OCTOBER 24, 2018 – GENEVA, SWITZERLAND – Four Twenty Seven received ISAR Honours for asset-level climate risk scores.
ISAR Honours recognized Four Twenty Seven’s contribution to developing best practices on corporate reporting. The Intergovernmental Working Group of Exports on International Standards of Accounting and Reporting (ISAR) supports progress on the Sustainable Development Goals (SDGs) by fostering corporate transparency, good governance and sustainability standards. Its awards aim to foster the dissemination of initiatives that improve global corporate reporting and integrate environmental, social and governance factors into reporting cycles. ISAR is convened through The United Nations Conference on Trade and Developments (UNCTAD).
“Four Twenty serves governments and cities, corporations and financial institutions,” Four Twenty Seven’s Director, Europe, Nathalie Borgeaud said during the awards ceremony. “We inform about the physical climate risks they incur. We inform about floods, cyclones and sea level rise and we inform about extreme heat and droughts, for each of their assets, with forward-looking, science-driven data. In order for all to develop meaningful resilience strategies, we inform about the future that is knocking on our door. And we all know it is knocking hard.”
Explore Four Twenty Seven’s award-winning equity risk scores and other climate data analytics that enable investors, corporations and governments to understand climate risk exposure and build resilience.
This PRI webinar, hosted in conjunction with DWS, discusses recent research in identifying physical climate risks and integrating this information into investment decisions. DWS shares its process for leveraging Four Twenty Seven’s equity risk scores to create a climate-optimized index.
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.
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!
From Recommendations to Action
March 15, 2018 – 427 ANALYSIS. The EU laid out a clear plan to move towards mandatory climate risk disclosure as part of a new set of regulations to finance sustainable growth and support the transition to a low-carbon economy. The European Commission’s Action Plan lays out a two year timeline for implementation, with a goal to create a taxonomy for climate adaptation finance by the end of 2019. These regulations from the EU will drive change into financial markets globally and set standards on reporting, disclosures and infrastructure resilience that will likely set the bar for the rest of the world.
The European Commission recently released its Action Plan: Financing Sustainable Growth to establish a regulatory framework that supports the goals of the Paris agreement. The Action Plan calls for transformation of the whole financial system and to enable the financing a sustainable, resource-efficient economy.
The Action Plan builds on the recommendation from a high profile expert group, the High-Level Expert Group on Sustainable Finance (HLEG), which was created by the European Commission in December 2016. The group included experts from banking, insurance, asset management and stock exchanges. Its final recommendations to the Commission, released in January acknowledged the responsibility of the financial system to drive change towards “enduring and inclusive economic prosperity”. HLEG recommendations aimed to both promote sustainable investments, so that capital reaches sustainable projects and also to ensure that the financial system itself addresses risk and builds resilience.
Incorporating many of the recommendations of the HLEG, the Commission’s Action Plan lays out ten specific actions, setting deadlines within the next two years, with a number of thematic sub-actions that willbe pursued simultaneously. Action 1 lays the groundwork for many of the following actions as it will establish a Technical Expert Group on Sustainable Finance, with the responsibility of drafting a standardized EU sustainability taxonomy , including climate mitigation by Q1 2019 and adaptation by Q3. This effort will be supported by legislation this year that mandates the creation of the taxonomy.
The 10 actions are summarized in this infographic from the European Commission:
Of most immediate importance to investors is Action 7, which calls for the proposal by Q2 2018 of legislation mandating investors to explicitly consider sustainability factors in their investment decisions and disclose their methodology of doing so. This effort is particularly focused on improving the consistency and transparency of climate risk considerations by investors.
Likewise, Action 9 is focused on improving the methodologies and practice of corporate risk disclosure. The Commission will publish a report on current reporting legislation by Q2 this year, which will inform a revision of corporate reporting guidelines to help them align with the TCFD recommendations, by Q2 2019. Later this year the Commission will develop a European Corporate Reporting Lab, under the European Financial Reporting Advisory Group, to help develop best practices for corporate reporting. The goals of Action 10 will support these actions by supporting a shift in corporate governance. It aims to improve transparency and combat long-termism, by engaging with stakeholders around corporate governance starting by Q2 next year.
Revamping Credit Ratings
The Commission also commits to revamping the ways in which credit ratings incorporate sustainability metrics into their scoring. Through Action 6, the European Securities Markets Authority (ESMA) will examine the credit ratings’ current practices around this topic by Q2 2019 and the Commission will pursue comprehensive research on reporting standards, exploring the potential of mandating agencies to integrate specific sustainability metrics into their standards.
To improve consumers ability to identify sustainable investments, Action 2 calls for the technical expert group to publish a report exploring green bond standards by Q2 2019 and the Commission will consider expanding the EU Ecolabel to include financial products, initially focusing on retail investments. Likewise, Action 4 says that by Q2 2018, the MiFID II and IDD rules will be updated to ensure that sustainability preferences are considered when banks, investment firms and insurers offer accounts to clients and by the end of the year the ESMA will include these provisions in their guidelines. Through Action 5 the Commission will adopt acts that improve the transparency of sustainability benchmarks by Q2 2018.
Comprehensive Sustainability Support
The Commission identifies a lack of technical expertise as a challenge to pursuing sustainable infrastructure projects and aims to confront this by to increasing the technical support available to investors. It will run a pilot project offering tools for sustainable infrastructure projects, from 2019-2023 through Action 3.
Action 8 states that the Commission will consider including sustainability frameworks in prudential requirements, looping in the European Insurance and Occupational Pensions Authority (EIOPA).
“A Blueprint” for Change
While the HLEG emphasized that its report is only the beginning of an enduring effort to create a resilient financial system that supports a sustainable society, the Commission’s resulting Action Plan clearly defines the next steps. And as HLEG also emphasized its report’s relevance for financial sectors worldwide, the Commission’s Action Plan states that a “coordinated, global effort is crucial.” As “the HLEG hopes to stimulate a wide public debate that helps shift Europe’s financial system from post-crisis stabilization to supporting long-term growth,” that same widespread conversation is essential to driving global change. These regulations from the EU, as is often the case, will drive change into financial markets globally by setting new standards global financial institutions must meet.
For more resources on building a sustainable financial sector, read about Four Twenty Seven’s work providing the technical secretariat for an EBRD and GCECA initiative to build a resilient financial sector and download the GARI Investor Guide to Physical Climate Risk and Resilience.