December 3, 2020 – Four Twenty Seven Report. More frequent and severe extreme events driven by climate change pose a significant threat to nations around the world and understanding who and what is exposed to climate hazards is essential to pricing this risk and preparing for its impacts. This new report and underlying analytics assess 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.
Globally, increasingly severe climate conditions impose growing pressure on populations and economies. The implications on economic growth, welfare, production, labor, and productivity are large, with potential material impacts on sovereign credit risk. However, assessing sovereign climate risk presents significant challenges. While most approaches to quantifying future climate risk exposure for sovereigns measure the average exposure over the entire territory of a country, this doesn’t capture whether the populated or economically productive areas are exposed to extremes. Likewise, averages of exposures to several climate hazards can mask extreme exposure to a particular hazard in a certain area of a country.
We’ve mapped the co-occurrence of hazards and exposures, explicitly factoring in the spatial heterogeneity of both climate hazards and people and economic activities across a country. This new report, Measuring What Matters – A New Approach to Assessing Sovereign Climate Risk, provides an analysis of the data. We find that all nations face meaningful risks despite their variation in size and resources. Explore sovereign climate risk in the interactive map below, based on both total and percent of a nation’s population, GDP (PPP) and agricultural areas exposed to climate hazards in 2040.
*Erratum: In Table 1 of a previous version of this report the “Agriculture Area at High Risk” column was said to be in units of 1 billion hectares. However, it is in units of 100 million hectares.
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.
This joint report provides a comprehensive analysis of the ways in which climate risks affect sovereign risk, demonstrating new empirical evidence of how climate risk and resilience influence the costs of capital. It also explores the implications for Southeast Asia in particular, where countries are highly exposed to climate change risks and their economic consequences. Lastly, the report outlines five policy recommendations based on these findings. The report was a collaboration between 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.
“Climate Change and Sovereign Risk” outlines six transmission channels through which climate change affects sovereign risk and in turn the cost of capital, providing examples of each and explaining how they’re connected. It uses empirical analysis to demonstrate the significant impacts of climate risk exposure on the cost of capital. Using a sample of 40 developed and emerging economies, econometric analysis shows that higher climate risk vulnerability leads to significant rises in the cost of sovereign borrowing. Premia on sovereign bond yields amount to around 275 basis points for economies highly exposed to climate risk. This risk premium is estimated at 113 basis points for emerging market economies overall, and 155 basis points for Southeast Asian economies.
To further explore these channels, the report provides a closer look at Southeast Asia, a region with significant exposure to climate hazards such as storms, floods, sea level rise, heat waves and water stress. Physical risks are expected to considerably affect economic activity, international commerce, employment and public finances across Southeast Asian countries. Transition risks will be prominent as exports and economies become affected by international climate policies, technological change and shifting consumption patterns. 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.
The report highlights the need for governments to climate-proof their economies and public finances or potentially face an ever-worsening spiral of climate vulnerability and unsustainable debt burdens. 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.
The report was originally posted by SOAS University of London.
While real estate investment trusts (REITs) can manage the current physical risks of climate change, increased asset exposure to climate hazards will pose greater challenges. In its sector in-depth, REITs Can Manage Climate Risk, Investments Needed to Address Growing Challenges, Moody’s Investors Service leverages Four Twenty Seven’s climate risk data to assess climate risk for 15 rated US REITs.
REITs are most exposed water stress in regions such as California and the Southwest while heat stress puts strains on operating costs in California, the mid-Atlantic and several Northeast locations. For the REITs assessed in the report, hurricane and sea-level rise risk pose less severe threats than they do in some coastal markets. pose modest influence in comparison to heat and water stress for most property locations. Floods pose a modest risk to most assessed REITs.
The analysis found that factors such as the power to pass improvement costs to tenants and local government investment in resilience can mitigate these growing risks. While insurance has traditionally been another risk mitigation technique, these growing changes demand larger capital investments. Asset-level resilience measures can help protect properties from the the impacts of hazards and reduce increased operating costs.
Moody’s subscribers can read the full report here.
Increasing physical climate hazards affect the operations and costs of nuclear plants due to their water needs and reliance on critical equipment. In its report, Nuclear Operators Face Growing Climate Risk but Resiliency Investments Mitigate Impact, Moody’s Investors Service leverages Four Twenty Seven’s physical climate risk data to explore the exposure of nuclear power plants to climate hazards, including heat stress, water stress, flooding and hurricanes.
The analysis found that nuclear power plants are vulnerable to increasing frequency of extreme weather conditions such as flooding and storm surge, due to their need for water cooling which means many plants are adjacent to large bodies of water. Technology and equipment required for safe plant operation are susceptible to damage and nuclear plants along the East Coast and the Gulf of Mexico are particularly exposed to floods from sea level rise.
Clustered in the Midwest and eastern part of the U.S., market-based plants face less risk of hurricanes or sea level rise than regulated/cost-based plants. However, they face increased heat stress and water stress which can reduce plants’ cooling capacity. The credit impact for market-based plants can be more significant than the regulated plants that are more easily able to make-up costs through rate recovery programs.
Nuclear plant operators face physical and economic risks due to extreme events driven by climate change, and operators and owners will have to consider these risks and explore increased resilience options, as they approach license expiration and renewal processes between 2030 and 2050.
Black communities and other people of color are disproportionately exposed to the impacts of climate change and also tend to have fewer financial and healthcare resources to prepare for and respond to these impacts. Adapting to climate change without an explicit focus on racial justice can further reinforce inequalities; hence, building systemic resilience to climate change must include investment in communities that are on the frontlines of climate impacts, including Black communities.
For the Local and Regional Government Alliance on Race & Equity, “racial equity means that race can’t be used to predict success, and we have successful systems and structure that work for all.” Equity means that different groups are provided with the resources they need to address their distinct challenges, acknowledging that these will not necessarily be equal. Thus, adaptation must include equity in every step of the process, from risk assessment and decision-making to planning, implementation, monitoring and evaluation. Key elements of equitable adaptation include conducting vulnerability assessments that account for place-based vulnerabilities, integrating consideration of social and cultural value within budgeting decisions, involving frontline communities in the decision-making from the start, and investing in the resources and policies these communities need to thrive. While by no means exhaustive, this article highlights the importance of racial equity for several phases in the climate adaptation process and shares some emerging best practices.
Risk and Vulnerability Assessment
The first step in the climate adaptation process is identifying risk exposure and vulnerability. Climate risk is not based solely on exposure to climate hazards like floods and extreme heat, but also on vulnerability, driven by a community’s specific characteristics. Vulnerability is shaped by the sensitivity of a given population and its adaptive capacity. Thus, the impact of a climate hazard, such as a storm or drought, will depend upon the resources and sensitivities of exposed communities.
Adaptive capacity is multifaceted, including both tangible resources such as access to transportation, air conditioning and green spaces and intangible elements such as social capital. Effective risk and vulnerability assessments explore these characteristics of a community, to identify how risks may manifest, and serve as the foundation for determining what adaptation measures are needed. For example, members of low-income communities with low vehicle ownership and greater dependence on public transportation will be less likely to be able to evacuate during an extreme event, experience longer-term impacts if subway stations are flooded or damaged, and be more likely to face economic hardship if they cannot get to work or lose their jobs. For extreme heat, communities with more urban green spaces, widespread access to air conditioning, or access to public cooling centers such as libraries, are likely to be less vulnerable than communities in dense urban centers with little greenery and/or those without access to safe public cooling centers.
Social capital is built through regular interaction, shared values or culture, and human connections, which build trust and lead individuals to look out for one another. In some cases, high social capital has increased communities’ resilience, helping to counterbalance a lack of tangible resources. For example, during Chicago’s deadly 1995 heat wave, while Black communities were hit hardest, the Black community of Auburn Gresham stood out with lower death rates than Chicago’s most affluent neighborhoods. The distinguishing factor was the way Auburn Gresham’s infrastructure was conducive to building social capital—its sidewalks and restaurants promoted opportunities to get to know each other and interact. Assessing the social elements of adaptive capacity in climate vulnerability assessments is critical to understanding a community’s needs and ensuring that adaptation efforts build on and leverage existing social capital.
Sensitivity refers to the characteristics of individuals and communities that affect how a climate hazard may impact them. For example, Black communities often have high sensitivity to climate hazards, due to preexisting health conditions, which are driven by disproportionate exposure to environmental toxins. Likewise, agricultural communities are particularly sensitive to water stress due to the water-intensive nature of agricultural activities, with those that lack financial resources and political influence likely to experience the greatest impacts. Engaging with a community to assess its exposure to physical climate hazards, the resources it has to respond, and its residents’ particular sensitivities lays the groundwork for equitable adaptation.
A climate risk assessment centered on concerns for social equity can inform an equitable planning and budgeting process. Traditional cost benefit analysis can undervalue the needs of low-income communities or communities of color, due to its emphasis on ensuring adaptation costs do not exceed property values. While this approach is often used to determine the best locations for adaptation investment, it can perpetuate inequitable distribution of impacts and investment. For example, in Cedar Rapids, IA, a flood mitigation study found that a region on the Cedar River’s West Bank did not qualify for investments in flood barriers due to relatively low property values. However, hundreds of these homes were destroyed by flooding in 2008. Policy makers can integrate a consideration for equity and improve the longer-term return on investment by replacing the current cost benefit analysis to account for vulnerability and longer-term community impacts and savings, rather than only up-front economic impacts.
The distribution of disaster recovery funds will dictate the resources available for community rebuilding and, in many instances, Black communities do not receive the funds they need. For example, after Hurricane Harvey, Taylor Landing, TX received $1.3 million in recovery funds—about $60,000 per affected resident. Taylor Landing is a town of 228, which had a median household income of about $69,000 in 2017 and, according to the Census, had no Black residents. Meanwhile, nearby Port Arthur, a town of 54,000 residents, with a median household income of $32,000 and a population that was over a third Black, received $4.1 million from the same funding—about $84 per affected resident. This inequitable distribution of funds is due to an unrepresentative regional fund allocation system. The members of the council that distributes the funds disproportionately represent the region’s smaller, primarily white towns, rather than the region’s largest cities, including Port Arthur. Moreover, the Small Business Administration approves disaster loan applications from primarily white communities at almost twice the rate that it does for applications from majority Black communities. This discrepancy is largely because disaster loan applications are based on credit scores, which are typically lower for minority populations and are more likely to remain low if these communities lack the resources to recover. This exemplifies the need for Black communities most exposed to climate impacts to be represented in decisions about resource allocation to support climate resilience and for reconsidering financing structures.
Acknowledging that many Black communities face compounding challenges due to a historic lack of investment in their communities, investing in these communities, and reducing the loss and costs that come with repeated impacts are important steps in ending this cycle. This calls for a restructuring of federal disaster response funding processes, moving beyond rigid frameworks based on home value and including advisory committees composed of members of the frontline communities. Financial institutions also have an opportunity to increase the flow of financial capital to Black communities. Strategies can include building advisory offerings meant to foster financial literacy and savings, shifting to key performance indicators focused on client financial health rather than promoting indebtedness and creating new models to reach those typically excluded. For example, accepting proof of current employment instead of requiring credit history to allow individuals to begin building credit would help those typically unable to access capital begin to obtain financing. Building equity in budgeting and promoting equitable lending practices would play a role in breaking the cycle of disenfranchisement.
Integrating Equity into Adaptation
Maladaptation and the Need for Change
There are many different types of adaptation measures, including structural measures, land-use policies and capacity-building. The impacts and efficacy of any adaptation measure is highly context-dependent. One common point of failure is the exclusion of certain stakeholders or when planners, consultants, and policy-makers make their own judgements of what is important and may ignore important characteristics of the community. In this case, there is often high potential for maladaptation, or unintended consequences that end up perpetuating existing social inequities by increasing the exposure of those who are already on the frontline.
For example, levees and other flood barriers often worsen downstream flooding as they force the water through a narrower channel, so there is more volume to inundate surrounding areas that do not have flood protection. The cost benefit calculations discussed above drive these engineering decisions and lead to protection for more affluent communities while nearby low-income towns endure the consequences. Likewise, while increasing flood insurance premiums may help provide incentives to move from flood-prone areas, for those who cannot afford to leave it also leads to increased affordability challenges and potentially the decision to forgo flood insurance, compounding challenges when flooding does occur.
As governments begin to invest in adaptation measures, there is a risk of climate gentrification, or the pricing out of Black residents and low-income communities. For example, in Norfolk, VA, part of the sea level rise strategy is to demolish several public housing units, replacing them with mixed-income buildings and transforming the rest of this exposed area into a green space that can absorb floodwater. The city provides some assistance and vouchers for relocation, but the burden largely falls on the low-income residents. In some cases, their only options are to live farther away from the city center, paying more money for gas to commute to work and making the daily efforts of providing for their families even more challenging.
Many factors influence the efficacy of adaptation outcomes, including whether or not the adaptation is responsive to the community’s needs. For example, if a new cooling center is built, but residents lack transportation or feel uncomfortable meeting in public spaces with few amenities, the cooling center will do little good. Likewise, evacuating ahead of hurricanes saves lives and warning systems can help prompt more thorough evacuations. However, residents that are not informed about the importance of evacuations or those who do not trust public authorities are unlikely to heed evacuation warnings, particularly if evacuations are challenging due to resource and transportation constraints. The long history of racism and exclusionary government programs have weakened trust of public authorities in some communities. Creating adaptation strategies that are truly equitable and effective requires understanding the community’s needs and tailoring a climate response that can be fully embraced by the community at risk.
Policy makers must start exploring alternatives to adaptation guidelines that perpetuate inequity, such as the Army Corps of Engineers’ sole use of property value metrics when assessing which communities get flood protection, or waterfront adaptation that leads to climate gentrification. Some cities including those in the Bay Area, Atlanta and Chicago have started developing Land Trusts to ensure that affordable housing is available in the long-term, even as areas increase in value. The Land Trusts permanently own the land, but allow low-income families to enter into long-term leases and to build equity on the homes. When the time comes to move, the family sells to another qualifying low-income family and a resale formula is used to determine the amount, providing profit for the family that is selling while keeping the home affordable for other low-income families. This is one example of ways that innovative policies can foster equity alongside climate adaptation.
Engagement and Representation
Community engagement should be integrated into all steps of the adaptation process. This engagement can be broken down into three forms: outreach, consultation and deliberation. Outreach is the one-way, information sharing that comes from informing the community about climate risks or adaptation efforts, and consultation involves soliciting community feedback on draft plans and decisions. While this is important, it is essential that community engagement doesn’t just occur in the middle or end of the process, but rather is a central component from the beginning. Having community members present during the decision-making process will help identify what the community really needs. Equitable representation of community members, in terms of demographics and socioeconomic status is essential.
Another important outcome of intentional community engagement is transparent, two-way trust-building. Understanding the language, scientific literacy and culture of a community helps to build trust, and ultimately, to reduce vulnerability as a result of more successful and inclusive adaptation efforts.
Building Upon Existing Capacity
As discussed above, social capital is an important component of resilience and shared culture is one element of social capital. It is often the case that strong bonds exist in communities of color based on shared culture. While many Black communities and other communities of color lack financial capital and, thus, often do not have financial resources to build resilience, their social capital provides a solid foundation from which to build equitable, cohesive adaptation plans. Funneling resources through existing networks such as local religious groups and community cultural centers helps bolster this social capital while also allowing the organizations most informed regarding a community’s needs and trusted by its population to lead adaptation.
One example of adaptation rooted in community engagement and trust building is Baltimore’s Make a Plan, Build a Kit, Help Each Other program centered around residents sharing their stories and discussing the impacts of climate change, while working with local experts to develop preparedness plans. It is important to meet communities where they are, framing adaptation efforts around ensuring that communities have the social resources needed to prepare for climate hazards and acknowledging the wealth of insight and experience the community has to provide.
Equitable climate adaptation involves identifying areas that are on the frontlines of climate change and what they need to prepare for climate impacts. It also involves considering the implications of policy and ensuring that a disproportionate burden is not placed on frontline communities. Investing in equitable adaptation is one essential tool for addressing the disproportionate impacts of climate change on Black communities and other people of color. For too long, planning decisions have excluded communities of color, with long-term negative impacts. While more recent adaption efforts have sought to end this vicious cycle by creating a more inclusive environment for planning, communities of color still lack the political clout and funding to move projects forward. Opportunities to build partnerships with (or within) these communities, identify new funding and development models that directly address decades of exclusion, and reduce repeated loss by helping those most exposed confront climate change, must be embraced and advanced.
The relationship between race and climate change is too often ignored. The recent protests for racial justice and police reform call attention to the fact that racism is still deeply embedded in our institutions and public policies. In the United States, people of color are disproportionately affected by polluting industries and climate change. A long legacy of racist housing policy and weak environmental protections contribute to this disproportionate exposure, coupled with systemic issues related to public health, education and wealth.
As part of our commitment to help raise awareness of the nexus between racial equity and climate change, this article will provide a brief overview of environmental injustice issues in the U.S., as well as highlight the disproportionate impacts of climate change on Black communities and people of color.
Disclaimer: We are aware that the history of environmental justice in the U.S. is deep and complex, and this short piece cannot do justice to the complex web of issues and suffering imposed on minorities. We hope this blog post provides an entry point for identifying organizations and researchers with greater expertise and a long history of commitment to environmental justice.
Housing Discrimination and Environmental Injustice
The disenfranchisement of Black communities and other people of color in the United States includes discrimination in terms of access to education, public transportation, recreation, employment, healthcare and housing. Environmental racism is just one manifestation of this oppression and is particularly evident in housing and development.
Black communities and other people of color have been relegated to neighborhoods that have greater exposure to environmental pollution and toxicity than primarily white neighborhoods. Housing and lending policies have historically limited options for Black communities and people of color and concentrated these communities in locations with higher exposure to environmental hazards. In the 1930s, federal housing policy actively and intentionally contributed to segregation, subsidizing development for middle to low-income white households and prohibiting people of color from purchasing those homes. Relegated to live only in certain areas, entire minority communities were then “redlined,” labeling home buyers’ mortgages as too risky to insure. “Threat of infiltration of negro[s]” and “Infiltration of: Negroes” were often listed as reasons for giving a community a low grade, and for deeming the community as “hazardous.”
In America, where homeownership is the single most important source of equity- and wealth-building, Black households have historically been shut out of higher-value neighborhoods and have been systematically prevented from benefiting from the upward mobility and financial resources that accompany homeownership. Factors like redlining, disenfranchisement and the operation of toxic facilities in Black neighborhoods means that homes in majority Black neighborhoods are valued at half the price of homes with non-Black residents. Lack of opportunity to build equity through home ownership is a key reason that African American wealth equals just 5% of white wealth in the U.S.
Furthermore, as of 2019 over 30 million Americans live in areas where water infrastructure has violated safety standards. For example, in rural and primarily Black Lowndes County, Alabama, only around 20% of the population has a sewer system—the others have pipes deploying raw sewage into their yards. Navajo Nation residents rely on water contaminated by uranium mining, and infections and cancer are rampant in these communities. Lack of access to safe water leads some residents to drive for hours to obtain safe water, which in turn hampers education and work efforts, further perpetuating inequities. There is a nationwide trend in lack of enforcement and regulation around safety standards for drinking water, and often low-income, Black, Indigenous and other people of color who lack political clout endure the most severe impacts. In 2017 the American Society of Civil Engineers rated the U.S. drinking-water infrastructure as a D, estimating a need for $1 trillion investment in the next 25 years to prevent further erosion of pipes.
After decades of discriminatory housing policies and inequitable development, Black communities are still disproportionately exposed to pollution and environmental toxins, leading to detrimental health impacts which are often compounded by lack of access to suitable healthcare. This disproportionate exposure has been well-documented since the 1980s when a nationwide study by The United Church of Christ Commission on Racial Justice found that race was the strongest determinant of the location of commercial hazardous waste sites. Nationally, “African Americans are 75 percent more likely than Caucasians to live in fence-line communities—those next to commercial facilities whose noise, odor, traffic or emissions directly affect the population.”
Disproportionate Exposure to Climate Impacts and Climate Justice
While climate justice has multiple dimensions, at its core it refers to the understanding that those who are least responsible for climate change suffer its gravest consequences. Globally this manifests in developing countries experiencing the worst impacts of climate change, while their industrialized counterparts bear the responsibility for the carbon emissions responsible for worldwide climate impacts. From an intergenerational perspective, today’s younger generations are inheriting the consequences of older generations’ actions related to climate change, with Greta Thunberg a vocal advocate for generational justice.
Climate justice also manifests through racial inequity, in particular in the U.S., where the impacts of climate change will not be distributed evenly. While Black communities and other people of color bear the greatest health costs of industrial activity and of physical climate hazards, they also bear less responsibility for the greenhouse gas emissions causing the climate crisis. While individuals within these communities can be highly resilient, confronting social and economic disparities daily, these communities also often lack the resources to adequately prepare for and respond to the health impacts of pollution and physical impacts of climate change.
Flooding in the United States disproportionately affects Black residents, as Black neighborhoods are often in low-lying floodplains, with impermeable surfaces and a lack of effective flood protection infrastructure. In many cases, nearby chemical sites, refineries and other industrial infrastructure are also located in flood zones, multiplying the risks of exposure to toxic chemicals during storms. While many middle-income white households face difficult decisions about whether to permanently leave their home in the floodplain, not everyone has the economic freedom to make such decisions. In many cases, Black residents and other people of color do not have access to the transportation or the savings to evacuate at a moment’s notice, let alone permanently relocate.
The overexposure of Black neighborhoods to flood risk, alongside the lack of resilience investment in these communities, also leads to disproportionate vulnerability to the impacts of storms. During Hurricane Katrina, Black individuals were among those that were least likely to evacuate, with access to transportation being a key factor. The city’s four largest public housing buildings, primarily occupied by Black residents, were permanently closed after incurring storm damage. Four of the seven zip codes enduring the costliest flood damage due to Hurricane Katrina were at least 75% Black and the community most damaged by Hurricane Harvey was 49% nonwhite. This is a common trend across the nation.
These statistics, stem partially from a history of inequitable funding. In 1965 Hurricane Betsy hit New Orleans, causing the most damage in New Orleans East and the Lower Ninth Ward, which are primarily Black neighborhoods. This catalyzed investment in levees to protect New Orleans from flood waters, but these investments went primarily to predominantly White neighborhoods which were not as damaged and already had some flood protection infrastructure. This distribution of funds foreshadowed the unequal distribution of impacts when Katrina hit decades later.
Sea level rise
Global sea levels have risen by about eight inches over the past century, with the rate of rise increasing recently. In responding to sea level rise, jurisdictions tend to take one of two approaches: invest in adaptation measures to keep the water out, or abandon an area to the rising seas. Studies show that low-income minority neighborhoods are more likely to be abandoned while higher-income predominately white neighborhoods tend more often to be protected. One reason for this is decision-making that relies only on financial indicators. Resilience investments driven by cost benefit analysis focusing only on the property values, rather than looking at social and cultural characteristics of a community, further contribute to the inequitable impact of climate change.
Relatedly, as the risks of sea level rise become more evident there is an increased risk of “blue-lining” – a term used by Tulane Professor Jesse Keenan, to express its connection to redlining. Many Black and low-income populations that did not receive investment in sound sewage and drainage systems due to redlining experience the worst impacts of flooding today. As banks and investors learn about exposure to floods and sea level rise, they are increasingly hesitant to offer funding to these neighborhoods. Yet without investment, communities are unable to improve their infrastructure and build resilience, further reinforcing the cycle of racial injustice.
Research in Miami-Dade County, Florida found a positive relationship between price appreciation and elevation in most study cities. This shift can potentially lead to ‘climate gentrification’—another term coined by Prof. Keenan, as minority populations migrate towards more exposed areas. For example, in Miami’s higher elevation, traditionally minority neighborhoods such as Liberty City and Little Haiti, rising property values are making homes unaffordable for residents, reflecting the new preference for high elevation. This combination of being priced out of higher elevation neighborhoods and property values decreasing in more exposed coastal areas may further contribute to the cycle of disproportionate exposure to sea level rise among Black populations and other minority residents.
According to the World Resources Institute’s data, 20% of the U.S. currently experiences “high” or “extremely high” water stress, and this number is expected to increase significantly by midcentury. Population growth will further threaten drinking water supplies, and the impacts will be uneven. In 2014 the water table in Fairmead, an unincorporated town in California’s Central Valley with majority Black and Latino residents, dried up and the citizens had to rely on donations and emergency relief for drinking water. Many of Fairmead’s residents are farmers, relying on water for their livelihoods as well as for human consumption, and water for irrigation comes from private wells that are only a few hundred feet deep. While these farmers cannot afford to drill deeper wells, nearby corporate farms can afford to drill wells up to 1,000 feet deep and are thus less affected by the dwindling water table. Climate change will exacerbate existing inequities around water access, particularly for Black and Indigenous communities.
Extreme heat kills more residents annually in the U.S. than any other climate hazard. Temperatures can vary by as much as 20ºF between neighborhoods due to the urban heat island effect. The hottest neighborhoods tend to be disproportionately covered in concrete and home to low-income and Black residents. Research shows that these urban development trends are connected to the history of racist housing policies. Residents in low-income and Black communities are also less likely than middle-income and white populations to have well-insulated homes, access to consistent air-conditioning or cool, safe public gathering spaces. Meanwhile, the asthma, heart disease and other chronic illnesses precipitated by exposure to air pollution, increases the health risks of extreme heat.
Due to a history of segregation and systematic economic oppression Black communities are consistently relegated to areas most exposed to flooding and extreme heat, while at the same time lacking resilience investment and access to educational, health and transportation resources to effectively prepare for and respond to disasters. Investing in equitable climate change adaptation is one facet of pursuing climate justice. Equitable adaptation requires involving community members in every step of decision-making and reviewing adaptation options based on the exposure and vulnerability of the community in question, as well as the potential for downstream impacts on others. We discuss this subject in our blog on equity as a cornerstone of adaptation.
Introduction: Why Climate Risk Matters for Asset Owners
In the world where quarterly corporate reporting makes it feel like financial markets are ruled by short-termism, asset owners stand out in contrast, managing their portfolios with horizons in the decades and even longer. With trillions in assets under management and the long-term well-being of their beneficiaries and other stakeholders as their goal, asset owners’ risk management practices must be robust. This includes the consideration of factors beyond traditional financial metrics. While their long horizon allows asset owners to withstand short-term volatility, their portfolios may be exposed to higher levels of other risks, including those posed by a changing climate, which is not necessarily accounted for in asset prices.
Additionally, regulatory actions like the EU Action Plan on Sustainable Finance, growing global support of the Task Force on Climate-related Financial Disclosures (TCFD), and groups like the Network for Greening the Financial System, whose members include 42 central banks and supervisors, are pushing investors of all stripes to take physical climate risks into account, warning of dire systemic consequences if climate risks continue to go unpriced.
With climate risk moving from the fringes of finance to center stage, the challenge is to translate climate models and climate data into actionable intelligence for financial decision-making. Climate models are complex, incorporating information from many disciplines of earth science, and their outputs are unwieldy. However, when transformed into indicators at appropriate scales and timeframes, climate data provides essential forward-looking information for financial decision-makers.
Assessing Exposure to Inform Risk Management
Evaluating an asset’s exposure to physical climate hazards is challenging, yet also an essential first step in managing climate risks. Four Twenty Seven’s Physical Climate Risk Application (Application) allows investors to assess exposure to floods, sea level rise, hurricanes & typhoons, heat stress and water stress at the asset and portfolio levels. Asset owners leverage hazard exposure scores to identify regional and sectoral trends as well as specific hotspots. Flexible viewing options and digestible data provide insight for portfolio risk assessments and due diligence processes. Armed with climate risk data at decision-relevant scales, asset owners can begin to manage their risk.
Climate Data for Portfolio Management
Real estate, infrastructure, agriculture, timber and other real assets have long been an integral component of an asset owner’s portfolio due to their returns and the diversification they offer to the overall fund. However, many real assets are highly vulnerable to physical climate risks. These risks manifest in direct and indirect ways, including increased costs, reduced revenues, and decreased asset value.
Asset owners use Four Twenty Seven’s Application to evaluate forward-looking physical climate risk exposure. For example, the portfolio-specific summary table in Figure 1 provides a snapshot of exposure and serves as the starting point for the analysis of physical climate risks. In this portfolio, hurricanes & typhoons, earthquakes, heat stress and water stress are the most prevalent hazards.
While asset owners frequently emphasize the hazards they view as most financially material—for instance floods, hurricanes, and sea level rise—heat stress and water stress can also have material financial impacts. For instance, a major heat wave across Europe in the summer of 2019 demonstrated how increasing temperatures can cause business disruptions and raise operating costs. Absent retrofits to address climate risks in European real estate, the total increase in energy bills for commercial buildings could potentially cost $300 billion (£457 billion) by 2050. Water stress, another potentially overlooked risk, can threaten the long-term operations of assets like thermal power plants that rely on large amounts of water for cooling. For example, Moody’s found that 11 major U.S. utilities representing over $31 billion in rate base have extreme risk to water stress, which has already caused some power utilities to retire capital-intensive generation facilities early.
In addition to providing an entry point for further analysis, metrics in the summary table are useful for risk reporting. As reporting requirements develop, outputs from the Physical Climate Risk Application will empower asset owners to effectively describe asset exposure, communicate how risks are being managed, and characterize their portfolios’ overall climate risk and resilience strategies.
Asset owners can also identify exposure hotspots, explore sectoral trends, and dive deeper into the exposure of individual assets. Figure 2 shows the same portfolio ranked by highest flood risk score. Floods can raise costs, cause business disruption, and decrease asset values.
Using the data in Figure 2, asset owners can consider shortening their holding periods for assets with the highest levels of exposure, ensure that they have appropriate insurance coverage, and evaluate if coverage or premium prices may rise in the future. As the climate changes, insurers’ risk tolerances may also reach their limits and they may seek to exit markets. It is thus essential for asset owners to monitor the evolving landscape. Beyond evaluating potential changes to insurance, asset owners can also use this data as an entry point for engagement with a building manager, to better understand the site’s flood history and investigate if the asset has flood defenses.
Institutional investors understand that, over the typical commercial real estate hold period of seven to ten years, the next buyer of their building is likely to be concerned by climate risk as well. The Application equips asset owners with the exposure data they need to make sure their portfolios are resilient to climate risks and continue to provide the returns they need and expect from the asset class.
Climate Data for Due Diligence
Beyond analyzing portfolios of existing holdings, the application’s real-time scoring allows asset owners to quickly incorporate physical climate analysis into their due diligence processes for new acquisitions. In addition to providing easily digestible, high-level screening results, granular climate data allows clients to continue to invest, for example, in valuable coastal markets with known exposure. Figure 3 shows exposure of nine facilities in Tokyo, where the combination of storm surge and sea level rise could cause $1 trillion (100 trillion yen) in damages in a 1-in-100 year storm. Because the sea level rise (and flood) data featured in the Application is at a scale of 90 x 90 meters, investors do not need to eliminate entire markets from their investment strategies. Rather than exiting a profitable market, asset owners can use the Four Twenty Seven Physical Climate Risk Application to selectively invest in assets with lower exposure.
Asset owners often use Four Twenty Seven data to set their own internal thresholds for further due diligence. Using the detailed site information, as shown in Figure 4, as well as the downloadable scorecard, analysts can quickly understand which hazards to investigate further.
Some investors require further due diligence for any assets that receive “High” or “Red Flag” scores. Deal teams may be tasked to investigate asset-specific features that would make it more resilient to specific climate hazards, such as freeboard above base flood elevation, onsite power generators, or water efficiency measures.
Real assets, whose time horizon of returns aligns well with the investment goals of asset owners, are exposed to physical hazards, which will continue to become more frequent and severe. Exploring asset-level climate hazard exposure is the first step to analyzing and ultimately managing physical climate risk. As regulation around climate risk rapidly evolves, mandates to monitor and report these risks will also expand. Equipped with a detailed understanding of their portfolio holdings’ exposure, asset owners are empowered to make better-informed investment and risk management decisions, ultimately enhancing the resilience of their portfolios to physical climate risk.
Four Twenty Seven offers on-demand physical climate risk scoring for real assets and other climate risk datasets for investors to assess their risk across asset classes. Learn more about Four Twenty Seven’s data or reach out to schedule a demo.