Climate fintech is a natural pairing of the busiest tech sector and the most high-profile public policy issue. In 2021 , we saw a plethora of new climate fintech startups ranging from Stripe Climate’s online carbon removal marketplace to green finance and neobanks that allow users to track the carbon footprint of their transactions. Legacy banks and financial services firms aren’t resting on their laurels either—most are publicizing climate initiatives that will at least see them on the right side of essential environmental, social, and governance (ESG) initiatives.
However, climate change has more significant implications for financial services than just how firms themselves impact the environment. It potentially has repercussions that represent colossal risk, and in some cases, massive opportunity across numerous industries—factors that aren’t currently accounted for in asset pricing.
S&P Global, recognized internationally as one of the most authoritative financial information and analytics providers, intends to change this. They’ve just acquired The Climate Service Inc., a climate fintech company that has developed technology to quantify climate risk. Here’s what you need to know about the acquisition:
What Activated the Requirement for Climate Risk Measurement?
The Climate Service was founded in 2017, coincidentally precisely a century after S&P Global. Joseph Lake joined the firm as COO in 2019. In an interview with Fintech TV, he explains the exponential increase in interest in climate risk in the year or so leading up to the pandemic.
First, Lake says that investors were increasingly pressuring financial service providers to account for climate risk. And secondly, regulatory pressures were taking hold from initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) headed by Mike Bloomberg and Mark Carney. Then, finally and unfortunately, there were more and more observable incidents of climate change in action—investments being damaged by flooding, wildfires, and rising sea levels, for example.
Lake brought with him a background in political and macroeconomic risk. In his experience, clients started asking about climate risk in the same way they’d previously asked about credit, currency, and sovereign risk. It became the new emerging risk that they needed to measure in order to manage.
How Does The Climate Service Assess Climate Risk?
The Climate Service’s Climanomics® platform allows clients to submit asset-level data—for example, where they have facilities located or what crops their supply chains rely on and in what countries. The Climate Service can then provide them with a risk screening across their whole asset portfolio. For example, they’ll be provided with likely time horizons for catastrophic events such as hurricanes and wildfires and what that means for them in financial terms.
A dollar value is attributed to the risk over different time intervals and under different climate scenarios—for example, if the world was on track with the Paris Agreement goals versus continuing current trends. In addition to modeling physical risk, the platform also provides clients with intelligence regarding transition risks such as evolving legal, regulatory, and market conditions. The outputs are aligned with the TCFD.
How Reliable is the Science Determining Climate Risk?
When asked to comment on how accurately climate science can predict climate and weather patterns, Lake shares that climate predictions for the last 40 to 50 years have been significantly more accurate than political predictions for the last two years. He says the science on climate is largely resolved at this stage. Now, it’s a matter of understanding how climatic changes will affect assets and investments.
What Industries Will Be Affected by Climate Change?
Climate risk is the most significant unmeasured risk in the world today, and it will touch almost every industry. It’s easy to think of the obvious industries at risk from global warming, such as agriculture, but rising temperatures will affect almost every aspect of our lives. Right now, there are properties in parts of Florida that will be underwater in thirty years, says Lake, yet that risk isn’t being factored into the borrowing costs of mortgages.
Theme parks like Disney will need to consider how to remain profitable when climate events force them to close for long periods. Sports apparel manufacturers need to consider whether there will be demand for their products in the future—in 2020, players in the Australian Tennis Open were forced to abandon play due to wildfire smoke inhalation. Cruise line companies may need to dedicate more space to indoor entertainment, decreasing capacity and increasing air-conditioning costs, for example.
What Does the Acquisition Mean for the Parties?
James McMahon, CEO of The Climate Service, says his company’s union with S&P Global means it can now deliver its insights at the scale the world urgently needs. For S&P, the acquisition builds on the launch of S&P Global Sustainable1, and The Climate Service’s best-in-class offering means S&P will be able to provide clients with a 360-degree view to help them achieve their sustainability goals. With the right intelligence, financial institutions, corporations, and governments can make decisions with confidence.