Understanding Industry Relative Exposure to Physical Impacts of Climate Change

As banks and lenders increasingly aim to assess the climate risks in their portfolios, there is a growing need for an efficient way to screen thousands of companies on their exposure to climate risks. Likewise, as regulators develop new requirements for stress testing and disclosure, they’re looking to phase in requirements and understand what can be reasonably assessed and disclosed in the near term. Traditionally, a company’s sector is used as a basis for understanding its exposure to climate risk when more detailed information is not available. This approach is the foundation for transition risk approximations, as a company’s exposure to risks from the transition to a low-carbon economy is largely driven by its sector. However, a broader range of companies can face risks from physical climate hazards, based primarily on the location of their operations. Physical risks translate into business risks through damage and disruption at business manufacturing plants, data centers and other operating facilities, as well as through their supply chains.

Approach

One way to obtain a high-level view of a company’s exposure to physical risk is to understand the trends of risk exposure both in its sector and in the countries in which it operates. We leveraged our database of 5,000 global companies and their underlying 2 million global corporate facilities  scored on their forward-looking exposure to climate hazards to provide a view on relative risk exposure by industry. We use the framework in figure 1 to assess companies’ exposure to climate risk and aggregate the findings up to the sector and country level to provide a high-level view that’s informed by asset-level analysis.

Framework for assessing a company’s exposure to physical climate risk:

  • A company’s Operations Risk is based on its facility-level exposure floods, heat stress, hurricanes & typhoons, sea level rise, water stress and wildfires. 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.

Figure 1. Framework for assessing companies’ exposure to physical climate risk.

Scores are normalized, with 0 being the least exposed and 100 being the most exposed. In line with considerations of relevant time horizons and of impacts being locked in over the climatic short term our company risk scores consider 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.

 

Key Findings by Sector

In this analysis we share key findings on companies’ Operations Risk, which is based on their facilities’ exposure to each climate hazard. Understanding relative exposure by sector can inform high-level assessments of market-wide risk based  on the concentrations of certain industries in loan portfolios.

Manufacturing, construction and transportation/storage sectors have the highest Operations Risk scores (Figure 2). This is noteworthy because these are industries with particular vulnerabilities to disruption from extreme events such as floods, as well as vulnerability to chronic stresses like increasing temperatures which affects labor productivity and energy prices. Companies in the manufacturing sector are often part of global supply chains, such that disruptions at plants in one country can lead to shortages around the world. Construction and transportation, on the other hand, are often critical for local economies.

Figure 2. The average Operations Risk for companies within each sector. The size of the box represents the number of facilities assessed within each sector and the color of the box represents its relative risk to physical climate hazards. The number in the box shows the average Operations Risk for companies in that sector.

 

The next layer of detail provides an understanding of a sector’s relative risk by hazard, based on the average risk scores of companies in that sector. As risks and also relevant corporate resilience measures vary based on hazard, this detail can help inform risk management and engagement efforts.

Figure 3. The average hazard risk score for companies within the manufacturing sector.

 

Key Findings by Country

Within a sector there are significant differences in average exposure depending on the country, as physical climate risk varies by location. For example, in the construction sector the average Operations Risk scores are highest in the Philippines, Vietnam and Mexico, while the average scores are lowest in Finland, Bulgaria and Switzerland.

Different countries also have different risk exposure based on the hazard. For example, the Philippines, Indonesia and Mexico are countries with significant numbers of corporate facilities that also stand out with the highest Operations Risk scores. However, for wildfires, Indonesia, Mexico and Brazil stand out as countries with significant numbers of corporate facilities that are among the highest risk (Figure 4). Meanwhile, for water stress Kazakhstan, Morocco and  Australia are among the most exposed (Figure 5)

Figure 4. Facilities owned by transportation and storage companies, colored based on their exposure to wildfires.

Figure 5. Global corporate facilities owned by manufacturing companies, colored based on their exposure to water stress.

 

This dataset provides a multifaceted view on physical risk exposure by industry and country, which can be tailored to the needs of specific risk assessments and inform views on aggregate portfolio risk.

US Automotive Manufacturing Hubs Exposed to Climate Risk

Introduction: Growing Investment in US Manufacturing

Manufacturing stands out as a key part of President Biden’s America Jobs Plan and there is wide support for strengthening American manufacturing. Historically, manufacturing was a backbone of the domestic economy, contributing around 25% to national GDP, but that number fell to 11% in 2019.

The COVID-19 pandemic underscored the need for resilient and local supply chains, and provides an opportunity to transition to a low-carbon economy as part of the recovery. Investing in the domestic manufacturing industry offers a lifeline to new sectors, such as electric vehicles (EVs), which can introduce clean energy jobs nationwide. The American Jobs Plan offers “$52 billion to increase access to capital for domestic manufacturers, focusing on successful existing access programs and targeting rural manufacturing and clean energy” and “a $174 billion investment to win the EV market.” While it’s unclear if this exact proposal will pass, it is likely that there will be growing investment in domestic manufacturing. At the same time, increasingly frequent climate-driven extreme weather events demonstrate the need to build climate resilience into new manufacturing investments.

In this analysis, we explore municipal climate risk exposure in states with significant and growing automotive manufacturing industries. Understanding municipal climate risk is important because in addition to the direct physical threat to manufacturing plants, climate emergencies cause loss of life, hinder commutes and disrupt supply chains by closing roads, airports and other infrastructure. We leverage our county climate risk scores, which quantify population-weighted exposure to floods, heat stress, hurricanes & typhoons, sea level rise, water stress and wildfires, over the 2030-2040 horizon.

Automotive Manufacturing in Michigan & Tennessee

Both Michigan and Tennessee have seen “real manufacturing GDP grow by a compound annual growth rate (CAGR) of more than 3% between 2009 and 2019, about twice as high as the national rate.” Michigan automotive manufacturing generated around $225 billion and 712,000 jobs in 2019. Automotive manufacturing is Tennessee’s dominant manufacturing sector and the state’s employment in the  sector is 3.3 times higher than national average.

In addition to serving as hubs for traditional automotive manufacturing, Michigan and Tennessee are both seeing increasing investment in EVs, which provide a growing opportunity for these states to continue revitalizing their automobile manufacturing sectors while creating jobs and growing their economies. However, when making capital-intensive investments in new facilities and equipment it is important to consider the long-term risks these assets may face, to protect the company’s investment, and also to ensure that the regional economic benefits are seen.

Flood Risk

In addition to damaging equipment and products, floods can also cause upstream and downstream supply chain disruptions and impact manufacturing productivity if employees cannot get to work. Moreover, since manufacturing can serve as a regional anchor, employees living one or two counties over may be affected by floods that avoid the facility itself.

Figure 1. Michigan county-level exposure to flood risk.

Of Michigan’s 83 counties, 70% are exposed to high flood risk (Figure 1). In 2020, flood damage in Midland County was assessed at over $200 million as heavy rains broke dams and led to significant flooding. Further south,  Wayne County has long been a nexus for the automotive industry and is home to the headquarters of both General Motors and Ford. Ford pledged $850 million  and Fiat Chrysler is investing $4.5 billion to build assembly plants and expand operations there. The county also holds 23% of US automotive production and 76% of total automotive Research & Development. While Figure 1 shows that Wayne County is at a lower risk for flooding than the surrounding counties, all manufacturing in the area would be affected by delivery delays and commute disruptions if the regional transportation infrastructure is not prepared for increased floods.

Figure 2. Tennessee county-level exposure to floods.

In Tennessee, about 90% of the 95 counties are exposed to high flood risk (Figure 2). We find that most key manufacturing hubs are at high risk of flooding, while others are adjacent to highly exposed counties. Williamson County, where General Motors is planning a multi-billion dollar EV battery plant, neighbors Davidson County, the epicenter of catastrophic flooding, and multiple deaths in March 2021. This flood event ultimately led to a Federal Disaster Declaration which expanded to neighboring counties.  Rutherford County has high flood risk and is home of the US manufacturing facility for Nissan Leaf, which was 2016’s most productive automotive manufacturing facility.

Heat Stress 

Heat stress is also a significant threat to manufacturing. It can cause electricity shortages or outages due to increased use of air conditioning, which is already happening more frequently as heat waves increase in duration and severity. Increasing temperatures also present a public health hazard that increases the risk of cardiovascular and respiratory illness and lowers worker productivity. Research shows that temperatures above 90F for six or more days reduces weekly production by an average of 8% in US automotive manufacturing plants.

Figure 3. Michigan county-level exposure to heat stress.

Heat stress is less of statewide concern for Michigan, with only 12% of counties exposed (Figure 3), but it is a high risk for Wayne County, where most of the state’s automotive manufacturing is centered.  Ford, Fiat Chrysler and General Motors all reopened their North American manufacturing facilities on May 18th. This means facilities with high exposure to heat stress are coming back online right as summer is picking up, and the season is likely to be warmer than average, especially in southern Michigan.

Figure 4. Tennessee county-level exposure to heat stress.

Over 92% of Tennessee counties are exposed to heat stress (Figure 4), which represents significant risk for the industry and economies it underpins. The key counties housing the state’s automotive manufacturing facilities are all at high risk. New environmental commitments by General Motors signal growth in domestic EV manufacturing, as they plan a multi-billion dollar EV battery plant in Tennessee with LG Electronics. In a state largely exposed to increasing temperatures, planning for increasing energy costs will help increase the viability of these new facilities.

Mitigating Climate Risk

The revitalization of the US automotive manufacturing industry provides an opportunity for key regions to benefit from population growth, a growing tax base and increased economic activity. However, the success of these developments will rely on business resilience to increasing climate extremes. There are opportunities for municipalities to invest in climate resilience measures both to reduce risk to existing businesses and to attract more business. For example, New York City’s  report outlining ways in which industry can take innovative and cost effective approaches to implementing flood preparedness measures also highlights opportunities for the public sector to support these efforts, including through flexible zoning.

Companies would benefit from exploring a region’s climate risk carefully before developing new facilities and from pricing effective risk mitigations into plant development. For example, for heat stress, at the site level, companies can anticipate higher energy costs, improve insulation, build generators, leverage renewable energy and invest in monitoring and predictive systems to understand facility-level energy use. Nissan installed sub-metering in its Tennessee facilities to monitor energy use, identify unnecessary energy draws, and reschedule certain fabrication to when more energy is available.

Likewise, due to the automobile industry’s reliance on both reliable energy and onsite employees, there are opportunities for businesses to engage with the municipalities to help maintain the resilience of key regional infrastructure to relevant hazards like floods and heat waves. For example, companies can partner with the public sector on initiatives like investing in parks and other green infrastructure which can both help reduce the health impacts of heat waves and can also contribute to flood reduction. Companies such as General MotorsFord, and Nissan invest heavily in education and training for the communities where they are located, and there may be an opportunity to develop trainings around climate risk, which can contribute to increased resilience of the local community, including companies’ employees and customers.

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This post was updated on June 4th to omit data on company facility exposure due to data limitations.

Four Twenty Seven Announces Partnership With Lockton

March 8, 2021 – BERKELEY, CA – Four Twenty Seven’s data is now available through Lockton, a global independent insurance broker.

As part of a long-term commitment to protect clients as the effects of climate change take their toll, Lockton works with insurers to develop and deliver innovative insurance products, designed to meet the needs of the future. Lockton’s broker partnership with Four Twenty Seven enables clients to make decisions based on climate science. The service provides data and analytics required to build resilience and mitigate the risks of climate change.

The partnership will benefit many of Lockton’s clients:

  • Real estate investors can evaluate the long-term risk exposure of portfolio holdings and engage with asset operators to improve resilience and bolster risk management capabilities
  • Property and asset managers can enhance portfolio analysis and monitor risk as investment appetite can change over time. They will also be able to screen assets for their exposure to climate hazards pre-acquisition
  • Banks can identify the climate-related risks in commercial and residential mortgage portfolios, incorporating these risks into their loan acquisition appraisals

Steve Rust, Global Real Estate and Construction Partner at Lockton, commented: “Right now, it’s more important than ever for the real estate and construction sectors to better prepare themselves for the great risk that climate change holds globally. By harnessing the power of data, especially in relation to locations, Four Twenty Seven can help us additionally support clients with invaluable awareness of long-term climate risks, allowing them to make better informed decisions, and plan a strategy for the future. This is an exciting opportunity and we look forward to building a productive, forward-thinking partnership.”

Emilie Mazzacurati, Global Head of Moody’s Climate Solutions and Founder & CEO of Four Twenty Seven, commented: “Understanding an asset’s exposure to hazards such as floods, storms and wildfires is critical to risk management processes, including decisions around insurance and asset-level resilience investments. We’re delighted to partner with Lockton to help a broader range of stakeholders access forward-looking information on their climate risk exposure.”

Read Lockton’s announcement.

Newsletter: The Impacts of “Global Weirding”

Four Twenty Seven, an affiliate of Moody's, sends a monthly newsletter highlighting recent developments in climate risk and resilience. 

In Focus: Deadly Winter Storm in Texas

Devastating Extremes Highlight the Need for Equitable Resilience

 

In the massive disaster still unfolding in Texas after temperatures have returned to average, dozens were killed and many more are still suffering with lack of clean drinking water, home repairs from burst frozen pipes, and exorbitant energy bills, among other challenges. While scientists are still exploring the connection between a warming Arctic and frigid conditions spreading south, the scientific community agrees that climate change will bring more extreme conditions. The widespread power outages in Texas underscore the dire need to implement a diverse set of adaptation measures to prepare for a range of extreme events, including heat waves and storms. Weatherization of power plants and energy infrastructure, alongside improvements to home insulation can help prepare for extreme temperatures on either end of the spectrum.

This disaster also underscores the disproportionate impacts of extreme events on low-income residents and people of color, who are less likely to have backup generators or disposable income and more likely to lose critical wages from missing shifts during the storm. Likewise, in Texas, residents that shared energy circuits with critical facilities such as hospitals often kept their power during the storm, but these facilities are not usually in Black and Hispanic communities. These challenges aren't unique to Texas. In Louisiana, residents still homeless or suffering from two hurricanes last fall were also hit by extreme cold, facing yet another challenge to their survival, and there are similar stories after disasters across the country.

Earlier this month the Federal Energy Regulatory Commission did announce plans to create a senior position focused on environmental justice and equity, which could be a small step toward including these critical issues in decision-making about national energy infrastructure. Meanwhile, the New York State Department of Financial Services took an important step by announcing plans to incentivize climate resilience investment in low-to-moderate income communities.
Financial Regulators Act on Climate

Ongoing Efforts to Address the Financial Risks of Climate Change

Central banks and financial regulators around the world continue to announce developments in their plans to address climate risk. This month the E.U. made additional progress, while the US began to make up for lost time. The UK also released a consultation on its updated draft climate risk disclosure legislation for pensions based on last fall's consultation responses.

The Eurosystem's 19 central banks, as well as the European Central Bank committed to releasing TCFD-aligned climate risk disclosures for their investment portfolios within the next two years. Meanwhile, the French Ministry of Economy, Finance and Growth consulted on updates to its landmark climate risk disclosure law, Article 173. The draft guidance provides more concrete recommendations around forward-looking disclosures for climate and biodiversity related risks including scenario analysis and financial metrics.

Earlier this month the San Francisco Federal Reserve published an Economic Letter explaining its approaches to climate-related risks relating to supervision and regulation as well as financial stability. It outlined recent global efforts to address this risk and explained the Fed's own approach, emphasizing the value of scenario analysis for individual financial institutions and of stress tests as a tool for assessing potential climate impacts on the financial system more broadly. Meanwhile, Treasury Security Yellen has established a new Treasury climate "hub," and is currently seeking to find its leader. The likely candidate, Sarah Bloom Raskin, has served both as a deputy Treasury secretary and on the Federal Reserve Board.
Every Region Has its Climate Risks

The New York Times on Global Populations' Exposure to Climate Hazards, Featuring Four Twenty Seven Data

Every region has its own set of climate risk exposures and how this risk creates adverse impacts depends upon the population and economic activity exposed, as well as any climate adaptation measures in place. Based on Four Twenty Seven's data about 90% of the global population will be exposed to at least one climate hazard by 2040, and the New York Times' interactive story brings these findings to life, with additional context about each region.

Climate Risk by Community Type in the US

In the US there is a growing field of research exploring the overlay between community characteristics and their exposure to climate hazards. From demographics and resources to economic composition, many factors influence communities' vulnerability to climate hazards and their ability to prepare. The American Communities Project explores how climate hazards in the US correspond to different community types, leveraging Four Twenty Seven's data. The analysis highlights the significant exposure to sea level rise in "Military Posts," and exposure to extreme rainfall in "Working Class County" and "Middle Suburbs," as well as several other key findings and the potential implications of these exposure trends.
Climate Change & Sustainability Resources for Investors

Climate Opportunities and Risks in an Altered Investment Landscape

In this year's Megatrends report, Weathering Climate Change, PGIM provides a deep dive into the many ways climate risk can affect institutional investors, including a briefer on the climate science, an investor survey and a discussion of ways to integrate climate change into investment decision-making. It highlights risks and opportunities across asset classes, including fixed income, equities, real estate and infrastructure, and explores portfolio implications, with analysis from Four Twenty Seven.

Sustainable Bond Insights 2021

This year's Sustainable Bond Insights compiled by Environmental Finance, provides a review of 2020's green and sustainable bond issuance and looks forward to the year ahead. Moody's ESG Solutions and Moody's Investors Service contributed a chapter highlighting three trends to watch this year: increased issuance by governments and agencies; the rise of sustainability-linked financing; and climate risk and resilience in the bond market. 
We're Hiring! Join Moody's ESG Solutions
There are several opportunities to join Moody's ESG Solutions dynamic team. See the open positions below and visit Moody's Careers page for more information.
Upcoming Events

Join the team online at these upcoming events and check our Events page for updates:

  • Mar. 4 –  Climate Change and Your Business: A Conversation with Emilie Mazzacurati: Global Head of Moody’s Climate Solutions and Founder & CEO of Four Twenty Seven, Emilie Mazzacurati, will present on the business risks of climate change.
  • Mar. 10 Environmental Social Justice Webcast: Director, Communications, Natalie Ambrosio Preudhomme, will discuss opportunities to leverage climate risk analytics to build corporate and community resilience.
  • Mar. 22-25 Ceres 2021: Emilie Mazzacurati will speak on the panel "The New Materiality of Climate Science and What it Means for Investors and Companies."
  • Apr. 14-16 – The Eurofi High Level Seminar: Emilie Mazzacurati will present on the panel "Climate Risk Implications for the EU Financial Sector."
  • Sept 22 2021 CARE Sustainability Conference: Natalie Ambrosio Preudhomme will present on financial climate risk analytics during the panel "Implementation Issues."
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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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Newsletter: The US prioritizes climate change

Four Twenty Seven, an affiliate of Moody's, sends a monthly newsletter highlighting recent developments in climate risk and resilience. This month we discuss the Biden Administration's climate policy, share new climate change records and include recent books on climate risk in the financial sector. 

In Focus: Climate Risk a Priority in the US

First Week Signals Biden Administration's Commitment to Climate Action 

The Biden Administration has named climate changes as one of four top priorities, alongside the COVID-19 pandemic, racial justice and the economic crisis. Beyond rejoining the Paris Agreement, several of Biden's executive orders in his first week in office relate directly to climate, while others have significant implications for the environment. For example, in an executive order on public health and the environmental, federal agencies are mandated to comply with Obama-era regulations prioritizing climate change adaptation and resilience rolled back by Trump. Further, one of his first executive orders stated that regulatory reviews should promote concerns such as public health, environmental stewardship, racial justice and the interests of future generations rather than focusing on a cost-benefit analysis, which typically fails to fully recognize non-economic  benefits. There have been several key climate appointments and climate has emerged as a critical issue across many agencies, so this will remain a space to watch in the coming months.

The US Financial Regulators Begin to Move on Climate

On Monday the Senate approved Janet Yellen for treasury secretary, after she committed last Tuesday that the Treasury would examine the financial risks of climate change and appoint a senior official to lead climate initiatives. Meanwhile, this week the Federal Reserve announced a climate committee with a mission to "assess the implications of climate change for the financial system — including firms, infrastructure and markets in general." The central bank has slowly been increasing its participation in the dialogue on climate risk and this step signals that it may be starting to truly prioritize the issue.

The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae, Freddie Mac and the Federal Home Loan Banks, issued a Request for Input on climate risk for its regulated entities. The consultation asks about identifying climate risks and about options to integrate climate risk management into the FHFA's regulatory framework. Respond by April 19.
Climate Records Broken Repeatedly
There was a record 50 billion-dollar extreme weather events endured globally in 2020, with a total of $268 billion in total economic losses according to Aon. While the most costly disaster last year was the summer monsoon flooding in China, causing $35 billion in damage, the majority of the damage from extreme weather was in the US.

It's thus fitting that this past year also ties with 2016 for the hottest year on record, even during a La Niña event, which is a phase in the global climate cycle that typically leads to cooler years. The seven years we just experienced are the seven warmest years on record.

Meanwhile, scientists continue to increase our understanding of glacier dynamics and the implications for global sea level rise. A paper published on Monday found that global sea ice, glaciers and ice sheets are melting 57% faster than they were three decades ago.
Physical Climate Risk for Sovereigns

Four Twenty Seven Analysis: Over 25% of the world's population in 2040 could be exposed to severe heat stress and 57% of the economy could be exposed to flooding 

More frequent and severe extreme events driven by climate change pose a significant threat to populations and economies around the world and understanding who and what is exposed to climate hazards is essential to pricing this risk and preparing for its impacts. Four Twenty Seven's report, Measuring What Matters: A New Approach to Assessing Sovereign Climate Risk, builds on new analytics assessing sovereign exposure to floods, heat stress, hurricanes and typhoons, sea level rise, wildfires, and water stress based on the only known global dataset matching physical climate risk exposure to locations of population, GDP (Purchasing Power Parity) and agricultural areas within countries. 
Read the Analysis
The Latest Books on Climate Risk & Sustainable Finance 

Values at Work: Sustainable Investing and ESG Reporting,

This recent book highlights the latest research on sustainability topics of growing interest to investors, including climate change, pollution, diversity, governance, economic inequality and others. Four Twenty Seven wrote a chapter titled “Asset-Level Physical Climate Risk Disclosure.” The chapter discusses the need for consistent, comparable metrics for physical risk disclosure, using the pharmaceutical sector as a case study to examine climate risk disclosure versus climate risk exposure. 

Carbon Risk and Green Finance

This new book provides a comprehensive primer on both physical and transition climate risks as financial risks. It covers the emergence of reporting frameworks and mandatory disclosure laws in recent years. The latter portion examines the datasets and approaches that can be leveraged to assess and report climate risk, including emerging topics such as climae stress testing and scenario analysis, citing Four Twenty Seven.
Climate Change, Real Estate and
the Bottom Line

Webinar Recording

How will climate hazards like sea level rise and flooding affect real estate and how is the industry preparing? In this webinar in the Goodwin and MIT Center for Real Estate series, The Path to Tomorrow, Global Head of Climate Solutions at Moody's and Founder & CEO of Four Twenty Seven, Emilie Mazzacurati, joins insurance and finance professionals to discuss climate risk for real estate developers, investors and owners.
What the Recording
Upcoming Events

Join the team online at these upcoming events and check our Events page for updates:

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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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Are U.S. Corporates Ready for Climate Risk Disclosures?

Introduction

The results from the U.S. presidential elections signal an impending radical shift in U.S. climate policy. President-elect Biden’s transition team identified climate change as one of four top priorities, promptly followed with the appointment of John Kerry as special envoy for climate. As part of his transition plan, Biden announced ten executive actions related to climate change that he intends to take on his first day in office. One of these measures is the requirement for public companies to disclose climate risks and greenhouse gas emissions in their operations and supply chains.

This disclosure requirement aligns with a global trend, following similar announcements in the UK and in New Zealand, with other financial regulators across Europe and the Asia-Pacific also actively considering such measures.

Disclosures are but one of many policy measures the new Administration may implement to address potential risks from climate change on financial markets and the economy. The report published by the US Commodity and Futures Trading Commission (CFTC) in September 2020 provided an extensive list of policy recommendations for financial regulatory agencies and the government at large to regulate climate risk.

A number of these policy recommendations overlapped with the September 2020 report from the Business Roundtable (BRT)[1], where large corporations employing over 15 million in total and representing $7.5 trillion in assets(revenues) called on bold policy action to address the looming climate crisis.

Our analysis examines recommendation from the BRT and CFTC, alongside data on corporate risk disclosure, to provide an indication of how US firms are currently standing against the recommendations, and to provide a comparison to other markets.

Methodology

We use the TCFD Climate Strategy Assessment dataset from V.E, an affiliate of Moody’s, which provides a granular view of how 2,855 companies report in line with the TCFD recommendations. This data is based on a comprehensive analysis of companies’ risk disclosures, across sectors and regions. For the purpose of this analysis, we grouped firms based on the region in which they’re listed, comparing the progress of firms in the US (498 companies), Canada (109), Japan (399) and the European Union (EU) (840). Each of these regions have different approaches to  climate policy, with the EU leading the way in terms of regulatory developments for assessing and disclosing climate risk, while Japan expects markets to address financial risks from climate change through emerging best practices and market pressure. Comparing recommendations from the BRT and CFTC to companies’ risk disclosures, we grouped our analysis into two sections, first looking at recommendations around emissions reductions efforts and then discussing recommendations around risk management.

Emissions Reductions

Carbon price

Both the CFTC and BRT recommend imposing a carbon price to develop a clear price signal associated with greenhouse gas (GHG) emissions. Firms sometimes use  internal carbon pricing as a management tool, which suggests that they are more prepared to adjust to a nationwide carbon price.

We find that only 3% of assessed US firms report using an internal carbon price, which is fewer than Canada, the EU and Japan. Alongside Canada, US firms also have the highest average carbon footprint of the assessed regions, based on carbon footprint data from V.E. However, Canada shows the largest proportion of firms reporting an internal carbon price, at 19% of firms. The data shows that US firms are behind their peers and have not leveraged the use of an internal carbon price as a management tool to incentivize carbon reductions and price the externalities associated with carbon emissions.

However, we find that many firms that disclose internal carbon prices in the US are from the automobile, energy, mining and pharmaceutical sectors. These sectors are among those with the largest dependencies on energy consumption or fossil fuels, which are expected to be most exposed to transition risks. The overall low numbers are therefore balanced by the fact that the firms in these sectors that do use internal carbon prices are also those that most need to prepare for shifting climate policy.

Table 1. The percent of companies in each region disclosing each indicator.

Low-Carbon Technology

The BRT emphasizes the significant opportunity for the U.S. to continue to lead in development and commercialization of energy efficiency and renewable energy to support the transition to a low-carbon economy. It underscores the need to invest in low-carbon and emissions reduction technology to allow us to capitalize on this opportunity.

In the US, 7% of assessed firms disclose the development of products that contribute to the transition to a low-carbon economy, which is less than firms of other regions.  Japan and the EU lead the way with 19% and 18% of firms respectively reporting investments in low carbon technology. Only 1% of US firms report acquisition of businesses contributing to the transition; although all regions assessed show low uptake of this indicator. In the US, 35% of the companies in industrials, 33% in electrics and 30% in the automobile sector disclose development of products contributing to the energy transition. This demonstrates the opportunities for firms in sectors with high exposure to transition risk, such as electrics and automobiles, to invest in developing new products which would be in higher demand if climate policy increased.

The EU’s Sustainable Finance Taxonomy helps investors identify which activities contribute to climate adaptation and mitigation which in turn informs portfolio alignment with the Paris Agreement or other emissions reduction goals. The Taxonomy puts additional pressure and incentive for corporations to develop activities that directly contribute to the transition. This may explain why EU companies have made among the most progress to date, although it also may be an indication of further pressure growing outside of the EU as global investors aim to align with the taxonomy.

GHG Reduction Targets

The BRT recommends aligning policy and greenhouse gas reduction targets with scientific evidence around the need to reduce emissions. While few firms have disclosed divestment from or decommissioning of carbon intensive assets, those in the US and Japan show the least progress with only 1% of the assessed firms disclosing this indicator, while the EU shows the highest with 6%. Similar to the developments described above, as investors increasingly strive to align their portfolios with emissions reductions targets, companies will experience increased pressure to align their activities with such targets. While the US has experienced less regulatory activity to date in this regard than the other regions, this is likely to change going forward and companies prepared for those change are likely to be better positioned than others.

Risk Management

Governance

The CFTC recommends that financial firms define oversight responsibilities for climate risks for the board of directors. While this recommendation is particularly directed at financial firms, it also aligns directly with one of the TCFD recommendations, and as such will  be increasingly relevant as companies are increasingly asked to disclose their climate risks and opportunities in line with the TCFD. The BRT also recommends voluntary and transparent climate risk disclosure by corporations in line with existing frameworks.

Only 8% of US firms disclose integration of climate risk into board oversight and Japan and Europe show similar progress. Canada stands out with 19% of firms disclosing processes used by the board to monitor and oversee climate progress.

Table 2. The percent of companies in each region disclosing each indicator.

Integration into Risk Management

The CFTC report recommends that financial firms integrate climate risk monitoring and management into their governance. However, only 10% of US firms disclose integration of climate risks into their enterprise risk management. While this is similar to progress in Japan, 17% and 20% of firms in the EU and Canada respectively report integration of climate risks into their management, indicating that they are likely more well prepared both for an increase in extreme events or transition risks and for regulations around assessing and disclosing risk.

The CFTC recommends that financial firms conduct scenario analysis aligned with international efforts, In the US, 11% of firms have disclosed use of scenario analysis, which is similar to Japan and the EU. Canada stands out with 20% disclosing use of scenario analysis. There has been a rapid uptick in both the pressure to conduct scenario analysis and stress tests, particularly for banks, as well as the resources available to support these assessments, such as the reference scenarios released by the Network for Greening the Financial system in June 2020.

Conclusion

Our analysis shows that the largest US corporations tend to be slightly behind in terms of disclosing key indicators compared to their international peers. However, among all assessed regions, only a small percentage of firms disclose the indicators highlighted in this analysis, which demonstrates that there is significant room for progress. Increasing firms’ capacity to assess and disclose climate risks in an informative manner remains a global challenge.

Our analysis focused on the largest publicly trading companies, which are the first that have to comply with upcoming regulations around climate risk disclosure. The picture of progress likely looks different for mid-market firms where integration of emerging best practices for ESG and climate risk is not yet as deep.

 

[1] Moody’s Corporation, Four Twenty Seven’s parent company, is a BRT member.

Moody’s Analytics Wins Climate Risk Award at Chartis RiskTech100®

Moody’s Analytics received the Chartis RiskTech100® Climate Risk Award, highlighting its commitment to integrating climate risk analytics into its world-class credit models. As part of Moody’s ESG Solutions, Four Twenty Seven works closely with Moody’s Analytics, bringing data on granular, forward-looking physical climate risk exposure. Read the press release from Moody’s Analytics:

SAN FRANCISCO, November 23, 2020 – Moody’s Analytics has won the Climate Risk category in the 2021 Chartis RiskTech100®, the first year this category has appeared. It’s one of 10 awards for Moody’s Analytics to go along with the #2 overall ranking.

The Moody’s Analytics offering helps customers first identify whether they have exposure to climate risk in their portfolios and then quantify the impact of exposure to various climate risk factors.

“Expanding our climate risk capabilities is a top priority and one we have invested significantly in achieving,” said Dr. Jing Zhang, Managing Director and Global Head of Quantitative Research at Moody’s Analytics. “Severe climate events throughout 2020 underscore the importance and urgency for market participants to understand how climate change is already affecting—and will continue to affect—the risk and return of their portfolios.”

Measuring the physical risks associated with climate change is one piece of the climate risk management puzzle. Award-winning climate risk analytics from Moody’s ESG Solutions, powered by Moody’s affiliate Four Twenty Seven, a leading provider of physical climate risk data and V.E, a Moody’s affiliate with expertise in transition risk, ESG, and corporate disclosures, are being incorporated across Moody’s Analytics solutions. Moody’s climate solutions suite brings climate data into risk management tools, translating climate risk exposure into financial impact and credit risk across asset classes.

Our team recently conducted an AI-powered study of climate-related disclosures from roughly 12,000 companies, across industries and regions. Among the findings, which were presented to the Task Force on Climate-Related Financial Disclosures (TCFD) and are highlighted in the most recent status report on TCFD implementation: Only 17% of the companies examined had reported any climate-related information, and with significant variation in focus, content, and quality.

Capabilities from Moody’s ESG Solutions are also increasingly being leveraged by Moody’s Investors Service (the credit rating agency and sister company of Moody’s Analytics).

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

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

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

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

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

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

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

ABOUT MOODY’S ESG SOLUTIONS 

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

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

Moody’s: Climate Risk and Resilience at US Airports

Climate change will expose the airport sector to increased physical climate risks within the next two decades. In its report, US airports face growing climate risks, but business model and resiliency investments mitigate impact, Moody’s Investors Service leverages Four Twenty Seven’s physical climate risk data to explore potential damages from increased exposure of US airports to floods, heat stress, hurricanes, sea level rise and wildfires.

The report found that in 2004-2019, an average 37% of delayed flights annually resulted from climate-related extreme weather events. Airports along coastlines or rivers face particular risks as floods can damage crucial structures such as runways and terminals leading to significant costs or rendering the assets unusable. Likewise hurricanes can cause widespread damage including economic impacts on broader regions. Heat stress and wildfire smoke can both present challenges for planes taking off or landing, leading to delayed or canceled flights or adjusted cargo loads.

Airports often undertake long-term capital intensive projects and integrating resilience measures into planning these investments will be critical. Liquidity will also help absorb the effect of disruptive climate-related events.

Moody’s subscribers can read the full report here.

———————-

To learn more about Four Twenty Seven’s climate risk data, check out our solutions for investors, banks and corporations or read our report on.

Newsletter: Climate Risk Increases Sovereign Risk

Four Twenty Seven's monthly newsletter highlights recent developments in climate risk and resilience. This month we share new research on climate risk and sovereign risk, discuss the climate implications of the U.S. election and highlight new data on EU Taxonomy alignment and TCFD disclosures.

In Focus: Climate Change and Sovereign Risk

Report: Cost of Sovereign Capital is Affected by Climate Risk

New joint research provides a comprehensive analysis of the ways in which climate risks affect sovereign risk. Published by the Centre for Sustainable Finance at SOAS University of London, the Asian Development Bank Institute, the World Wide Fund for Nature Singapore and Four Twenty Seven, the report, “Climate Change and Sovereign Risk,” outlines six transmission channels through which climate change affects sovereign risk and, in turn, the cost of borrowing. Using econometric analysis on a sample of 40 developed and emerging economies shows that higher climate risk vulnerability leads to significant rises in the cost of sovereign borrowing. 

The report also provides a closer look at Southeast Asia, a region with significant exposure to physical climate risks such as storms, floods, sea level rise, heat waves and water stress, as well as transition risks. The implications of climate change for macrofinancial stability and sovereign risk are likely to be material for most, if not all, countries in Southeast Asia.

Lastly, the report highlights the need for governments to climate-proof their economies and public finances. It outlines five policy recommendations, emphasizing the importance for financial authorities to integrate climate risk into their risk management processes and for governments to prioritize comprehensive climate vulnerability assessments and work with the financial sector to promote investment in climate adaptation.
Read the Report
Watch the Launch Event
US Presidential Election: Climate Implications

November's Election is Pivotal for Climate Change

Donald Trump and Joe Biden present significantly different approaches to climate change and environmental justice. Moody's Investors Service's report "Next administration will confront five policy challenges with wide-ranging credit impact," explores policy challenges the next administration will face, including environmental issues. The analysis writes that "Biden's economic plans include measures to address climate change. Trump's proposals do not prioritize addressing climate change or lowering carbon dependence."

Trump plans to continue his efforts to reduce regulation on fossil fuel emissions and pollution, supporting growth of the fossil fuel industry and completing the US withdrawal from the Paris Agreement. Meanwhile in addition to rejoining the Paris Agreement and planning for net-zero emissions by 2050, Biden would implement pollution regulation with a particular focus on environmental justice. Biden has also expressed his support for mandating that public companies disclose their climate risks and emissions. This National Geographic piece outlines Biden and Trump's respective records on climate change and environmental issues, as well as their future plans.
Handbook on Climate Risk Assessment

NGFS: Case Studies of Environmental Risk Analysis Methodologies

The Network for Greening the Financial System (NGFS) released a collection of case studies outlining methodologies for climate and environmental risk analysis for banks, asset managers and insurers. The compilation of approaches, written by academic researchers, financial practitioners and data providers highlights the latest developments in addressing data gaps, identifying how climate risk translates to financial risk, and leveraging climate data to build a resilient financial system.
Four Twenty Seven and Moody's Analytics contributed Chapter 2: "An Approach to Measuring Physical Climate Risk in Bank Loan Portfolios," and Moody's Investors Service wrote Chapter 27: "Moody's Approach to Incorporating ESG Risks into Credit Analysis."
New Data on Companies' Taxonomy Alignment & TCFD Disclosure

Vigeo Eiris Launches Taxonomy Alignment Screening & Request for Comment

Last week Moody's affiliate Vigeo Eiris (V.E) released the beta version of its Taxonomy Alignment Screening tool and a Request for Comment (RFC) to inform the final product, which will launch early next year. Comparable, comprehensive data on companies' alignment with the taxonomy will provide critical information for investors striving to align their portfolios with the taxonomy. 

The EU Taxonomy Regulation outlines criteria for activities contributing to six environmental objectives: climate mitigation; climate adaptation; protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity. It was formally adopted earlier this year, with criteria for climate change mitigation and adaptation; criteria for the other objectives are forthcoming.

To date, V.E has screened 1,587 European issuers based on their alignment with the taxonomy's three-part criteria: substantial contribution to one of the six environmental objectives, Do No Significant Harm and compliance with minimum social safeguards. Results show that many companies perform at least one of the 72 Taxonomy activities but few meet the technical criteria for the activities. This beta dataset is freely available upon request and the Request for Comment is open until November 1st, 2020.

How do Climate Risk Disclosures Align with TCFD Recommendations?

Consistent climate risk disclosure is essential to improving market transparency and building a more resilient financial system. As devastating extreme events, regulatory developments and investor pressure have led to an increase in climate risk disclosure, the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations have become a global reference. V.E's new TCFD Climate Strategy Assessment dataset provides a granular view of how 2,855 companies report in line with TCFD recommendations.

This new V.E and Four Twenty Seven report, Measuring TCFD Disclosures, explores the key findings from this assessment, highlighting companies’ disclosures in governance, strategy and risk management and providing a case study on how companies' risk disclosures compare to their exposure. We find that while 30% of companies have identified at least one climate-related risk that may affect their business, only 3% have disclosed enhanced due diligence for projects and transactions. 

Read the Report
Climate Risk in Real Estate

Report: Emerging Practices for Market Assessment

In their latest report, the Urban Land Institute (ULI) and Heitman explore how real estate investors are integrating an understanding of market-level climate risk into their decision-making. The report highlights the progress made in assessing climate risk at the asset-level, citing Four Twenty Seven's climate risk analysis. It also discusses the increasing importance of understanding both market-level risk as well as regional resilience measures and how much risk these efforts may mitigate.
Meanwhile, new research on coastal real estate markets finds that a decrease in sales often foreshadows a decrease in prices, which is already taking place in Miami-Dade County, Florida and throughout the state. Many experts think that an increased awareness of the risks of sea level rise is contributing to this trend.

New Resilience Category in ULI Awards for Excellence

The ULI Awards for Excellence honor development projects that demonstrate the highest standards throughout their process, including but not limited to the architecture and design phases. This year one of the five categories is Resilient Development, with application questions including the topics of physical and community resilience. Submissions are open and the early application deadline for ULI Americas is December 18, 2020.
Webinar: Climate Change for Banks

Join Us at 8am PST / 11am ET / 2pm BST next Tuesday Oct. 27th

Join the Moody's Sustainable Finance webinar series for next week's webinar, Responsible Approaches to Climate Change for Banks. Hear from climate risk experts and bank practitioners on ways in which climate change affects banks and how they can respond. The webinar will explore the effects of climate change on banks’ activities and the role banks can play in supporting resilience. We will discuss the ways in which climate change poses material financial risks to banks, as well as opportunities. Practitioners will share case studies of how they leverage climate data for decision-making.

Speakers:
  • Yoon Kim, Managing Director, Global Client Services, Four Twenty Seven (Moderator)
  • Sara Faglia, Senior ESG Analyst - Financial Sector, Vigeo Eiris
  • Michael Denton, Director - Enterprise Risk Solutions, Moody's Analytics
  • Craig Davies, Head of Climate Resilience Investments, European Bank for Reconstruction and Development
  • Imène Ben Rejeb-Mzah, Group CSR Head of Methodologies and Data, BNP Paribas
Register for Free
Inside the Office at Four Twenty Seven

Senior Climate Data Analyst, Research - Siraphob (Gain) Boonvanich

Four Twenty Seven welcomes Gain as a Senior Climate Data Analyst, Research. Gain optimizes cloud infrastructure and climate data processing to support the development of Four Twenty Seven's climate risk analytics. Previously, Gain worked at Weathernews Inc. where he helped transform cloud infrastructure and developed various weather research applications, including radar and satellite image processing, machine learning models and demand prediction. 

Join the team! 

Find open positions on our Careers page and visit Vigeo Eiris' and Moody's Careers pages for more opportunities in climate change and ESG.
Upcoming Events

Join the team online at these upcoming events and check our Events page for updates, including links to events not yet available:

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