Finding climate valuation expertise

Greetings Readers,

When valuing climate risk, there is one key ingredient needed: people! Without people--and their diverse set of skills, experience, backgrounds, and passions--we and our institutions would not know where or how to begin understanding the financial impact of weather and climate.

In order to establish a framework for the skills needed to value climate risk, let's first discuss the types of questions those skills help us answer. For example, a climate-exposed company like a theme park can experience decreased attendance and revenue during very rainy or hot days. Key decision makers like Chief Financial, Revenue, and Operating officers are likely to ask questions such as:


1. How frequently do climate events occur?

Example: How frequent are low revenue days when rain is greater than 1/2 inch or temperature is greater than 90°F (32°C)?


2. How is the frequency and severity of climate events changing over time?

Example: Are wet or hot low revenue days occurring more frequently today than they did in the past? Have days become wetter and hotter in recent years?


3. How sensitive are my revenue, costs, and capital to climate?

Example: How significant are rainfall and heat in causing low revenue days, versus other non-climate variables?


4. Is it possible to increase the value of my business or institution by proactively mitigating the financial risk of climate events?

Example: Can we refinance our debt at lower cost by insuring against climate revenue volatility?


5. How does valuing and managing climate risk enable my institution to benchmark progress toward net zero carbon emission targets?

Example: Are there lessons learned from insuring temperature and rainfall risk in the short-term that can be applied to protecting against missed CO2 or degree warming metrics in the long-term?


and importantly,


6. Where can I find people and how do I build teams with the experience necessary to answer the above questions holistically?

Example: Should we hire expertise in climate and data sciences or insurance and finance? Or all of the above?


7. Should I access expertise by building teams internally or sourcing external partnerships or services?

Example: What is the cost-benefit analysis of hiring scientists and underwriters, versus an insurance broker or service provider?


Regarding these final 2 questions, there are some basic building blocks needed in terms of climate risk valuation expertise. These building blocks apply regardless of whether the expertise is sourced internally or externally. They include (in alphabetical order):


Climate science

Goal: Understand the physical behavior of weather (e.g daily) and climate (e.g. decadally) along various time scales

Communication

Goal: Translate climate risks into understandable language and visuals that address risk expecations and uncertainties, and enable pragmatic action toward increased financial resilience

Data science and computer programming

Goal: Gather, analyze, and summarize data on climate and institutional variables to explain financial-climate relationships and inform strategic risk management decisions

ESG / Sustainability

Goal: Track institutional, investor, market, and regulatory requirements on environmental / social / governance matters and create benchmarks for tracking institutional progress toward sustainable development goals

Financial risk management

Goal: Identify existing--or create novel-- risk transfer (e.g. insurance) and financial products (e.g. green bonds) that manage climate risk efficiently and enhance institutional value

Probability and statistics

Goal: Quantify the range, expectation, upside, and downside of climate and financial outcomes during specified time periods


The great news is that there are a growing number of individuals who possess most, if not all, of these skills and experience! In future posts we will discuss where to find the people with the required expertise to value climate risk.

Best,

Prime

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