Newsletter: Scenario Analysis for Physical Climate Risks

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we feature a report on scenario analysis for physical climate risks, share technical elements of climate risk assessments and highlight new research on sea level rise.

In Focus: Scenario Analysis for
Physical Climate Risks

427 Report: Demystifying Scenario Analysis for Financial Stakeholders

Scenario analysis is an essential yet challenging component of understanding and preparing for the impacts of climate change on assets, markets and economies. Many climate impacts are already locked in to mid-century, so when focusing on the next few decades scenario analysis should focus on the scientific phenomenon driving uncertainty, rather than the climate policies which have a greater impact over the longer term. Four Twenty Seven's new report, Demystifying Climate Scenario Analysis for Financial Stakeholders, explores which impacts are already locked in, identifies how Representative Concentration Pathway (RCP) scenarios fit into the conversation, and describes an approach to setting up scenario analysis for near-term physical climate risks.
 
Our atmosphere will continue to warm for many decades even if we stop emitting carbon dioxide tomorrow.  The oceans will continue to rise, heat waves will become more severe and droughts will intensify. For example, the most water stressed areas  are anticipated to experience reductions in dry season rainfall equivalent to the two decades surrounding the American dust bowl. This report outlines an approach called percentile-based analysis, which allows users to explore the range of potential outcomes based on climate model outputs within a single RCP.
 
Read the Report
Technical Drivers of
Climate Risk Assessments

Leveraging the Cloud for Rapid Climate Risk Assessments

"Providing location-specific risk assessments requires accessing and processing the best climate data available. Climate data poses processing challenges due to the raw file size of climate model outputs, where a single file can be hundreds of megabytes or more, and an entire dataset can be anywhere from tens of terabytes to multiple petabytes." Four Twenty Seven Senior Data Analyst, Colin Gannon, writes about leveraging Amazon Web Services (AWS) for data storage and processing.

The Next Generation of Climate Models

Forty-nine modeling organizations are working on the next generation of climate models, known as Coupled Model Intercomparison Projects, or CMIP 6. Some of these models have already been released, but others are still forthcoming. CMIP 6 explores a larger range of potential futures and released models tend to project more warming than previous climate models. Although CMIP 6 is behind schedule, the Intergovernmental Panel on Climate Change's Sixth Assessment Report plans to incorporate these updated models into its analysis. 
Sea Level Rise - What's at Stake?

Global Vulnerability to Sea Level Rise Worse than Previously Understood

Many global coastlines are lower than previously known, meaning that hundreds of millions more people than expected are vulnerable to sea level rise, according to recent research by non-profit Climate Central. Leveraging a new digital elevation model, Climate Central found that by mid-century "land currently home to 300 million people will fall below the elevation of an average annual coastal flood." While scientists continue to explore the timing and implications around ice sheet collapse, this new research provides improved understanding of global coastal elevations and the potential for dire impacts on economies and communities. 

The space industry is particularly vulnerable to sea level rise. There is little redundancy built in to the industry and the Kennedy Space Center and Cape Canaveral Air Force Station are both exposed to significant coastal flooding. "Complex 39A is estimated to face a 14% annual risk of flooding next year and it’s projected to flood at least once a year on average during the 2060s unless additional measures are taken to protect it according to Climate Central's analysis. By 2100, parts of the launch site could experience near monthly flooding." NASA is building a 17ft high sand dune to protect the launchpads from the rising ocean, but experts wonder if this is a meaningful solution. 
Inside the Office at Four Twenty Seven

Meet Senior Software Engineer, Alix Herrmann 

Four Twenty Seven welcomes Alix, who leverages over 25 years of experience in software engineering to expand Four Twenty Seven’s climate risk scoring capabilities. Previously, Alix developed big data analytics for financial market trading at Instinet. She also has experience building neural network compilers, developing DSP-oriented mathematical libraries and creating ground-based radar signal processing pipelines.

Join the Team! Four Twenty Seven is Hiring

There are several opportunities to join Four Twenty Seven's dynamic team in offices across the U.S. and Europe. See the open positions below and visit our Careers page for more information.
  • Climate Risk Analyst with expertise in translating applied climate change science for a wide range of stakeholders
  • Regional Sales Directors (North America and United Kingdom), with extensive experience selling and supporting data products and services for large commercial, financial and government institutions
  • Director of Financial Data Systems with significant experience in the development and management of financial data processing, storage and retrieval
Upcoming Events

Join the Four Twenty Seven team at these events:

  • Dec 4 - 5 – RI New York 2019, New York, NY: Stop by Four Twenty Seven's booth to meet the team and hear Global Director of Client Services, Yoon Kim, speak about climate risk stress tests. Senior Analyst, Lindsay Ross, and Editor, Natalie Ambrosio, will host Four Twenty Seven's booth.
  • Dec 10 – Sustainatopia, Sunnyvale, CA: Natalie Ambrosio will speak on integrating physical climate risk into investment strategies.
  • Dec 9 - 12 AGU Fall Meeting 2019, San Francisco, CA: Director of Analytics, Nik Steinberg, and Senior Data Analysts, Josh Turner and Colin Gannon, will attend.
  • Jan 6 - Jan 9NCSE 2020 Annual Conference, Washington, DC: Yoon Kim and Lindsay Ross will speak about cross-sector resilience-building and resilient infrastructure, respectively.
  • Jan 12 - Jan 16 2020 AMS Meeting, Boston, MA: Josh Turner will attend.
  • Jan 27 –  Cleantech Forum, San Francisco, CA: Natalie Ambrosio will speak.
  • Feb 10 - 12 – Americatalyst 2020: Entropy, Dallas, TX: Director of Analytics, Nik Steinberg, will speak.
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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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Demystifying Climate Scenario Analysis for Financial Stakeholders

December 4, 2019 – 427 REPORT. Scenario analysis is an essential yet challenging component of understanding and preparing for the impacts of climate change on assets, markets and economies. When focusing on the short term, the warming and related impacts we have already committed to calls for scenarios that are decoupled from economic and policy activities and instead focus on the impacts that are already locked in. This report explores which impacts are already locked in, identifies how Representative Concentration Pathway (RCP) scenarios fit into the conversation, and describes an approach to setting up scenario analysis for near-term physical climate risks.

Download the report.

As the effects of climate change increasingly threaten financial stability, investors and regulators are seeking to understand what impacts lie ahead, and calling for an increase in physical climate risk assessment and disclosure in line with the Task Force on Climate-related Financial Disclosures (TCFD). To assess the scale of financial risk posed by physical climate change it is important to quantify risks under different climate scenarios. How will changes in extreme weather patterns, longer droughts and rising seas differ under various scenarios? Answering these questions through scenario analysis helps uncover the range of risks, allowing investors to identify assets and markets that are more likely to become stranded over time and to begin developing forward-looking resilience strategies. However, science-driven, decision-useful scenario analysis poses many challenges for businesses and financial stakeholders today, due to complex feedback loops, varying timescales, and multiple interacting factors that ultimately determine how global climate change manifests.

 

Figure 2. Distribution of daily extreme temperature changes in 2030-2040, expressed as a percent change, relative to a baseline of 1975-2005 under RCP 8.5. This map shows statistically downscaled global climate models averaged together, for this time frame and scenario. NASA Earth Exchange Global Daily Downscaled Projections statistically downscales climate model outputs to a ~25 kilometer resolution (see full details here) White areas are excluded because they lack potential for significant economic activity.

This new report, Demystifying Climate Scenario Analysis for Financial Stakeholders, explores which physical impacts are already locked in, identifies how Representative Concentration Pathway (RCP) scenarios apply, and describes an approach to setting up scenario analysis for near-term physical climate risks. Scenario analysis is often approached from the perspective of transition risk, where policy developments and greenhouse gas (GHG) emission targets are the key drivers of risk pathways over the near-term, in the next 10 to 30 years. Physical risk, however, requires a different approach.  Impacts over the coming decades are largely locked in, making the emissions scenarios less relevant. Unlike transition risk, GHG emission pathways play a minimal role in the behavior of the near-term climate and GHG emission pathways only begin to meaningfully influence global temperatures near mid-century. The uncertainty in physical climate risks in the near-term is driven by uncertainty in physical processes, rather than in policy decisions.

For organizations looking to construct physical climate risk scenarios for risk management and strategy purposes, it is critical to understand the scientific phenomena driving our plausible climate futures. This report outlines an approach called percentile-based analysis, which allows users to explore the range of potential outcomes based on climate model outputs within a single RCP. This offers a flexible, data-driven approach, suitable for portfolio-level screenings, reporting, and in some cases, direct engagement with asset managers.

Key Takeaways:

  • Quantifying climate risks under different scenarios is a key element in understanding how physical climate risks pose financial risks.
  • Scenario analysis is often approached from the perspective of transition risk, where policy developments and greenhouse gas emission targets are the key drivers of risk pathways in the next 10 to 30 years. However, physical climate impacts over the coming decades are largely locked in, so physical risk requires a different approach.
  • Even if we stopped emitting carbon dioxide tomorrow, many physical climate impacts, such as increasing temperatures, more severe droughts, and rising sea levels, would already be locked in because of the time carbon dioxide stays in the atmosphere and the time it takes the atmosphere to respond.
  • The uncertainty in how physical climate risks may manifest in the next few decades is driven by model uncertainty, which should therefore be the focus of scenario analysis for physical climate risks in the near-term.
  • Percentile-based analysis offers a flexible, data-driven approach, suitable for portfolio-level screenings, reporting, and in some cases, direct engagement with asset managers.

Download the report.

Download the press release.

 

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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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









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 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.

Upcoming Events

Find Four Twenty Seven at Climate Week NYC:

Join the Four Twenty Seven team at these events:

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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








Real Estate Climate Risks: How Will Europe be Impacted?

Introduction: Increasingly Severe Impacts

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

Assessing Exposure to Climate Change in Real Estate

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

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

Inland Floods: A Major Threat for a Warming Europe

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

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

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

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

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

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

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

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

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

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

Sea Level Rise: When Beach Front No Longer Means Value

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

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

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

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

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

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

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

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

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

Heat Stress: Shattered Records Becoming the New Norm

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

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

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

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

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

Conclusion: Understanding Risk to Build Resilience

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

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

Download the analysis.

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

Scenario Analysis for Physical Climate Risk: Equity Markets

In this second installment of our blog series of scenario analysis, we focus on how investors can start exploring impacts on portfolios of listed equities/fixed income with existing climate risk analytics. The series provides our current reflections on how corporations and financial institutions can integrate physical climate risk into scenario analysis. The first installment, on foundations, focuses on important characteristics of climate science that affect how climate data can be used to inform scenario analysis for economic and financial risk. A forthcoming post will discuss scenario analysis at the asset level for real asset investments and corporate facilities.

Scenario Analysis Serves Different Purposes

Scenario analysis serves different purposes for real asset investors and for equity or fixed income investors. When looking at a single real asset, scenario analysis can be used to inform very concrete decisions regarding the asset, working directly with the asset operator: whether and what flood protections to put in place, insurance requirements, anticipated impacts on operational costs from water and energy consumption, etc.

In contrast, for an equity or fixed income portfolio, investors’ influence on the resilience of the underlying asset (e.g. a corporation or a sovereign entity) is much more limited. In a previous publication we discussed the importance of shareholder engagement with corporations as a key channel for investors to help raise awareness of rising risks from climate change, and encourage companies to invest in responsible corporate adaptation measures. Investors, however, would be hard pressed to run scenario analysis on individual portfolio companies themselves, and disclosures from corporations on scenario analysis remain weak and fragmented.

Meanwhile, prudential authorities in Europe have been signalling expectations that insurers and banks perform scenario analysis on their portfolio to examine potential impacts of climate change, to understand how different climate-driven outcomes might prevent the insurers and lenders from meeting their financial obligations. Most recently, in April, the Bank of England Prudential Regulatory Authority (PRA) released a proposed set of specifications for scenario analysis that includes some simplified assumptions on climate impacts on financial portfolios.

In this piece we examine how available climate risk analytics can be leveraged to inform early attempts at developing stress test assumptions and simulate potential outcomes on investment portfolios aligned with the relative exposure of corporations by sectors and by regions.

Climate Risk Analytics for Equities/Fixed Income

We leverage our data on corporate physical risk exposure to determine what assumptions can be made in this type of early stress test. In this piece, we analyze the climate risk scores for 1730 of the largest companies in MSCI All Country World Index (ACWI). This physical risk assessment is based on the exposure of the underlying database of about a million facilities globally.

We score each company on three components of physical climate risk: Operations Risk, Supply Chain Risk and Market Risk.

427 Methodology Chart
Figure 1. 427 indicators for physical climate risk exposure in corporations (equities/fixed income)
  • A company’s Operations Risk is based on its facility-level exposure to hurricanes & typhoons, sea level rise, floods, extreme heat and water stress. The analysis also considers the sensitivity of different types of facilities. For example, manufacturing plants with their high energy demands are more sensitive to extreme heat than offices.
  • Supply Chain Risk is based on the risk in countries that export commodities that the company depends on and a company’s reliance on climate-sensitive resources such as water, land and energy, based on its industry.
  • Market Risk is based on where a company’s sales are generated and how its industry has historically been impacted by weather variability.

Scores are normalized, with 0 being the least exposed and 100 being the most exposed. (For more details, please refer to our previous report Physical Climate Risk in Equity Portfolios as well as our Solutions page)

In line with considerations of relevant time horizons and of impacts being locked in over the climatic short term (detailed in Part 1), our standard equity risk score data considers projected climate impacts in the 2030-2040 time period under a single RCP scenario, RCP 8.5 (the worst case scenario, also known as business as usual), but leverages several climate models.

From Climate Hazard Exposure to Financial Impacts

Studies of how physical climate hazards translate into financial impacts at the company level are scarce. While a growing body of research explores the complex relationships between climate hazards and economic impacts, which vary by sector and by region, academic research on the relationship between climate events and corporate/stock performance, at scale, is still limited. Our approach focuses on leveraging what can be estimated in a robust, data-driven way: relative exposure of companies to climate hazards.

Our analysis of global corporations shows the relative exposure of industries to climate related risks across all three dimensions: operations risk, market risk and supply chain risk (Table 1). This table shows the sectors with the highest exposure, including manufacturing, infrastructure (utility, energy, transportation), and industries with high dependency on natural resources (food, apparel).

Table 1. Industries most exposed to physical climate risks . Source: Four Twenty Seven.

Services, not shown in the table, are not only less exposed, they’re also far less sensitive to changes in climatic conditions, with the exception of the financial sector, which holds the risk of all the other sectors in its investment, lending or insurance portfolios. Note that real estate is not included in this analysis, but data on regional exposure in that sector can be found in our white paper on climate risk in real estate.

These differentiated impacts by sectors can lay the foundations for a stress test, as industry risk levels can be used to set initial assumptions on sector-wide impacts. Following the example set out by the Bank of England’s PRA, for example, investors could assume that sectors with high exposure might see a 10% or 20% drop in value, whereas sectors with medium exposure would see half of that impact. These assumptions are not intended to substitute for financial impact modeling, but provide a shortcut to test how a portfolio might perform under climate-driven duress.

Drivers of Exposure to Physical Climate Risk

While some sectors overlap with those examined in scenario analysis exercises for transition risk, such as utilities and energy, other sectors with high exposure are not typically included in scenario analysis, like tech manufacturing or pharmaceuticals. Understanding the nuances of the risk pathways in each sector and their relative exposure to different hazards is critical to refining assumptions and developing models that can quantify value-at-risk by sector with some accuracy.

Manufacturing companies in the tech sector rely on complex value chains that can be interrupted by extreme weather events, particularly in Asia, which is a region highly exposed to typhoons and extreme precipitation. They also often produce expensive and water sensitive products using costly machinery and can incur costs and damages from extreme events on site.  Pharmaceuticals are particularly exposed because of the prevalence of their manufacturing in water-stressed regions (India, California) and regions highly exposed to hurricanes & typhoons. For example, damaged manufacturing sites in Puerto Rico had rippling impacts on pharmaceutical operations globally during Hurricane Maria in 2017. Pharmaceuticals is also one of the groups with the most weight in the MSCI ACWI, making this exposure particularly significant (Fig 2).

Figure 2. The average company risk score by GICS Industry Group, with Operations Risk on the y-axis and Market & Supply Chain Risk on the x-axis. Red represents those industries with the highest exposure, green represents those with the lowest exposure and the size of the bubble signifies an industry’s weight in the MSCI ACWI.  Source: Four Twenty Seven.

In the utility sector, the nature of the exposure is very different from that observed in transition risk analysis: carbon neutral power generation can be as exposed as thermal generation – for example due to water stress or floods for hydro facilities. In addition, utilities rely on expensive equipment, such as cables, poles, fuel storage and pipes that are often exposed to severe weather and sensitive to extreme conditions. Their operations are also resource-intensive, relying heavily on energy and water for cooling. They can experience operations disruptions during peak energy demands or due to equipment damage during storms.

The exposure of the automobiles & components sector has been illustrated by recent flooding in Japan. Automobile companies rely on manufacturing processes and machinery that can be interrupted due to flooding or hurricane damage, but their reliance on employee labor also makes these companies vulnerable to the wider regional impacts of extreme events. For example, during Japan’s extreme flooding in July 2018, Mazda was forced to halt operations at some of its facilities that were not physically damaged themselves, because its employees could not travel safely to work.

Conclusion

Climate change calls for a better understanding of impacts of physical hazards on financial markets, which remains a topic largely unexplored. Yet as regulators push insurers and banks towards the integration of climate scenarios into stress testing, robust, data-driven views on the relative exposure of sectors or regions provide a helpful foundation from which to explore the potential impacts on equity and fixed income portfolios.

Over time, better data will become available as academic and industry providers develop models that capture the nuances of climate impacts on different industries and geographies, but also as companies make a concerted effort to disclose better data on their past and anticipated financial exposure to extreme weather and climate-related events.

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Four Twenty Seven’s data products and portfolio analytics support risk reporting and enable investors and businesses to understand their exposure to physical climate risks across asset classes.

Scenario Analysis for Physical Climate Risk: Foundations

The TCFD Status Report published early June 2019 reiterates the need for corporations and financial institutions to perform scenario analysis in a context of uncertainty over climate risk. It notes that while about 56% of companies use scenario analysis, only 33% perform scenario analysis for physical risk. Even fewer firms (43% of those using scenario analysis) disclose their assumptions and findings. The report contains useful case studies, but most focus on transition risk.

Yet a growing number of corporations and financial institutions recognize the need to integrate physical risk into scenario analysis and to develop resilience strategies that address imminent challenges from climate impacts. For example, the most recent IPCC report illustrating the impact of 1.5˚C increase in global temperatures on mean temperatures, extreme temperatures, extreme precipitation and sea levels shows that there will be significant implications for economies even with a 1.5˚C increase in global temperatures. This is still a best case scenario compared to impacts of 2˚C or 2.5˚C warming.

Scenario analysis for physical risk is fundamentally different from transition risk in its challenges and assumptions. This blog series provides our current reflections on how corporations and financial institutions can integrate physical climate risk into scenario analysis. This first blog presents the Foundations, focusing on important characteristics of climate science that affect how climate data can be used to inform scenario analysis for economic and financial risk. 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. A forthcoming post will discuss scenario analysis at the asset level for real asset investments and corporate facilities.

Part 1: Foundations

The physical impacts of climate change encompass a range of direct and indirect hazards caused or exacerbated by the concentration of greenhouse gases in the atmosphere. Previous publications such as Advancing TFCD Guidance for Physical Risks and Opportunities, for which Four Twenty Seven was a lead author, provide background on these hazards as they pertain to corporate value chains and economic activities. Further information is also available in Cicero’s excellent report, Shades of Climate Risk. Categorizing climate risk for investors.

The Science: Uncertainties and Relevant Time Frames

Rapid developments in atmospheric and climate science over the past 30 years enable us to understand how these physical hazards will evolve over time due to climate change. Sophisticated global climate models project expected changes in key physical phenomena affected by greenhouse gas (GHG) concentration: heat, humidity, precipitation, ocean temperature, ocean acidification, etc. Like any other models, climate models have limitations in their accuracy and ability to correctly simulate complex and interrelated phenomena. However, it is worth noting that since 1973 models have been consistently successful in projecting within the range of warming that we have experienced in the past twenty years. More details on climate data and uncertainties from global climate models can be found in our report, Using Climate Data.

The Bad News: Impacts Are Locked In

Global climate models project different possible outcomes using scenarios called Representative Concentration Pathways (RCPs). RCP scenarios capture differing GHG emissions trajectories based on a representation of plausible global policy outcomes, without specifying the details of the underlying policies that could generate this outcome. These scenarios show that GHG emissions generated over the coming decades will influence the severity of impacts in the long-term, but also that we are already committed to some impacts through 2100 and beyond.

This is particularly noticeable over the “short term.”  When looking at the next 10 to 20 years, projections for temperature and other physical hazards do not present significant differences under different emissions scenarios (Fig 1). This is due to the massive inertia of the Earth’s systems, and the life expectancy of the stock of greenhouse gases already in the atmosphere. To put it simply, significantly reducing GHG emissions is akin to applying the brakes on a rapidly moving truck. It won’t stop instantaneously. Even if we were to stop emitting GHG altogether, climate change would persist. In the words of the Intergovernmental Panel On Climate Change (IPCC), climate change “represents a substantial multi-century commitment created by the past, present, and future emissions of CO2.”

Figure 1. Temperature increases under different GHG emissions scenarios in the near term. Source: IPCC, as published by Climate Lab Book.

This is by no mean an invitation to give up on reducing GHG emissions. Quite the opposite. Emission reductions are critical to curbing long term impacts and avoiding irreversible effects to our environment (Fig. 2). But for organizations looking at climate data and scenario analysis for risk management and strategy, with a focus on the coming decade(s), this is a critical fact to understand.

Figure 12.5 | Time series of global annual mean surface air temperature anomalies (relative to 1986–2005) from CMIP5 concentration-driven experiments. Projections are shown for each RCP for the multi-model mean (solid lines) and the 5 to 95% range (±1.64 standard deviation) across the distribution of individual models (shading). Discontinuities at 2100 are due to different numbers of models performing the extension runs beyond the 21st century and have no physical meaning. Only one ensemble member is used from each model and numbers in the figure indicate the number of different models contributing to the different time periods. No ranges are given for the RCP6.0 projections beyond 2100 as only two models are available.Source IPCC AR5: Collins, M., R. Knutti, J. Arblaster, J.-L. Dufresne, T. Fichefet, P. Friedlingstein, X. Gao, W.J. Gutowski, T. Johns, G. Krinner, M. Shongwe, C. Tebaldi, A.J. Weaver and M. Wehner, 2013: Long-term Climate Change: Projections, Commitments and Irreversibility. In: Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Stocker, T.F., D. Qin, G.-K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex and P.M. Midgley (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 1029–1136, doi:10.1017/CBO9781107415324.024.
Figure 2. Temperature increases under different GHG emissions scenarios through 2300 from IPCC AR 5: Figure 12.5 | Time series of global annual mean surface air temperature anomalies (relative to 1986–2005) from CMIP5 concentration-driven experiments. Projections are shown for each RCP for the multi-model mean (solid lines) and the 5 to 95% range (±1.64 standard deviation) across the distribution of individual models (shading). Discontinuities at 2100 are due to different numbers of models performing the extension runs beyond the 21st century and have no physical meaning. Only one ensemble member is used from each model and numbers in the figure indicate the number of different models contributing to the different time periods. No ranges are given for the RCP6.0 projections beyond 2100 as only two models are available.
Aside from RCP-driven scenarios, there is, of course, a broad range of possible increases in temperature (and other climate hazards) even when looking at the 2030-2040 time frame. These plausible differences are not so much policy-driven as science-driven, demonstrating the different possible responses from the Earth’s systems to the existing stock of GHG.

These differences have significant implications for businesses and investors. For example, a model of sea level rise developed in 2018 incorporates accelerated rates of melting and recent advancements in modelling ice-cliff dynamics to capture extreme risk of coastal flooding. The model shows the Atlantic rising by 1.2m (3.9ft) by 2060 on the Florida coastline, which would equate to widespread flooding of coastal properties with potential domino effects on real estate prices across the state (Fig 3). The ‘intermediate’ scenario, however, most often used for planning, predicts only a 55cm (1.8ft) rise in water levels. While reducing GHG emissions does reduce the risk of more extreme sea level rise millennia into the future, year after year, scientists find that the Antarctic is warming faster than anybody predicted, and there is increasing concern that the process of ice sheet melt may be too far advanced to be stopped.

Figure 3. Building-level perspective of inundation in downtown Miami under 1m (3.3ft). Red buildings are those most likely to be impacted and blue areas are inundated. Source: NOAA Office for Coastal Management.

Thus, performing scenario analysis where the key variable is GHG emission reduction targets may not be an accurate representation of the range of possible outcomes for the near future. Rather, looking at high and low warming projections across a large set of models to understand the range of potential outcomes (independent of the underlying RCP scenario) is a better way to understand potential risk. In other words, physical risks over the next 10-20 years are largely independent from policy decisions and emission pathways, and a rapid, orderly, effective transition to a low-carbon economy could still come with massive physical impacts as these processes are already under way, fueled by the past 150 years of GHG emissions.

The Worse News: Tipping Points

Another challenge is that climate scientists are not currently able to model certain possible impacts from climate change, commonly known as “tipping points.” Tipping points is a catch-all term for a wide range of phenomena that may accelerate feedbacks due to climate change, though the timing or probability of their manifestation is currently not well understood. The phenomena are known as tipping points because past a certain threshold, they may not be reversible, even with a dramatic reduction in GHG emissions. Tipping points of most concern to the scientific community are presented in this report from the Environmental Defense Fund.

Some tipping points catalyze “feedback loops” which can worsen and dramatically accelerate climate change beyond human control. Such is the case, for example, with melting ice sheets, which would not only lead to catastrophic sea level rise, but would also further heat up the planet as the poles’ albedo (reflectivity) is reduced after the ice disappears. Thawing permafrost could lead to massive amounts of methane, a particularly powerful GHG, to be released from the frozen tundra into the atmosphere (in addition to many direct impacts for local communities, infrastructure  and ecosystems in the region).

Tipping points further reinforce uncertainty about severity and timing of these extreme impacts and the limitations of using RCP scenarios to understand the range of outcomes for physical risk.

Another source of uncertainty for physical climate impacts are knock-on effects, or ‘indirect hazards,’ from the primary expression of global warming (rising temperature and humidity), ranging from biodiversity losses and ecosystem collapses, human health impacts, impacts on crop yields, pests and soil, impacts on human society, increased violence, and rates of war and migration, etc. (Fig 4)

Figure 4. The likely risks to human and natural systems under several global warming scenarios, with dark purple representing high risks of severe impacts with limited reversibility and white indicating no attributable impacts. Source: IPCC, 2018

These indirect or second-order hazards are as relevant as first-order impacts to understand the implications of physical climate change on economic outcomes, but they’re not captured by RCP scenarios and many require stand-alone models that cannot easily be integrated into one clean set of scenarios.

Conclusion

Scenario analysis is often approached from the perspective of transition risk, where policy developments and GHG emission targets are the key drivers of risk pathways over the next 10 to 30 years. Physical risk, however, requires a different approach. Impacts over the coming decades are largely locked-in and are only marginally influenced by GHG emission pathways. In contrast, uncertainty looms large regarding how severe these physical hazards will be, and exploring a range of possible outcomes for physical risk, including looking at tail-risks, provides important insights for risk management and financial analysis.  In summary, the current state of scientific knowledge and the nature of the Earth’s atmospheric systems call for the developments of scenarios that are decoupled from transition/policy scenarios and instead focused on key scientific drivers of uncertainty and risks that may be experienced regardless of policy decisions over the short to medium term (2020-2040).

While efforts to develop easy-to-use tools for physical risk analysis are nascent, organizations can still extract important insights from climate data and leverage estimates of risk exposure across portfolios. Our next blog in this series provides examples of how financial institutions can leverage data on physical risk exposure in equities to inform some early scenario analysis in equity markets.

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Four Twenty Seven’s data products and portfolio analytics support risk reporting and enable investors and businesses to understand their exposure to physical climate risks across asset classes.

Newsletter: How Can Real Estate Investors Cope with Sea Level Rise?

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we highlight recent research on sea level rise and feature NPR Marketplace's new podcast series on tech and adaptation.

In Focus: Sea Levels May Rise by 2 Meters

Recent Research Emphasizes the Complexity of Sea Level Rise

There is a statistically significant possibility of sea levels rising by 2m (6.5ft), under a 5˚C increase in temperatures, according to a study released on Monday. The researchers surveyed experts to establish a broader picture of potential sea level rise. While this extreme scenario may not be very likely, the rate of ice melt and its contribution to global sea level is a complicated phenomenon, with increased research leading to growing questions on the interacting feedback loops driving these changes. 

In fact, recent satellite data suggests that warming water is causing East Antarctica to melt more quickly than previously thought and a study released last week found that almost a quarter of West Antarctica's ice is thinning -- its largest glaciers are shrinking five times faster than in 1992.

This growing body of sciences unambiguously calls for better integration of climate data into financial decisions and underscores the need to accelerate adaptation efforts.

Sea Level Rise Has Cascading Economic Impacts

Sea level rise has cascading impacts, damaging physical assets but also reaching far beyond to mortgages, insurance prices and real estate markets. Homes exposed to sea level rise declined in value by about $465 million between 2005 and 2016 in Miami-Dade, FL and in Annapolis, MD "sunny day" flooding already reduces visits to the historic downtown district by 1.7%, costing businesses in the area.
The tangible impacts of sea level rise are already being felt and understanding these impacts enables governments, businesses and investors to manage asset-level and regional risk. Read more on real estate impacts in our new blog post and reach out to find out how our on-demand climate screening application supports real asset investors for due diligence and portfolio risk management.  

Risk and Resilience Along California's Coast

The first study to overlay the impacts of sea level rise, storm surge and erosion along California's coast finds this "dynamic" flooding could affect 600,000 people and $150 billion of property, equivalent to over 6% of the the state's GDP by 2100. The new San Francisco Bay Shoreline Adaptation Atlas proposes a science-based framework for identifying adaptation strategies. It focuses on nature-based solutions along the San Francisco Bay and was created by the San Francisco Estuary Institute and SPUR, the San Francisco Bay Area Planning and Urban Research Association.
How We Survive - NPR Podcast
How does technology help us understand climate impacts and how can innovation in tech help drive adaptation? NPR Marketplace Tech's new podcast series, "How We Survive," features speakers leveraging technology for adaptation across sectors. The podcast includes a conversation with NASA's Annmarie Eldering, who shares the agency's new CO2 monitoring system attached to the International Space Station, that's "watching the planet breathe." Jay Koh of private equity firm, the Lightsmith Group, discusses the importance of adaptation finance, and Four Twenty Seven Founder and CEO, Emilie Mazzacurati, highlights the value of integrating climate data into businesses' and investors' strategies.
Upcoming Events on Climate Risk in Asia

Ceres Webinar: Are Asia's Pension Funds Ready for Climate Change?

In this webinar, speakers from the Asian Investor Group on Climate Change (AIGCC), China Water Risk, and Manulife Investment Management will share key findings from their recent report - Are Asia’s Pension Funds ready for Climate Change? Discussions will explore pension fund exposure to water and climate risks in Asia, including the economic impacts and trade flow and supply chain disruptions in the region. Register Here.
May 28, 2019 6pm PST / 9pm EST; May 29, 2019 9am HKT / 11am AEST
 

Institute of International Finance (IIF) Sustainable Finance Workshop

The IIF is hosting a sustainable finance workshop on disclosure, data and scenario analysis. The event will focus on leading practice in climate risk disclosure, including developments in TCFD and the IIF report on leading practices. Speakers include Satoshi Ikeda, Chief Sustainable Finance Officer, Japan FSA and Representative to the Central Banks and Supervisors Network for Greening the Financial System (NGFS); and Keiko Honda, EVP and CEO, Multilateral Investment Guarantee Agency (MIGA), World Bank. To RSVP contact Raymond Aycock (raycock@iif.com or +1 202-857-3652). 
Wed. June 5th from 2:00-5:00pm, Tokyo. 
Upcoming Events

Join the Four Twenty Seven team at these events:

  • May 23EU / UC Berkeley Law - Climate Risk and Sustainable Finance in the EU and California, Berkeley, CA: Founder & CEO, Emilie Mazzacurati, joins an event featuring Mario Nava from the European Commission DG Finance, Betty Yee, California State Controller, and Dave Jones, Insurance Commissioner Emeritus, to discuss the future of sustainable finance. Emilie will join a panel to discuss trends in TCFD reporting and the way forward for the United States in climate risk disclosures. 
  • May 30 – Workshop on the California Heat Assessment Tool, Sacramento, CA: Director of Analytics, Nik Steinberg, and Editor, Natalie Ambrosio, will lead a workshop on the California Heat Assessment Tool for SafeCAT members. 
  • June 4 - 7 – Innovate4Climate, Singapore: Director of Advisory Services, Yoon Kim, will present on climate risk and resilient infrastructure in this event hosted by Temasek. 
  • June 6 - 8 – AIA Conference on Architecture 2019, Las Vegas, NV: Strategic Advisor, Josh Sawislak, will present on climate risk and real estate.
  • June 10 - 12 – US SIF Annual Conference, Minneapolis, MN: Senior Analyst, Lindsay Ross will attend.
  • June 11 - 12 – RI Europe, London, UK: Hear Emilie Mazzacurati present on scenario analysis for physical climate risk and meet with Director, Europe, Nathalie Borgeaud, at Four Twenty Seven's booth.
  • June 12 - 14 – Emergency Preparedness Training Workshop, Sacramento, CA: Nik Steinberg will present on the California Heat Assessment Tool.
  • June 19  – Columbia University and PRI Private Round Table, New York, NY: Emilie Mazzacurati will discuss scenario analysis for physical climate risk at this workshop.
  • June 19 - 21 – Columbia University - At What Point Managed Retreat? New York, NY: Lindsay Ross will attend.  
  • July 4 – Finance for Adaptation Solutions and Technologies Roundtable, London, UK: Emilie Mazzacurati will present on private sector solutions for climate resilience investments during London Climate Week.
  • July 4 Young Professionals Conference 2019, Lisbon, Portugal: Nathalie Borgeaud will present on climate risk in real estate.
  • July 17 - 19 – Oxford Climate Related Financial Risk Course, Oxford, UK: Nathalie Borgeaud will teach a session on measuring climate risk.
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Anticipating Sea Level Rise Impacts on Real Estate Investments

What does the future hold?

New research on sea level rise emphasizes the potential for dire changes over the course of the century. Recent satellite data suggests that warming water is causing East Antarctica to melt more quickly than previously thought and a study released in early May found that almost a quarter of West Antarctica’s ice is thinning, with its largest glaciers shrinking five times faster than in 1992. A study based on expert opinion found that there is the possibility of sea levels rising by 2 meters (6.5ft) under an extreme scenario of  5˚C global temperature increase. This would mean an area of land as big as Libya would be lost, and up to 2.5% of the population globally could be displaced.

The cascading direct and indirect impacts of sea level rise affect all facets of the regional economy. Source: Union of Concerned Scientists.

Extreme scenarios of sea level rise will have severe impacts on our cities and economies. Sea level rise is happening today to a lesser extent; however it is already having tangible impacts on real estate values. This means increasing costs for property owners and tenants, but it also has far-reaching market impacts on access to and cost of insurance, fluctuations in market values and potential increase in local taxes to fund adaptation efforts.

Of all U.S. states, Florida is expected to experience the greatest consequences of sea level rise. Between 1960 and 2015, sea levels along the Florida coast rose by 10-15 cm (4-6 in), and the range of projections vary wide looking a few decades out, with projections ranging from  33 to 122cm  (13-48 in) by 2060.

Widespread flooding risk in Florida

65,000 homes in Florida worth $35 billion are expected to be underwater or impacted daily by high tides in 2040. From soaring insurance premiums and increasing risk of disclosure to declining property value and diminishing tax revenue, sea level rise is already challenging property owners, investors and banks. Among other impacts, the value of single-family homes in Miami-Dade County that are exposed to sea level rise declined by about $465 million between 2005 and 2016.

Furthermore, climate change is predicted to increase the number of strong hurricanes in the region. These stronger storms will combine with sea level rise to exacerbate the impacts of extreme floods. Storm surge flooding damages buildings and landscaping,  destroys merchandise,  and can also have wide-reaching economic impacts due to damaged power and transportation infrastructure.

Downtown Jacksonville, FL flooded during Hurricane Irma. Source: iStock.

Last but not least, tidal flooding, also called “nuisance” or “sunny day” flooding increased from 1.3 to 3 days per year in the Southeast from 2000-2015. By the end of the century tidal flooding could happen daily.  Even with no rainfall, these floods have significant impacts – halting traffic, overburdening drainage systems and damaging infrastructure.

Investors and businesses have a responsibility to understand these risks: using best available science to measure exposure to sea level rise and other flood risks, getting informed on adaptation efforts by local governments, and engaging with local industry associations or other groups to promote further investments in resilience.

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Four Twenty Seven works with investors to provide portfolio hotpot screenings and real time due diligence with site-specific data on sea level rise and other climate risks. Contact us for more detailed analysis and site-specific data on sea level rise exposure and detailed analysis of local jurisdictions’ response.

Assessing Local Adaptive Capacity to Understand Corporate and Financial Climate Risks

January 15, 2019 – 427 REPORT. Building resilient communities and financial systems requires an understanding of climate risk exposure, but also of how prepared communities are to manage that risk. Understanding  the adaptive capacity, or ability to prepare for change and leverage opportunities, of the surrounding area can help businesses and investors determine how exposure to climate risk is likely to impact their assets and what the most strategic responses may be. This report outlines Four Twenty Seven’s framework for creating location-specific actionable assessments of adaptive capacity to inform business and investment decisions and catalyze resilience-building. 

Every investment, from real assets to corporate initiatives, is inextricably connected to its surrounding community. From flooded or damaged public infrastructure hindering employee and customer commutes to competition for water resources threatening business operations and urban heat reducing public health, the impacts of climate change on a community will impact the businesses and real estate investors based in that community. Thus, evaluating how acute and chronic physical climate hazards will affect local communities and communities’ responses enables investors and corporations to assess the full extent of the risks they face.

This report, Assessing Local Adaptive Capacity to Understand Corporate and Financial Climate Risks, outlines Four Twenty Seven’s framework for capturing a city’s adaptive capacity in a way that’s actionable for corporations seeking to understand the risk and resilience of their own facilities and for investors assessing risk in their portfolios or screening potential investments. The framework focuses on three main pillars: 1) awareness, 2) economic and financial characteristics, and 3) the quality of adaptation planning and implementation. It is informed by social sciences research, recent work by credit rating agencies, and our experience working directly with cities and investors.

Figure 2. After New York City subways were flooded during Hurricane Sandy, the New York MTA issued a catastrophe bond to obtain $200 million in insurance coverage, providing an important financial safety net for the city. Image from Wikimedia, by Metropolitan Transportation Authority of the State of New York used with a Creative Commons Attribution 2.0 Generic license.

While a city’s adaptive capacity plays a key role in determining whether or not exposure to climate hazards will lead to damage and loss, cities are also likely to find that their resilience to climate impacts is an increasingly important factor in attracting business and financing, as adaptive capacity is more frequently integrated into credit ratings and screening processes. It is valuable for both cities to understand how investors are interpreting adaptive capacity and for investors to understand which factors of local adaptive capacity translate into increased resilience and reduced financial loss for their assets.

Key Takeaways

  • Corporate and real asset investments can be financially impacted by climate-driven weather events and chronic stresses, even with strong internal risk management systems in place, as climate events can affect the broader community and disrupt local infrastructure.
  • Adaptive capacity, the ability to adjust to potential damage and leverage opportunities, will influence how local jurisdictions and infrastructure are affected by climate-driven weather events.
  • Four Twenty Seven has developed a framework to assess the adaptive capacity of local jurisdictions to inform the private sector, examining a city’s awareness of climate impacts, economic characteristics, and adaptation planning efforts.
  • Understanding a local jurisdiction’s adaptive capacity provides opportunities to engage with decision-makers and relevant institutions to support local efforts to build resilience.

Download the report.