Climate Risk Intelligence, the First Frontier
As Climate Week came to its COVID-induced virtual close, the world burns, floods, and its oceans rise. People around the world have justifiably questioned how we will ever come to terms with the ever worsening climate crisis. It’s clear(1) that we are battling environmental conditions that have never before been seen, but what does it mean to be in a climate crisis?
How does climate change impact our daily lives, and what is the economic or human health impact of forgoing climate action?
With a background in banking and capital markets, I recently began a journey to align my professional experience to my personal passion in environmental stewardship. In this series of posts, I will be sharing my perspectives on leading innovations in the nascent stage industry of ‘Climate Tech’, which are companies seeking to quantify, mitigate, or adapt to, the catastrophic impacts of climate change.
Using an all-too-familiar lens of investing, modern portfolio theory suggests that all investment opportunities sit along a spectrum of risk and reward. As the theory goes — a balance exists whereby a person may seek a higher expected return but, in turn, must tolerate higher levels of risk.
But what happens when you don’t understand, or perhaps ignore, the risks?
The far-too-jolly sun demonstrates this effect — returns look outsized. And, as history reminds us, with outsized returns comes outsized investment.
From the 1600’s Dutch Tulip Mania, to the 1990’s Japanese Asset Price Bubble, to the 2008 Global Financial Crisis, investors and companies chased the perception of outsized returns under the disconcerted belief that risks were understated (or didn’t exist).
Today, I, and others, believe the same is true of the climate crisis.
Society has over invested in fossil fuels and unsustainable practices which create enormous externalities under the guise of misunderstanding the risks and by exploiting the ‘returns’ of the natural world. So how do we fix this gregarious exploitation?
We must quantify the financial risk related to climate change and internalize the physical and transition costs of creating an environmentally sustainable economy.
Across the world, regulators, governments, and investors have started to require that corporations disclose risks related to climate change. Although we are still in the early innings of defining a framework of disclosure, recent progress has been made by leading standard setting bodies and innovative entrepreneurs have emerged to build companies which address the most challenging climate risk questions, namely — How do companies and consumers quantify the risks born by climate change?
In this article, I highlight companies that collect earth science information and seek to transform it into meaningful data which can be used to mitigate, manage and forecast climate change impacts.
I call this space — Climate Risk Intelligence.
As seen above, I’ve attempted to segment the universe of Climate Risk Intelligence companies into categories or industry verticals. Below you’ll find brief descriptions of each category/industry, with a caveat that by no means is this intended to be an exhaustive list. I welcome any and all feedback to expand the known universe of startups and companies making an impact in the space.
Agriculture , Land Use and Water — These companies, at least in part, utilize climate data to help inform decisions across the agriculture/forestry/fishing/livestock value chains. As agriculture is so reliant upon inputs provided by our natural world, these companies provide transparency to farmers and ranchers to better inform strategic decisions. Examples of companies in this space are Gro Intelligence, an agricultural data platform backed by Data Collective, GGV, and TPG Growth, or Pachama, an Amazon and Breakthrough Energy Ventures-backed company that measures carbon sequestration in forests to ensure sustainable investment goals are being met.
Broad Based — These companies leverage earth science data for broad based cross-sector/industry applications of climate risk management. Examples of businesses in this space include Cervest, an AI driven platform that analyzes billions of earth science data points to forecast changes in climate conditions, or Jupiter, a company that provides risk analysis for climate change induced hazards including flood, fire, heat, drought, cold, wind, and hail.
Cities & Disaster Management — These companies utilize climate data to guide infrastructure design and management of cities. An example in this space is the Australian company, Senscity, which monitors real-time environmental conditions for policy making, future development and planning assessments. Some of these technologies leverage climate data to inform strategy and execution of Disaster program managers and Emergency responders. Examples of companies in this space include Geospiza, a data visualization software and consultancy company for climate-exposed businesses and public safety organizations, or ZoneHaven, which provides government agencies and community members with software to increase and promote public safety preparedness.
Corporate — These entities are subsidiaries or divisions within large public/private corporations and I believe are the closest proxy to ‘industry incumbents’ of this nascent stage work. Examples of businesses in this space include Trucost, an affiliate of S&P Global Market Intelligence, which seeks to quantify climate risk impacts at a company level for use in investor decision making, or Risk Management Solutions (RMS), a subsidiary of Daily Mail and General Trust, which helps companies model the stress impacts of climate change.
Energy — These companies, at least in part, collect and analyze climate data to optimize electric grid utilization and demand response practices for Utilities and Energy companies. An example in this space includes Myst AI, a Google-backed company that tracks weather patterns and other relevant data to better predict future electricity demands.
Financial Services — These companies, at least in part, collect and analyze climate data to guide decision making across industries including Insurance, Real Estate, Investments, and Banking. Perhaps the closest to the ‘core’ of climate change impacts, financial services offer the provision and protection of capital and physical assets. Companies in this space seek to better inform risk management decisions made by capital allocators to avoid record breaking losses as a result of climate change. Examples include RisQ, which models the financial risks of climate change for municipal debt stakeholders, or Cape Analytics, a company that uses data science and geospatial imagery to better inform decisions in the real estate and insurance industries.
Across all of these companies, value creation occurs when earth science information is translated into actionable insights for managing the risks born by climate change. Examples of this information include the identification of hazard prone areas which may lead to mass migration, wide scale divestment of fossil fuel companies, and/or the reallocation of investment dollars to sustainable businesses which outperform in times of crisis.
Modern portfolio theory suggests that once risks are well defined, a paradigm shift will occur and investors will divest from industries most at fault for the climate crisis.
Fossil fuel companies and carbon emitters will begin to internalize these legacy ‘externalities’ and either pivot, as is underway at BP, or face existential repercussions, as is happening at Exxon Mobil. At the same time, companies will begin to pursue large scale investments in sustainable businesses and in turn will be rewarded by investors.
To make fact based decisions and recommendations, investment professionals will seek out information to better understand the previously ignored climate risks inherent to their investments, and the companies I’ve highlighted in this article, among others in the Climate Risk Intelligence space, are helping to bridge the Climate-induced gap.
And just like the sea level rise will consume some the world’s largest cities, investors and companies that ignore climate change will become victims of their own making.
It’s with great pleasure that I highlight this work as done in coordination with the team at Buoyant Ventures, an early stage venture fund investing in digital technologies which address the impacts of climate change across key industries including energy, transportation, the built environment, and agriculture.
Please feel free to reach out for feedback, insights, or if you’re an entrepreneur that wasn’t mentioned. I’m early in my journey and would love to connect!
(1) To most of us, sorry Climate deniers
