July 15, 2018 – 427 ANALYSIS: Record-setting rains in Japan led to floods and landslides that disrupted business operations of automobile manufacturers, electronic companies and others. Understanding the ownership and operations of facilities located in the damaged areas provides insight into what companies and industries may exhibit downturns in performance over the near term and be vulnerable to similar storms in the future.
Japan was the inundated by over 70 inches of rain in early July, an event that resulted in significant loss of life and business disruptions. The clouds have since receded, leaving economic damage with long-term implications yet to be understood. However, estimates expect industry losses to be in the billions USD. Destruction was centered in Okayama and Hiroshima, driven by flooding and landslides.
Typhoons Prapiroon and Maria contributed to this rainfall and climate scientists expect a warmer climate to increase the severity of these storms. Japan has fewer preparations in place for floods than it does for other extreme events, and understanding the various manifestations of risk caused by extreme rainfall is essential to mitigating damage in the future.
Much of Okayama sits immediately below mountains, which makes it particularly exposed to devastating landslides following significant rainfall events. Bursting pipes and power outages led over 250,000 homes in the Okayama and Hiroshima Prefectures to go without water for several days after the floods. Landslides destroyed homes and exacerbated infrastructure damage caused by flooding.
Many business operations were severely impacted by these events as well, and some facilities remain closed. Companies such as Panasonic experienced physical damage due to flooded facilities, and others were impacted by damaged infrastructure and communities, impacting their supply chains and workforce.
Okayama and Hiroshima are centers of economic activity for a number of key sectors in Japan, hosting production facilities for auto manufacturing, consumer electronics, retail trade and others. The figure below highlights the concentration of facilities of companies in the auto manufacturing industry by the sector of their operations. Companies that rely heavily on manufacturing operations are particularly vulnerable to flooding due in part to their utilization of expensive equipment that can easily incur water damage.
The heavy rainfalls showed no favorites in their disruption of manufacturing facilities across industries. For example, Mitsubishi and Mazda halted operations at some factories during the storms, due in part to supply chain disruptions. Many companies were also forced to pause operations because employees couldn’t get to work. While Mazda’s headquarters in Hiroshima Prefecture and a production facility in Yamaguchi Prefecture weren’t damaged themselves, they remained closed after the storms until employees could return to work safely. Likewise IHI Corp. closed its No. 2 Kure factory in Hiroshima because of water shortages and employees’ commute challenges.
The extent of long-term economic impacts that these companies will bear in the aftermath of last week’s storms is not yet known, but merits ongoing examination as the region recovers. Understanding the location of a corporation’s facilities and their exposure to extreme weather events is a key starting point for gauging exposure, and therefore can be instrumental in understanding company’s future performance.
Four Twenty Seven’s extensive facility level database can help investors proactively identify their portfolio companies’ exposures both to chronic climate effects and to individual extreme weather events such as the extreme rainfall that beset Okayama and Hiroshima. This deeper understanding can drive better risk-return tradeoffs, and importantly, shareholder engagement strategies that foster investments in resilience.
June 25, 2018 – 427 REPORT. Regulatory pressure and financial damage are necessitating an increase in physical climate risk disclosure in Australia. In exercising their own due diligence and assessing the exposure to physical climate risks in their portfolios, investors arm themselves with valuable information on corporate risk exposure which they can leverage to engage with companies around resilience. This report explores the connection between climate hazards and financial risks and shares examples of corporate adaptation and investor engagement to build resilience.
The global tide of interest in the Task Force on Climate-related Financial Disclosures (TCFD) has hit the shores of Australian financial markets, steered by regulators concerned about the systemic risk climate change poses to the economy. In 2017 Australian Prudential Regulation Authority’s Geoff Summerhayes was the first Australian regulator to formally endorse the TCFD. “Some climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now,” he said. This sentiment was echoed by John Price of the Australian Securities and Investments Commission in 2018 and reflects growing regulatory concern over climate risk disclosure internationally, as shown by Article 173 of France’s Law on Energy Transition and Green Growth and the 2018 European Commission Action Plan.
This Four Twenty Seven Report, Responding to Economic Climate Risk in Australia, explores the drivers of financial risk in Australia and discusses approaches to addressing this risk. The nation’s dominant industries are particularly threatened by the prevalent climate hazards. For investors, understanding a company’s risk to climate change is an essential first step to mitigating portfolio risk, but must be followed by corporate engagement to build resilience. Institutional investors are increasingly leveraging shareholder resolutions and direct engagement to prompt companies to disclose their climate risks and adapt.
This Four Twenty Seven webinar on emerging metrics and best practices for physical climate risks and opportunities disclosures covers recent developments in TCFD and Article 173 reporting, challenges to assessing climate risk exposure, strategies for investors to incorporate this information into decision-making and approaches to build corporate resilience.
June 5, 2018 – 427 REPORT. Shareholder engagement is a critical tool to build resilience in investment portfolios. Investors can help raise awareness of rising risks from climate change, and encourage companies to invest in responsible corporate adaptation measures. We identify top targets for shareholder engagement on physical climate risks and provide data-driven strategies for choosing companies and approaching engagement. Our report includes sample questions as an entry point for investors’ conversations about climate risk and resilience with corporations.
Shareholder engagement on climate change has grown tremendously in recent years. Over 270 investors, managing almost $30 trillion collectively, have committed to engage with the largest greenhouse gas emitters through the Climate Action 100+. In addition to their ongoing efforts to engage and encourage companies to reduce emissions, investors are becoming aware of the financial risks from extreme weather and climate change. Climate change increases downside risks: a negative repricing of assets is already being seen where climate impacts are most obvious, such as coastal areas of Miami. As climate change can negatively impact company valuations, investors must strive to bolster governance and adaptive capacity to help companies build resilience.
This Four Twenty Seven report, From Risk to Resilience – Engaging with Corporates to Build Adaptive Capacity, explains the value of engagement, for both corporations and investors and describes data and case studies to drive engagement strategies. While news coverage of extreme weather events can clue investors in to which corporations may be experiencing climate-driven financial damage, new data can empower investors to identify systemic climate risk factors and proactively engage companies likely to experience impacts in the future. Reactive engagement strategies based on news stories can also use data to more thoroughly explore corporations highlighted in the news, by examining other hazards that may pose harm to their operations.
The report also identifies the Top 10 companies with the highest exposure to physical climate risk in the Climate Action 100+ and calls for investors to leverage their engagement on emissions to also address urgent issues around climate impacts and building resilience.
Once they identify companies, shareholders can use a variety of questions to gain a deeper understanding of companies’ vulnerability to climate hazards and their governance and planning processes, or adaptive capacity, to build resilience to such impacts. The report provides sample questions for different components of climate risk, including Operations Risk, Market Risk and Supply Chain Risk, as well as Adaptive Capacity.
• The impacts of a changing climate pose significant downside risk for companies; a risk bound to increase as the climate continues to degrade.
• At present, investors are likely to become aware of exposure to financial damages from extreme weather events only after they have occurred. Disclosure is limited but gaining traction.
• Corporate engagement is a tool to encourage companies to deploy capital and technical assistance to build resilience in their operations and supply chains.
• Investors can select target companies reactively based on prior incidents or pro-actively identify firms that would benefit from resilience plans.
• Investors should question companies on their exposure to physical climate risks via their operations, supply chain and market, as well as how they are building resilience to these risks through risk management and responsible corporate adaptation strategies.
The European Bank for Reconstruction and Development (EBRD) and the Global Centre of Excellence on Climate Adaptation (GCECA) have announced details of their conference, “Advancing TCFD guidance on physical climate risk & opportunities.” A culmination of their initiative focused on building climate resilience in the financial sector, the conference will share findings on physical risk and resilience metrics from three expert working groups. Read the press release below, originally published on EBRD’s website:
Findings of industry working groups will be published ahead of the event “Advancing TCFD guidance on physical climate risk and opportunities”
The EBRD and GCECA are hosting an event “Advancing TCFD guidance on physical climate risk and opportunities”, which will be held on 31 May 2018 at the EBRD’s headquarters in London.
Findings about physical climate risk and opportunity disclosure by industry-led working groups, which have been meeting at the EBRD’s headquarters since 2017, will be released at the conference.
This event will build on the recommendations of the TCFD, headed by Mark Carney and Michael Bloomberg. These recommendations highlight a growing concern over the effects of climate change on the economy and financial markets, and the need for investors to be able to assess climate-related risks.
At the conference, senior representatives from the financial, business and regulatory communities will discuss the development of metrics for disclosing physical climate risk and opportunities, and the integration of these disclosures into decision-making.
The confirmed high-level speakers at the conference will include:
The panelists will represent a rich variety of market leaders such as Aon, Citi, Maersk, Moody’s and Standard Chartered, as well as the Bank of England, the French Treasury and the European Commission.
Findings from the expert working groups will also be published. The working groups include representatives from Allianz, APG, Aon, Bank of England, Barclays, BlackRock, Bloomberg, BNP Paribas, Citi, DNB, DWS, Lightsmith Group, Lloyds, Meridiam Infrastructure, Moody’s, OECD, S&P Global, Shell, Siemens, Standard Chartered, USS and Zurich Asset Management. An expert team led by Acclimatise and Four Twenty Seven is providing the Secretariat function to the working groups.
TCFD recommendations, released for the G20 summit in June 2017, call for the inclusion of metrics on physical climate risk and opportunities into financial disclosures by corporations and financial institutions. This is echoed in the recommendations of the European Union’s High Level Expert Group on sustainable finance, released in January 2018, and the Action Plan from the European Commission released in March 2018.
Last month the EBRD become a TCFD supporter, the first multilateral development bank to do so. The EBRD’s 2017 Sustainability Report, to be released later this month, will provide an initial outline of how TCFD recommendations relate to the Bank’s operations. The conference on 31 May will be an important milestone in the Bank’s support for the TCFD process.
Since 2006 the EBRD has invested over €22 billion in projects under its Green Economy Transition approach. Energy efficiency and environmental sustainability have been a priority for the Bank since its creation in 1991.
We chat with our new Chief Development Officer, Frank Freitas, about his motivations to join Four Twenty Seven after almost 30 years in finance and fintech, and his vision for new products and markets in climate analytics.
Why did you decide to join Four Twenty Seven?
First and foremost, the fact that our firm provides data-driven analytics that quantify real issues facing our planet today is very attractive to me. I have spent my entire career in finance and, like others, have increasingly come to see the need for alignment of investment decisions with those that preserve the future of our planet. To me, Four Twenty Seven’s mission and vision exist at the center of this nexus.
When I encountered the Four Twenty Seven white paper on climate risk in equity markets, I was impressed by the level of thought-leadership embedded in the research, and by the high level of quantitative rigor applied to the development of its risk scores. The acceleration of climate’s influence on corporate performance are upon us, and investors are rapidly awakening to the risks that climate change brings to financial markets. Four Twenty Seven’s sophisticated climate data analytics are at the forefront of identifying the most exposed corporations and assets globally.
My career to date has been focused on the development of analytical solutions for institutional investors, ranging from multi-factor risk models at Barra (now MSCI) to the solutions we built in my previous company, Pluribus Labs, where we combined data science and natural language processing with quantitative modeling to distill a variety of unstructured data sources into investible signals.
In my subsequent conversations with Emilie and the Four Twenty Seven team, I quickly came to realize that Four Twenty Seven’s research methodology really resonated with me, and that the culture here is fabulous. It’s rare that you have an opportunity to do what you love and also provide solutions that impact the planet’s future — my role at Four Twenty Seven enables me to do just that!
How is technology spurring innovation in research around financial risk?
There are a number of drivers at play in this respect. First and perhaps most obviously, the availability of computing power at our fingertips makes data analysis on large data sets more available and more affordable than ever before. If you had told me when I started my career that I would be able to create an account on a cloud computing platform like Google’s GCP or Microsoft’s Azure and have massive amounts of compute power available within minutes, I wouldn’t have believed you! Four Twenty Seven’s ability to distill terabytes of climate data from an ensemble of models into actionable insights at the asset level is a great way to leverage this computing power.
Relatedly, the ubiquity of meaningful data, both unstructured and structured, also provides a much broader set of lenses through which to view the world. Financial research has always focused on the development of insights from any and all available data sources on companies, industries and economies. Today, an ever-increasing volume of data sources are accessible for analysis. For example, features extracted from satellite images of our planet can be used to arrive at estimates on a wide variety of metrics, ranging from crop yields to consumer brand sales changes. Similarly, observations gleaned from the ‘Internet of Things’ (IoT) can provide us with insights into weather trends and CO2 emissions at the sub-city level. Moving forward, opportunities afforded by organizations’ self-reporting of their climate risks and mitigation plans specifically related to climate change will provide additional data points for firms like ours to incorporate into our ground truth analysis of companies, industries and economies.
Couple these two trends with increasingly sophisticated machine learning and feature extraction techniques and you wind up with tremendous opportunities to develop insights into both the physical risks of climate change and the steps that companies are taking to mitigate these risks.
What are the priorities during your first year at Four Twenty Seven?
Emilie and the team have translated their broad and deep base of intellectual property into purpose-built solutions for a number of key market segments in the financial sector. These solutions enable asset owners and investors alike to understand their holdings’ exposure to the physical reality of climate change.
Our goals for this year are to continue tuning our existing offerings through engagement with our clients and to position the firm for its next phase of growth. Thanks to entities like the Task Force on Climate-related Financial Disclosures (TCFD), market participants are increasingly aware of the need to incorporate climate risk analytics into their investment process, and we will continue to evangelize this message in our own interactions with the investment community. We are currently in fundraising mode and will use proceeds from our capital raise to support plans to leverage our proprietary facility database to quantify the relationship between weather and company performance. In addition, we intend to on-board additional data sources to inform our analytics and add desktop visualization tools to our client offerings. This promises to be a busy year!