Chief Development Officer, Frank Freitas, discusses Four Twenty Seven’s report on Assessing Exposure to Climate Risk in U.S. Municipalities on the Midday Briefing. During this brief interview Frank describes Four Twenty Seven’s work as a data provider for investors, highlights the ubiquity of climate hazards across United States munies and explains the impact of both acute events like hurricanes and more subtlety destructive chronic stresses such as drought.
May 22, 2018 – 427 REPORT. Cities and counties are bearing the costs of the sixteen billion-dollar disasters in the United States in 2017, raising concerns over the resilience of municipalities to the impacts of climate change and associated financial shocks. Credit rating agencies are increasingly integrating physical climate risk into their municipal rating criteria; however, they lack concrete metrics that compare and assess which municipalities are exposed to climate impacts. Four Twenty Seven’s new local climate risk scores provide comparable, forward-looking data to fill this gap. This report discusses our approach to measuring exposure to climate hazards and highlights cities and counties most exposed to the impacts of climate change.
Following Hurricane Harvey, Moody’s downgraded Port Arthur from A1 to A2 due to its “weak liquidity position that is exposed to additional financial obligations from the recent hurricane damage, that are above and beyond the city’s regular scope of operations.” (Moody’s). This follows the recent trend of rating agencies increasingly considering climate change and past extreme weather events in their evaluations of U.S. cities. While this consideration is an important step, their evaluations could be better informed by incorporating forward-looking comparable data on the climate risks that impact these municipalities.
Featuring Four Twenty Seven’s new local level exposure scores, our report Assessing Exposure to Climate Change in U.S. Munis, shares key findings from our scoring of all 3,142 U.S. counties and the 761 cities over 50,000 in population. The research results are based on Four Twenty Seven’s market-leading expertise in five major climate categories, including cyclones/hurricanes, sea level rise, extreme rainfall, heat stress, and water stress. “This new dataset provides a comprehensive suite of risk scores to better inform rating and pricing decisions,” says Emilie Mazzacurati, Founder & CEO. “We believe that our analytics will be very helpful for all market participants, including muni bond investors, local governments, and ratings agencies.”
This report highlights specific cities and counties most exposed to each climate hazard and also discusses regional trends and economic sensitivities that may exacerbate a muni’s vulnerability. “Climate risk is increasingly a part of our credit analysis for municipal issuers across the country,” said Andrew Teras, senior analyst at Breckinridge Capital Advisors. “The climate risk scores developed by Four Twenty Seven provide a comparable way to evaluate climate exposure and will give us another factor for assessing our investment universe.”
- Sea Level Rise: The mid-Atlantic, particularly New Jersey, Virginia, North Carolina and Florida, has the highest exposure to coastal flooding in the United States, with the Bay Area and Pacific Northwest also highly exposed in several of their coastal cities and counties.
- Cyclones/Hurricanes: The majority of cyclone risk in the United States is concentrated in the Southeast, given its geographic proximity to the Gulf of Mexico and the tropical Atlantic Ocean. The coastal Mid-Atlantic and Northeast are also exposed to cyclones, but they tend to be less frequent than in the Southeast and somewhat weaker on average after interacting with land or cooler ocean waters.
- Extreme Rainfall: The Midwest is particularly exposed to heightened flood risk due to changing rainfall patterns. Recent advancements in attribution science show extreme rainfall to be the main driver of recent floods rather than 20th century agricultural practices, as was largely believed to be the case until recently.
- Heat Stress: The highest heat stress scores tend to be centered in the Southeast and Midwest, concentrated in Missouri and western Illinois and fanning out to the Great Plains, Mississippi River Basin, and Florida.
- Water Stress: Key watersheds for agricultural production such as the Central Valley aquifer system in California and the Ogallala Aquifer in the Great Plains are highly exposed to water stress. The agriculturally-dominated areas of Bakersfield, Delano, and Visalia, CA along the Central Valley Aquifer are among the ten cities most exposed to water stress. Similarly, municipalities along the Ogallala Aquifer in the Great Plains also rely heavily on agriculture and are among the most exposed to water stress.
April 25, 2018 – 427 TECHNICAL BRIEF. Financial institutions, corporations, and governments increasingly strive to identify and respond to risks driven by physical climate impacts. Understanding the risks posed by climate change for facilities or infrastructure assets starts with conducting a risk assessment, which requires an understanding of the physical impacts of climate change. However, climate data in its raw form is difficult to integrate into enterprise risk management, financial risk modelling processes, and capital planning. This primer provides a brief introduction to climate models and data from a business or government perspective.
The first of several reports explaining the data and climate hazards analyzed in Four Twenty Seven’s equity risk scores and portfolio analytics, Using Climate Data unpacks the process through which raw climate data is transformed into usable metrics, such as future temperature projections, to help financial, corporate and government users productively incorporate climate-based analytics into their workflows. Beginning by explaining what a global climate model is, the report explains climate data’s format, computational choices to hedge uncertainty and resources for aggregated climate projections tailored to specific audiences.
- Climate models are simulations of the Earth’s future conditions. Climate projections are based on a compilation of many models and are publicly available.
- Regional climate models and statistical downscaling improve the resolution of data produced by global climate models and are thus valuable options when projections are only needed for one location or several in the same region.
- Climate models can be used to project future trends in temperature and precipitation, but can not project discrete storms or local flooding from sea level rise, which require additional data and analysis.
- Different time horizons of climate projections have different strengths and limitations so it is important to select the data product best suited to a specific project’s goal.
- There are several drivers of uncertainty in climate models and strategies to hedge this uncertainty can help users correctly interpret and use climate projections.
Climate change poses multifaceted physical risks for infrastructure investors, affecting revenue, maintenance costs, asset value and liability. According to the New Climate Economy report, global demand for new infrastructure investment could be over US$90 trillion between 2015 and 2017. It is becoming increasingly clear that climate change must be considered in all infrastructure investment and construction.
Four Twenty Seven, in collaboration with our partners Acclimatise and Climate Finance Advisers, published a “Lenders’ Guide for Considering Climate Risk in Infrastructure Investments” to explain the ways in which physical climate risks might affect key financial aspects of prospective infrastructure investments.
Climate Change and Infrastructure
The guide begins with a discussion of climate risk, acknowledging that climate change can also open opportunities such as improving resource efficiency, building resilience and developing new products. It provides a framework for questioning how revenues, costs, and assets can be linked to potential project vulnerability arising from climate hazards.
Revenues: Climate change can cause operational disruptions that lead to a decrease in business activities and thus decreased revenue. For example, higher temperatures alter airplanes’ aerodynamic performance and lead to a need for longer runways. In the face of consistently higher temperatures, airlines may seek airports with longer runways, shifting revenue from those that cannot provide the necessary facilities.
Costs/Expenditures: Extreme weather events can cause service disruptions, but can also damage infrastructure, requiring additional unplanned repair costs. For example, storms often lead to downed power lines which disrupts services but also necessitates that companies spend time and money to return the power lines to operating conditions.
Assets: Physical climate impacts can decrease value of tangible assets by damaging infrastructure and potentially shortening its lifetime. Intangible assets can be negatively impacted by damages to brand image and reputation through repeated service disruptions.
Liabilities: Climate change is likely to pose increasing liability risk as disclosure and preparation requirements become more widespread. As infrastructure is damaged and regulations evolve, companies may face increased insurance premiums and costs associated with retrofitting infrastructure and ensuring compliance.
Capital and Financing: As expenditures increase in the face of extreme weather events, debt is also likely to increase. Likewise, as operations and revenues are impacted and asset values decrease, capital raising may become more difficult.
The guide also draws attention to the potential opportunities emerging from resilience-oriented investments in infrastructure. There are both physical and financial strategies that can be leveraged to manage climate-related risks, such as replacing copper cables with more resilient fiber-optic ones and creating larger debt service and maintenance reserves.
Climate Risks and Opportunities: Sub-Sector Snapshots
The guide includes ten illustrative “snapshots” describing climate change considerations in the example sub-industries of Gas and Oil Transport and Storage; Power Transmission and Distribution; Wind-Based Power Distribution; Telecommunications; Data Centers; Commercial Real Estate; Healthcare; and Sport and Entertainment. Each snapshot includes a description of the sub-sector, an estimation of its global potential market, examples of observed impacts on specific assets, and potential financial impacts from six climate-related hazards: temperature, sea-level rise, precipitation & flood, storms, drought and water stress.
Commercial real-estate, for example, refers to properties used only for business purposes and includes office spaces, restaurants, hotels, stores, gas stations and others. By 2030 this market is expected to exceed US $1 trillion per annum compared to $450 billion per annum in 2012. Climate impacts for this sub-sector include hazard-specific risks and also include the general risk factor of climate-driven migration which drives shifts in supply and demand in the real estate market.
As heat waves increase in frequency, people will likely seek refuge in cool public buildings, leading to increasing property values for those places such as shopping malls that provide air-conditioned spaces for community members. Increasing frequency and intensity of storms may damage commercial infrastructure, leading to recovery costs and increased insurance costs. Real estate managers may have to make additional investments in water treatment facilities to ensure the viability of their assets in regions faced with decreased water availability. An example of the financial impacts of climate change on this sub-sector can be seen in Houston after Hurricane Harvey. After the hurricane hit Texas in August 2017, approximately 27% of Houston commercial real estate was impacted by flooding and these 12,000 properties were worth about US$55 billion.
For more guidance on investing for resilience, read the Planning and Investing for a Resilient California guidance document and the GARI Investor Guide to Physical Climate Risk and Resilience.
Climate change impacts are already being felt in California and will continue to affect populations, infrastructure and businesses in the coming years. A resilient California is a state with strong infrastructure, communities and natural systems that can withstand increasingly volatile conditions. Executive Order B-30-15, signed by Gov. Brown in April 2015, mandates that all state agencies must consider climate change and that they must receive guidance on how to effectively do so.
To support the implementation of this Executive Order, the California Governor’s Office of Planning and Research released last week “Planning and Investing for a Resilient California,” a guidance document outlining strategies to include climate adaptation in decision-making. Four Twenty Seven CEO Emilie Mazzacurati served on the Technical Advisory Group that wrote the report, which aims to provide guidance for state agencies to both plan for future climate conditions and also conduct planning itself in a new way.
The guide outlines four steps for integrating climate into decisions and then looks specifically at investing in resilient infrastructure, providing actionable guidelines for building a resilient California.
Four Steps to Planning for Resilience
1. Characterize climate risk
- Determine the scale and scope of climate risk, ranking it as low, moderate or high impact.
- Identify the vulnerability of impacted communities and systems, ranking them as adaptable, moderately adaptable or vulnerable.
- Define the nature of the risk, ranking it as temporary, limiting or permanent.
- Identify the economic impacts of the risk, ranking them as low, medium or high.
2. Analyze climate risk
- Determine which emissions scenario (RCP) to plan for: the higher the risk identified in step 1, the higher the necessary RCP scenario.
- Determine complexity of uncertainty analysis needed: the higher the risk, the more important the uncertainty analysis.
- If a project is in a current coastal zone, or a location that will be coastal by 2050 or 2100, planning must account for sea level rise.
- Worst case scenarios should be identified for reference, but don’t need to be planned for.
- Cal-Adapt is an interactive online tool, displaying climate impacts by hazard, with downloadable downscaled data.
3. Make climate-informed decisions, by using resilient design guidelines
- Prioritize approaches that integrate adaptation and mitigation.
- Prioritize actions that promote equity and community resilience.
- Coordinate with local and regional agencies, including governments and community based organizations.
- Prioritize actions that use natural infrastructure.
- Base all choices on the best science.
4. Track and Monitor Progress
- Develop metrics and report regularly to foster transparency and accountability.
Case Study: California Water Plan 2013
Several state agencies are already integrating climate change into their planning. The Department of Water Resources used a scenarios approach to capture uncertainty in climate, but also in demographics, economic change and land use. Examining 22 different climate scenarios, analyzing different temperature and precipitation possibilities and accounting for growth uncertainty, the agency looked at 198 possible futures. This allowed them to examine different possible management approaches and how they may reduce certain vulnerabilities. This quantitative estimate provided a range of future conditions and possible strategies for the agency to consider in its planning.
The state of California invests in infrastructure through funding of onsite renewable energy and telecommunications, providing financial assistance to projects not owned by the state and providing capital for all steps of infrastructure development owned by the state. Regardless of the type of investment, climate change impacts must be considered. It’s important to first determine if there is a way to accomplish a goal by using natural infrastructure. Assessing the potential for natural infrastructure can be done by examining the landscape, exploring Cal-Adapt’s projections for the area, analyzing potential co-benefits such as improved ecological services or water health and consulting with other groups. It’s important to compare the risk reduction and complete costs and benefits of the natural infrastructure approach with the non-natural alternative. Using full life-cycle accounting, that considers all of the costs from a project including building, operating, maintaining and also deconstructing, is essential for evaluating proposed projects. Prioritizing infrastructure with climate benefits and integrating the resilient decision making principles will ensure that investments are resilient and climate-conscious.
This guidance document is a continuation of California’s ongoing leadership in climate adaptation, which includes Senate Bill No. 379 Land Use: General Plan: Safety Element, passed in 2015. This bill mandates that every city must include adaptation and resilience strategies in General Plan Safety Elements and Local Hazard Mitigation Plans by 2017. Read about Four Twenty Seven’s work helping cities in Alameda County implement these requirements and learn about our advisory services for adaptation planning, policy consulting and vulnerability assessments.