army Corps of Engineers’ sole use of property value metrics when assessing which communities get flood protection, or waterfront adaptation that leads to climate gentrification. Some cities including those in the Bay Area, Atlanta and Chicago have started developing Land Trusts to ensure that affordable housing is available in the long-term, even as areas increase in value. The Land Trusts permanently own the land, but allow low-income families to enter into long-term leases and to build equity on the homes. When the time comes to move, the family sells to another qualifying low-income family and a resale formula is used to determine the amount, providing profit for the family that is selling while keeping the home affordable for other low-income families. This is one example of ways that innovative policies can foster equity alongside climate adaptation.

Engagement and Representation

Community engagement should be integrated into all steps of the adaptation process. This engagement can be broken down into three forms: outreach, consultation and deliberation. Outreach is the one-way, information sharing that comes from informing the community about climate risks or adaptation efforts, and consultation involves soliciting community feedback on draft plans and decisions. While this is important, it is essential that community engagement doesn’t just occur in the middle or end of the process, but rather is a central component from the beginning. Having community members present during the decision-making process will help identify what the community really needs. Equitable representation of community members, in terms of demographics and socioeconomic status is essential.

Another important outcome of intentional community engagement is transparent, two-way trust-building. Understanding the language, scientific literacy and culture of a community helps to build trust, and ultimately, to reduce vulnerability as a result of more successful and inclusive adaptation efforts.

Building Upon Existing Capacity

As discussed above, social capital is an important component of resilience and shared culture is one element of social capital. It is often the case that strong bonds exist in communities of color based on shared culture. While many Black communities and other communities of color lack financial capital and, thus, often do not have financial resources to build resilience, their social capital provides a solid foundation from which to build equitable, cohesive adaptation plans. Funneling resources through existing networks such as local religious groups and community cultural centers helps bolster this social capital while also allowing the organizations most informed regarding a community’s needs and trusted by its population to lead adaptation.

One example of adaptation rooted in community engagement and trust building is Baltimore’s Make a Plan, Build a Kit, Help Each Other program centered around residents sharing their stories and discussing the impacts of climate change, while working with local experts to develop preparedness plans. It is important to meet communities where they are, framing adaptation efforts around ensuring that communities have the social resources needed to prepare for climate hazards and acknowledging the wealth of insight and experience the community has to provide.

Conclusion

Equitable climate adaptation involves identifying areas that are on the frontlines of climate change and what they need to prepare for climate impacts. It also involves considering the implications of policy and ensuring that a disproportionate burden is not placed on frontline communities. Investing in equitable adaptation is one essential tool for addressing the disproportionate impacts of climate change on Black communities and other people of color. For too long, planning decisions have excluded communities of color, with long-term negative impacts. While more recent adaption efforts have sought to end this vicious cycle by creating a more inclusive environment for planning, communities of color still lack the political clout and funding to move projects forward. Opportunities to build partnerships with (or within) these communities, identify new funding and development models that directly address decades of exclusion, and reduce repeated loss by helping those most exposed confront climate change, must be embraced and advanced.

 

Newsletter: How does climate risk threaten financial stability?

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we feature analyses on climate change from the Federal Reserve, highlight insights on climate risk across sectors and announce the opening of Four Twenty Seven's Tokyo Office.

In Focus: Regulators Speak Up on the Financial Impacts of Climate Change

Federal Reserve Publishes Research on Climate Resilience

Last week, the Federal Reserve Bank of San Francisco released a set of articles on the impacts of climate change on communities and the economic and financial implications of these risks. The articles cover a range of topics including the impacts of sea level rise on real estate assets and lending, the need for innovation in insurance markets and the implications of climate-induced migration for the private sector. Four Twenty Seven contributed a piece on the connection between community resilience and asset-level resilience, describing a methodology for investors to understand and promote community adaptive capacity.

"The collection of 18 papers by outside experts amounts to one of the most specific and dire accountings of the dangers posed to businesses and communities in the United States — a threat so significant that the nation’s central bank seems increasingly compelled to address it." - The New York Times' Christopher Flavelle wrote.
Read the Publication

International Monetary Fund to Assess Financial Risk of Climate Change

“'We are doing work on the pricing of climate risks and to what extent it is priced into stock and bond markets,' Tobias Adrian, financial counselor and director of the IMF’s monetary and capital markets department, told Reuters." Adrian cited the costly impact of Hurricane Dorian in the Bahamas and growing investor concern around the mispricing of climate risk in mortgage-backed securities as examples of the widespread financial impacts of climate change. This was one of many climate change conversations at the IMF's annual meeting last week.
Resources for Resilience Across Sectors  

Optimizing Community Infrastructure

Optimizing Community Infrastructure: Resilience in the Face of Shocks and Stresses examines the multiple dimensions of infrastructure that underpin resilient societies. The book discusses transportation infrastructure as well as utilities, land use and buildings and includes case studies and guidance on financing resilient infrastructure. Four Twenty Seven co-wrote a chapter with Climate Finance Advisors that examines how physical climate risks can impact infrastructure assets throughout their life cycle and ways in which investors and lending institutions can identify and manage physical climate risks in infrastructure assets. 

Resilient Cities - Transforming Over Time

This set of editorials discusses innovative opportunities to adapt communities and infrastructure to climate risks. The pieces cover the economic and social elements of climate risk and resilience, and Four Twenty Seven contributed an article, Addressing Shared Climate Risks to Build Community-Corporate Resilience. 

Podcast: Climate Change is Here. Are We Ready?

Founder & CEO, Emilie Mazzacurati, joins a new podcast, The Last Environmentalist, to discuss the evolving views of climate risk in the financial sector. Emilie describes near-term impacts of climate change on real estate markets, adaptation actions taken by corporations and the linkages between climate risk and resilience across private and public sectors.
 Climate Change Exacerbated the Impacts of Typhoon Hagibis
Within 24 hours Typhoon Hagibis sent over three feet of rain into areas surrounding Tokyo, as fierce winds exacerbated flooding from storm surge. At least 74 people died, 34,000 homes lost power and 110,000 lost running water. Meanwhile, disrupted ground transportation and damaged facilities had rippling effects. Subaru stopped operations at three facilities in the area due to disruptions at their suppliers, other automobile manufacturers halted production at damaged facilities and logistics firms incurred the costs of doubling their distance with alternate routes. 

While many areas of Japan have robust building standards to account for already frequent typhoons, the frequency and distribution of storms in Japan is shifting. Three of Japan's most costly typhoons since 1950 have happened in the past two years, with Typhoon Hagibis expected to be the fourth. The storm was unique partly because it is rare for storms to hit Tokyo with so much force. Research shows that tropical cyclones in the Northwest Pacific Ocean Basin are reaching maximum intensities further north than they used to, partly influenced by climate change, which means areas less accustomed to these extreme storms may experience them more often. 
Inside the Office at Four Twenty Seven

Four Twenty Seven Opens Toyko Office and Announces Country Director

Yesterday, Four Twenty Seven announced the opening of its Tokyo Office. This 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.

Four Twenty Seven welcomes Toshi Matsumae as Director of Japan. Toshi leverages his 30 years of experience in sales and development 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,” said 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.”

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.
  • 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
  • Controller experienced in financial reporting, planning and analysis
  • 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:

  • Oct 25 – Yale Alumni Real Estate Annual Conference, New Haven, CT: Senior Analyst, Lindsay Ross, will speak about resilience planning in real estate.
  • Nov 5 – Moody's ESG Conference, London, UK: Director of Analytics, Nik Steinberg, will discuss climate change's financial implications and Chief Revenue Officer, Lisa Stanton, will also join. 
  • Nov 7 –  Moody's U.S. Public Finance Conference, New York, NY: Lindsay Ross will participate. 
  • Nov 7 - 8 – Building Resilience 2019, Cleveland, OH: Global Director of Client Services, Yoon Kim, will speak on a panel about public-private partnerships.
  • Nov 8 – Yale Initiative on Sustainable Finance Symposium, New Haven, CT: Editor, Natalie Ambrosio, will speak about physical climate risk disclosure. Invite-only.
  • Nov 13 - 15 – SRI Conference, Colorado Springs, CO: Natalie Ambrosio will speak about physical climate risk in investments.
  • Nov 21 - 22 – IACPM 2019 Annual Fall Conference, Miami, FL: Lisa Stanton will speak at this International Association of Credit Portfolio Managers conference.
  • Nov 29 – Climate Finance Day, Paris, France: Lisa Stanton, Director, Europe, Nathalie Borgeaud, and Senior Analyst, Léonie Chatain, will attend.
  • Dec 4 – 2019 HIVE Conference, Austin, TX: Strategic Advisor, Josh Sawislak, will present about how to use data to build resilience. 
  • Dec 4 - RI New York 2019, New York City, NY: Yoon Kim, will speak on the panel “Banks, insurers and climate risk stress-testing,” and Lindsay Ross and Natalie Ambrosio will host Four Twenty Seven's booth.
  • 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.
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The Last Environmentalist Podcast: Climate Change Is Here. Are We Ready?

How does the private sector view climate change, why is this important for global climate adaptation and how does someone in this field remain motivated?  Founder & CEO, Emilie Mazzacurati, joins Josh Dorfman’s new podcast, The Last Environmentalist, to discuss these topics and much more. The conversation covers the evolving views of climate risk in the financial sector and how this awareness can translate into resilience-building.  Emilie describes near-term impacts of climate change on real estate markets, adaptation actions taken by corporations and the interacting nature of climate risk and resilience across private and public sectors.

For more detail on climate risk in real estate, read our recent analysis, Real Estate Climate Risks: How Will Europe be Impacted? For more insight on shareholder engagement, read our report, Engaging with Corporates to Build Adaptive Capacity.

Newsletter: How will climate affect Europe’s real estate & U.S. retail?

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.

Our latest analysis assesses the exposure of retail sites and offices across Europe to floods, sea level rise and heat stress. We find that 19% of assessed retail spaces and 16% of offices in Europe are exposed to floods and/or sea level rise, with floods presenting the highest risk for both types of asset. The analysis identifies the cities with the largest percent of facilities exposed to floods and sea level rise, and discusses the implications this exposure has for business continuity and real estate markets across the continent. 
Read the Analysis
Credit Quality in U.S. Governments Exposed to Heat Stress

Moody's Investors Service Analysis - Growing Exposure to Heat Stress Mitigated by Economic and Fiscal Strengths

Moody's new analysis overlays Four Twenty Seven's data on exposure to heat stress in U.S. governments with information on outstanding debt and credit quality, finding that 21% of outstanding debt they rate is exposed to high or very high heat stress. This exposure is concentrated in the central U.S. and Florida. The Southeast has the most debt exposed to heat stress, but this debt tends to be from larger, well-resources governments with diverse economies, which improves governments' resilience to extreme events. Bloomberg covers the report, emphasizing the potential implications of heat stress for Midwest bond issuers. Register for free to read the analysis:
Read the Report
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.

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

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Factsheet — Financial Climate Risk Regulation in the European Union

July 29, 2019 – 427 FACTSHEET. Regulation on climate risk in Europe is likely to have a rippling effect across markets globally. There has been key legislation in the past few months, with more action on the agenda. Staying up-to-date on these developments will provide early indications of regulatory action to come. This factsheet on regulatory developments in the EU provides key background to the EU’s sustainable finance agenda, outlines key actions and highlights upcoming dates to remember.

Since establishing the High-Level Expert Group on Sustainable Finance (HLEG) in 2016, the European Union (EU) has positioned itself as a leader in sustainable finance. It has made rapid progress on integrating climate change into its financial sector, simultaneously addressing it from several angles, including risk disclosure, green bond labels, a taxonomy for adaptation and mitigation, and risk management oversight directives. As global financial actors operate, and are regulated, in Europe, EU regulations are likely to propel a development in best practices for addressing climate risk that reaches beyond the EU. Likewise, regulators and financial actors across the world are watching carefully as EU regulation may influence their own action. This factsheet, Financial Climate Risk Regulation in the European Union, summarizes the EU’s stance on the financial risk of climate change, notes key regulatory players and highlights recent and upcoming regulatory action applicable to financial markets.

Key Takeaways

  • The EC completed several milestones from its Action Plan in June 2019, including publishing updated nonbinding guidelines for incorporating climate risk into the non-financial reporting directive and releasing the Technical Expert Group report on a taxonomy for activities that contribute to climate adaptation and mitigation.
  • In April 2019, the European Parliament and Council agreed on text for regulation on disclosures relating to sustainability risks and investments, explicitly stating that climate change demands urgent action.
  • The European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority have provided technical advice on proposed changes to oversight requirements, suggesting that sustainability be explicitly integrated into risk management, operations, investment strategies and governance.
  • The European Banking Authority will spend two years assessing environmental, social and governance risks and their management in the banking sector. The assessment will be used to develop a draft amendment requiring “large institutions” to disclose their risk and the disclosures will be required three years after the regulation is implemented.

Read the Factsheet.

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

Newsletter: Bank of England Publishes First Stress Test for Climate Risks

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

Yesterday the Bank of England released specifications for integrating climate risk scenarios into its insurance industry's biennial stress tests. This "exploratory" exercise is an enormous step towards catalyzing a growing understanding of possible impacts of transition and physical climate risks on financial assets.

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.

The Bank of England also recently released a practitioner's guide for assessing the financial impacts of physical climate change, to help the insurance sector address climate risks.

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.  
Read the Blogs
EU Technical Expert Group
Releases Guidance
Yesterday the European Commission released its final guidance on integrating climate change into corporate disclosuresThis guidance applies to 6,000 companies, banks and insurers in Europe and maps to the TCFD recommendations. The guidance includes key recommendations from Advancing TCFD Guidance for Physical Risks and Opportunities, published by the European Bank for Reconstruction and Development (EBRD) and GCECA last year, for which Four Twenty Seven was a lead author. 
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.
Investors Factor Climate Risk into Decisions
The past month has seen a flurry of news around the business risks of climate change and the financial sector response. CDP's annual climate change report estimates that 215 companies could incur around $1 trillion in climate-related costs if they don't prepare for these impacts. Companies expect these costs to begin accumulating in around five years. While some are not yet acting, others are, such as Japanese Hitachi Ltd preparing for increased rainfall in Southeast Asia and Brazilian Bank, Banco Santander, considering how increased water stress may damage borrowers' ability to repay loans. 

Alison Martin of Zurich Insurance Group told a meeting of CFOs that physical risks such as drought, extreme heat and flooding will be "incredibly meaningful." She emphasizes that the first step in integrating climate change into planning is for a company to understand its risk exposure. Meanwhile investors say they are increasingly factoring physical climate risk into their decision-making to minimize their risk and increase returns. Four Twenty Seven's on-demand scoring of real assets and analysis of asset-level risk in equity portfolios enables both corporations and investors to understand their exposure and strategically address physical climate risks.
Devastating Impacts Call for Preparation

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.

The Climate Connection

While the Mississippi River continues to swell, extreme precipitation has recently hit Houston and the Southeast with damaging floods. The past 12 months have been the wettest on record for the U.S. The national average of 37.7 inches since last June is 7.7 inches above average. 
A weak El Niño likely contributed to increased rainfall, but climate change also plays a role as warmer air holds more water. This month also saw record high temperatures in the western U.S., caused by a bulging jet stream making warm air flow south to north. While this does happen naturally, it may be happening more often due to warming ocean waters. This jet stream activity also contributes to other extreme events like the Midwest flooding.

The Need to Rethink Preparedness

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
important step by allowing FEMA to use a small portion of its disaster relief funding for risk mitigation ahead of disasters. However, this is the start of what must be a systemic shift in addressing extreme events. “If we don’t want to spend hundreds of billions of dollars on recovering for disaster, we need to spend tens of billions [on resilience],” Four Twenty Seven Strategic Advisor, Josh Sawislak, told Bloomberg.

"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.
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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
2000 Hearst Ave
Ste 304
Berkeley, CA 94709