The rush to profit from climate intelligence

Climate Economy

The rush to profit from climate intelligence

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Can the private sector be trusted to provide climate data equitably or reliably?

As the climate crisis escalates, so too is demand for information about physical risks, like floods, droughts, hurricanes, and wildfires. For a growing number of investors, insurers,and financial services providers, the information is climate gold. It is used to allocate equity capital through active and passive investments and to influence insurance premiums, which affect housing prices and cause demographic shifts. The data is also considered in municipal bond ratings, thereby serving as a mechanism for prioritizing infrastructure projects that protect certain neighborhoods over others.

The climate intelligence arms race

The soaring value of this data has triggered what scholar Jesse Keenan has described as a “climate intelligence arms race,” In recent years, mainstream financial services companies have acquired many early entrants in the space—the extensive list includes The Climate Service (bought by S&P), Four Twenty Seven and RMS (bought by Moody’s), Acclimatise (bought by Wills Towers Watson), South Pole (bought by proxy adviser ISS), Planetrics (bought by McKinsey), Jupiter Intelligence (partnered with Boston Consulting Group and the U.S. government), Rhodium (which licenses its physical risk model to asset manager BlackRock), and Carbon Delta (whose Climate VaR model was bought by MSCI).

All claim to use better science, better methods and models, and more comprehensive data than their competitors. 

But there is a problem. Researchers around the world have documented the risk from private consultancies over-claiming what their science is able to predict at small geographic scales or over particular time periods. Most providers of climate services use black box models that make overseeing the scientific rigor of their methodologies impossible— a concern given scientific critiques that many say may be obfuscating the uncertainty in their projections. But perhaps most concerning is that when companies have access to sophisticated modeling about future impacts— some of them potentially devastating for entire communities—the decision about how to share that information is largely left up to the corporation, not the public.

The physical-risk scores produced by leading ESG firms have little correlation with one another.

The need for public oversight of climate data

In a newly-published article in the Arizona State Law Journal, I call for greater oversight of these data products and their providers. I also call for a substantial increase in investment in the government’s own resources for assessing and communicating near-term climate risk.

Despite the federal government’s linchpin role in developing resource-intensive global climate models, it has arguably lagged the private sector in the production and broad dissemination of climate science aimed at the scale of adaptation. Adaptation science, which aids individual and community-level decision making, is the more “useable” climate science that must be prioritized, argues Columbia University climatologist Adam Sobel. 

My argument holds that this lag has significant consequences for regulators’ ability to monitor and police the providers of information about financial risk. Outside the United States, scientists with expertise in climate extremes warn that financial regulators are making some of the same mistakes as private climate-services providers, including designing risk-disclosure rules that require more precision than climate models can deliver. Indeed, this winter, the U.S. Federal Reserve rolled out a pilot climate-scenario analysis examining hurricane risk on the east coast when the science on that question remains unsettled.

As financial regulators increase their ability to monitor climate risks, other groups within the federal government work to provide better public information on climate risk. I argue that these two efforts—one focused on financial risk and the other on resilience—must be better integrated at both the policy and the technical level. 

The National Science Foundation and the National Oceanographic and Aeronautics Administration agree that the insurance industry requires more funding for research to price near-term climate risk. Nevertheless, entities like Fannie Mae and the Federal Housing and Finance Administration receive little oversight for their use of the non-governmental third-party climate risk data that underlies their longer-term risk assessments.

Hiding the risk of financial products

As I explain in detail in my article, projecting long-term climate risks such as those affecting a 30-year mortgage requires a combination of data outputs and complex methods. These assessments take significant training and modeling resources to produce, and as they are projections far in the future, the only way to validate them is to explore their methods and data inputs. In academia, peer review and data transparency requirements serve this role of checking climate forecasts.

Allowing the private sector to horde and hide climate risk data is not sensible policy.

As these questions of future risk leave academic journals and enter underwriting policies, however, the private sector would like to keep their methods and data hidden. The insurance industry is vigorously protesting the Federal Insurance Office’s recent effort to collect data on which U.S. regions may be exposed to physical hazards or lack of available insurance. Yet the severity and systemic nature of climate risk means that these insurance models potentially have macroeconomic significance.

In our interconnected world, we must know one another’s exposure.

Allowing the private sector to horde and hide climate risk data is not sensible policy. Whether a luxury condo is resilient to hurricane risk depends, in part, on its location and projected climate conditions, but it also depends on the resilience of the surrounding municipality. Even a building that has zero flood risk will suffer if all the roads leading to it are washed out and the city in which it sits lacks the capital to adapt.

Protecting a valuable public resource

Advocates and science experts alike have long called for a National Climate Service (NCS), arguing that location-specific climate risk information is a public good, akin to the National Weather Service’s free forecasting and provision of data. I agree with NCS advocates that the private sector cannot be relied upon to provide climate services equitably or reliably, and that the industry requires far more oversight. Importantly, all private climate services rely on upstream climate data and models that were collected and produced by an enormous network of public institutions. We should not hesitate to require pseudo-regulatory third parties, including ratings agencies and insurers, to tell us how they are applying this public resource—our collective knowledge about the future.

Editor’s note: Join Climate & Capital Media for our second policy event via Zoom on 23 October 5:30pm EDT (NY) / 24 October 8:30am AEDT (Sydney): Addressing the Global “climate risk intelligence arms race.” Our expert panel for the discussion includes Sarah Jane Raskin, senior fellow in the Duke Center on Risk, Madison Condon Associate Professor at Boston University School of Law, and Climate & Capital Media’s Climate Editor Blair Palese. RSVP for this online event. 

Featured image: Hurricane Ian aftermath, September 2022

Written by

Madison Condon

Madison Condon joined Boston University School of Law as an associate professor in July 2020. She teaches Corporations, Environmental Law, and a seminar on climate risk and financial institutions. Professor Condon is an expert on climate change, financial risk, and regulation. Her research has been relied upon by the US Securities and Exchange Commission and the US Department of Labor in rulemakings. The President’s Council of Advisors on Science and Technology pointed to her work criticizing financial models in its recommendations for managing extreme weather risk. In 2023, Professor Condon joined the United Nations Principles of Responsible Investment Academy Network Advisory Committee.