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What Moody’s Recent Acquisition Means for Assessing the Costs of the Climate Crisis

The credit rating agency Moody’s announced on July 24 that it had acquired a majority stake in Four Twenty Seven, a leading provider of insight on economic climate risk. The acquisition by one of the world’s foremost credit rating agencies stands out as an indicator that the climate crisis is seen as a material risk that corporations and governments must consider.

Four Twenty Seven uses outputs from climate models to assess physical risks associated with climate-related processes for governments and companies. Heat and water stress, extreme precipitation, cyclones, and sea level rise are among the hazards Four Twenty Seven scores to quantify climate risk exposure for its clients.

Moody’s acquisition, which was widely covered in the media, indicates a responsiveness to investors who are clamoring for not just environmental, social and governance (ESG) intelligence to inform their decisions, but climate data too.

A farm in Paducah, Kentucky is inundated by floodwaters in January 2016 (Source: PO2 Seth Johnson/US Coast Guard)

Richard Cantor is the chief credit officer at Moody’s. “Over the last few years we’ve become much more systematic and transparent about how we are incorporating ESG factors generally, and climate change in particular, into our credit rating analysis,” Cantor said, referring to the Four Twenty Seven acquisition. “This will help us do even more.”

What the acquisition of Four Twenty Seven enables the credit rating agency to do, explained Henry Shilling, a former senior vice president at Moody’s who oversaw the corporation’s ESG integration during his 25-year tenure, is to help Moody’s to make more sound financial decisions.

“It is clear to Moody’s, as well as other rating agencies, that climate risks have become elevated and they have financial and policy implications,” Shilling told GlacierHub. “It would help refine their capacity to anticipate how these risks could impact their ability to generate future cash flow, which is the primary basis for assessing credit quality.”

Reflecting their seriousness about sustainable investing, earlier this year Moody’s acquired Vigeo Eiris, a global leader in ESG research, data, and assessments. What’s become clear is that ESG is not just a values-based approach—it’s a commercial opportunity.

According to the U.S. Fourth National Climate Assessment, along the U.S. coastline, public infrastructure and $1 trillion in national wealth held in coastal real estate are threatened by rising sea levels, higher storm surges, and the ongoing increase in high tide flooding.

Bruce Usher, a professor and co-director of the Tamer Center for Social Enterprise at Columbia Business School, said Moody’s is a traditional firm and that its acquisition of Four Twenty Seven represents a significant shift in how the private sector is evaluating risk. “For them to reach the point where they believe that having a deeper understanding of [climate] risks, and presumably how those risks affect and ultimately are priced into financial assets…that’s an important signal,” he told GlacierHub. “This challenge of pricing financial risk is becoming important to the point where commercially you have to do it.”

Sea level rise is one of the physical factors forcing companies and governments examine their adaptation and mitigation strategy. Glaciers play a significant role in this process.

While glacier retreat is one of the more noticeable—and traceable—effects of the climate crisis, the impact of reduced glacier volume to business operations is not as obvious. Glaciers are referenced in several posts on Four Twenty Seven’s website, specifically on the topic of sea level rise and its effect on maritime shipping and coastal real estate. Glacier melt is occurring more rapidly than previously thought, accounting for 25-30 percent of observed sea level rise since 1961.

The Port of Oakland, California, near Four Twenty Seven’s headquarters (Source: Travis Leech/Flickr)

Seaborne shipping, which accounts for 90 percent of all global trade, is expected to be impacted by more severe storms and inundation of low lying port facilities. Anticipated effects on coastal real estate are even more worrisome.

An estimated 2.5 percent of the global population could be displaced with two meters (6.5 feet) of sea level rise, the level experts say coasts should plan for by 2100. Founder and CEO of Four Twenty Seven, Emilie Mazzacurati said real estate lies on the frontline of exposure to climate change. “Many valuable locations and markets are often coastal or near bodies of water, and therefore are going to experience increases in flood occurrences due to increases in extreme rainfall and to sea level rise,” she said in a 2018 company press release.

“These risks can now be assessed with great precision—the availability of this data provides investors with an opportunity to perform comprehensive due diligence which reflects all dimensions of emerging risks,” Mazzacurati added.

Her Berkeley, California-based company holds detailed climate risk data covering over 2,000 listed companies, one million global corporate facilities, 320 real estate investment trusts, 3,000 US counties, and 196 countries.

The name Four Twenty Seven is an homage to California’s calculated 1990 total emissions inventory: 427 million metric tons of carbon dioxide. The figure became the target to reduce emissions by 2020, which the state achieved four years early. It is worth noting that California’s economy grew by 26 percent during the period in which it reduced its emissions.

A destroyed home in the Belle Harbor neighborhood of Queens in New York after Superstorm Sandy in 2012 (Source: Chester Green/Flickr)

Natalie Ambrosio, who manages publications and communications at Four Twenty Seven, says companies and governments are awakening to the need for their services. “They’re increasingly aware that sea level rise and the rippling impacts of sea level rise are going to affect them directly on their own assets and also indirectly through impacts on infrastructure,” Ambrosio told GlacierHub. “We’re seeing more of our clients coming to us wanting assessments on their exposure to these impacts.”

The tricky part is how to price risks with the time horizons associated with climate disruption, which often lie far in the future.

Usher explained the dilemma facing risk managers. “The challenge at the intersection of climate risk and the financial markets is understanding how risk affects the value of assets today when climate risk is primarily considered a long-term risk with significant uncertainty,” he told GlacierHub. “It is very difficult for owners of financial assets to price those risks given those time frames and those uncertainties.”

Intelligence from a climate risk provider like Four Twenty Seven can help.

Regulatory initiatives toward low carbon economies across much of the world are also prodding rating agencies, like Moody’s, toward an embrace of climate risk intelligence.

Those in the field of evaluating climate risk say the time is already overdue for companies and governments to start addressing adaptation and mitigation risks. “Is the world sleepwalking into a crisis?” the World Economic Forum’s 2019 Global Risks Report begins. “Global risks are intensifying but the collective will to tackle them appears to be lacking.”

Peter Deneen is a graduate student of Climate & Society at Columbia University. He is a former Coast Guard officer and native Californian. 

A version of this post was originally published on GlacierHub. GlacierHub is managed by Ben Orlove, an anthropologist at the Earth Institute and the Center for Research on Environmental Decisions at Columbia University

Banner featuring a collage of extreme heat images.

Recent record-breaking heat waves have affected communities across the world. The Extreme Heat Workshop will bring together researchers and practitioners to advance the state of knowledge, identify community needs, and develop a framework for evaluating risks with a focus on climate justice. Register by June 15

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