When investors refer to climate change risk, they often mean the risks related to the low-carbon transition (‘transition risks’), such as changing consumer habits and technology advancements – rather than the physical risks of climate change.
Not so, warn experts. A 2019 RI analysis found that at least 88 US real estate investment trusts, worth $800bn, were exposed to the most destructive effects of rising sea levels. Yet despite the known risks, the financial sector at large has refused to modify its behaviour, in effect creating a ticking time bomb. As an example, lenders have continued to pump billions in mortgage dollars to coastal areas which will be fully submerged by 2050.
For Emilie Mazzacurati, the founder and CEO of climate data firm Four Twenty Seven (427) the inevitability of climate change destruction hit home in 2009 after high-level efforts to address climate change stalled at COP15 in Copenhagen and the US congress. But she also saw an opportunity.
“It was becoming increasingly clear to me that we were not going to be able to avoid the impacts of climate change. Yet, even the most sophisticated financial firms were not using climate science for risk management,” she says. “So the idea was to bring the two worlds together by translating outputs from climate models in ways that are easily accessible and actionable for investors.”
This is not as easy as it sounds, she is at pains to emphasise; the available data on Earth’s climate is vast and dynamic. There are more than 40 climate models, each describing possible daily fluctuations in weather for millions of grid cells which match up to the planet’s surface.
There is also the question of clarity. Much of climate data is probabilistic and granular, so is unlikely to be of much use in its raw form to decision-makers seeking an understanding of broad future trends.
With such complexity at play, Mazzacurati is mindful of the risks of getting it wrong. To avoid misrepresentation, she says that 427 consults closely with scientists and monitors cutting edge developments at key industry events like the American Geophysicists Union Conference.
“We're not trying to substitute the institutions that generate climate data. What we’re focused on is translating the science, and bringing the data through the last mile to investors."
After its founding in 2012, 427 underwent an extensive period of market research to understand the needs of potential future clients. Since then it has developed a suite of products. A popular one is a dashboard providing a breakdown of future climate hazards by location, over time. The company also scores companies on their climate exposure based on the locations of their facilities and supply chain; the data set is probably the closest thing to conventional ESG scores that 427 offers.
In its early days, the company also offered advisory services such as courses on climate risk management. This has now been discontinued due to staffing constraints and a desire to focus on the data side of the business.
According to Mazzacurati, there are multiple applications for 427’s data. A key client demographic which has emerged are real estate investors, who use 427 products to manage the exposure of their portfolio to climate risks
“For a particular investor, having 10% of properties with very high flood risk might be acceptable, while others may choose to divest some of the properties to reduce their risk exposure.”
Climate data is also increasingly being used by banks to understand their exposure to an underlying asset during the loan origination process. Other use cases include corporate risk management, as well as supporting TCFD-compliant disclosures.
There are a handful of other providers of investment climate data aside from 427, but Mazzacurati assumes there is a “general alignment” across competing products.
“While I haven’t had the opportunity to compare our data side-by-side with some of the other providers on the market, the underlying data is pretty clear as to which locations are at risk and the type of climate hazards which are at play,” she says.
Last year, Moody’s acquired a controlling stake in 427 in a period which saw many specialist ESG firms snapped up by mainstream finance providers. The ratings agency has subsequently doubled down, taking full ownership of the company and appointing Mazzacurati as Global Head of a new climate-focused business unit within Moody’s.
To observers, this seems to be a promising move to bring climate change data closer to the mainstream, but there is no sign yet that 427’s data will be used as a determination for actual credit ratings. An ex-Moody’s executive writing about a planned overhaul of the agency’s approach to ESG risks in RI recently, concluded that the proposals “will NOT change a single credit rating anywhere in the world at any time in the future.”
However, Mazzacurati is optimistic that the partnership between the two companies will be beneficial when it comes to raising awareness.
“The big picture is that our data will be incorporated into a much broader range of financial products and that means more people are going to be able to understand the impacts of climate change on their investments or company operations. And that is really the mission that we had set for ourselves.”