The Climate Crisis is already here: so how can we prepare for what's next?
Why we invested in Climate X
“By the time many of the pledges made in Glasgow this week are met… some of the participating countries may no longer exist”.
That’s what Mike Allen wrote in Axios this week, and unfortunately, he is not over-exaggerating. Countries in the Caribbean, Pacific and Indian Oceans are all under threat from climate change, and extreme weather is already impacting all continents on the globe - from hurricanes in Fiji to the heatwaves in Germany. Yet, in many ways, we are still acting like it’s business as usual.
Let’s take Miami.
People are still flocking to Miami, both wealthy Latin Americans, and a growing tech ecosystem which has earned Miami the nickname the ‘new tech hot spot’. Real estate in Miami is booming too, many ignoring the fact Miami is predicted to be underwater by the end of the century.
These aren’t just 80 year timelines either. Within just 25 years more than 300,000 coastal homes in the US will be at risk of chronic tidal flooding - a property value of $117.5 billion. This is not a distant risk of flooding ‘one day’ - it means there is risk of chronic flooding in the term of one standard mortgage agreement.
McKinsey reported that it will also be the poorest in society that will be the most vulnerable to climate change. Looking to Miami as an example, The Guardian reported that while the wealthy strip has received funding (from property taxes to municipal bonds), areas like Shorecrest (which houses primarily low to middle income residents) have not received the same support. One resident said they are expected to simply “remove their shoes and wade through the water”.
So why are people still pouring their life’s savings into high risk areas? And why are places like Miami booming when the forecasts predict climate catastrophe?
We don’t have the tools yet
The short answer is: most people don’t know exactly what’s ahead, and if they do know they don’t have the tools or resources to do anything about it. They can’t accurately find out how their homes and assets will be impacted, so they have to put their faith in financial institutions doing the risk assessments for them. Miami is just one of many places at risk of course, but it has become, as Jeff Goodell put it, “the poster child for a major city in big trouble”. Climate risk is a global problem and we need to better understand both physical risk (impact of extreme weather events that can lead to storms and flooding) as well as transition risks (the risks associated with changes made as we move towards net zero).
Our lack of preparation is concerning, but we are lucky to now have the data available so we can model what’s coming. Putting this data in the hands of governments and companies today can help them prepare for this new world as quickly as possible. Rapid decarbonisation and carbon removal are non-negotiables for the next decade, but we also need to bolster our third defence: resilience.
Do businesses need to disclose their climate risk?
Right now, it’s only voluntary for businesses to assess and report their climate risk, despite 80% of respondents on a recent survey expecting climate change risk to cut across all areas of their business.
Guidelines to help financial institutions already exist. The ‘Taskforce for Climate related Financial Disclosures’ (TCFD) - chaired by Michael R. Bloomberg - published their recommendations in 2017. They explain that an inability to price climate risk creates danger of “a rocky transition to a low carbon economy”.
So far, these recommendations have been offered on an opt-in basis, but as of next year the recommendations are set to become mandatory in the UK, with major economies worldwide considering following suit. Joe Biden is discussing implementing similar plans for the US.
This means that soon businesses will legally need to assess and disclose their climate-associated risks. This can’t come soon enough. In just 2020, damages from natural disasters were estimated at $268 billion (€227 billion). According to Swiss Re, a major insurance provider, climate change could take 11-14% off the world economy by 2050, amounting to $23 trillion. That's 27% of today's output.
We invested in Climate X in June of this year to help companies assess their climate risk. Climate X projects how climate change will damage properties, assets or infrastructure under different scenarios - to help businesses plan and better protect the most vulnerable from climate change.
Companies solving for climate risk will need to be specialised
It’s easy to fall into the trap of thinking that the companies that will win in this space will be generalists, or indeed just those with the biggest data sets. Access to data will matter - but we believe domain specificity is essential: building models and data predictions specific to the intricacies of the industries served.
Climate X co-founders Lukky and Kamil worked together across all areas of risk management for financial institutions, as well as being management consultants, and have a deep passion for using climate data to help people make better decisions and prevent unnecessary climate disasters. Climate X’s risk data and analytics is packaged into a SAAS platform and also delivered by an API - ready to power tens of millions of decisions each year. This will help shape long term climate resilience strategies for financial institutions, corporates and real estate companies.
How does it work?
Climate X start by creating a ‘digital twin’ of the Earth: combining satellite data and other observational data to describe climate hazards at a high resolution. This means covering whole countries with grid squares as small as 10m by 10m. Hazards predicted include both sudden risks (floods and landslides for example) as well as chronic risks (things like subsidence and sea level rise).
Climate X can then run multiple simulations of the hazards for each small square - projecting risk under various climate scenarios. Each risk is then given a financial loss estimate which provides actionable intelligence on an asset-by-asset level. Already, they have run hundreds of different climate models, using methods that are scientifically sound and independently validated - providing accuracy metrics for each model component they produce.
Climate preparation is a moral matter too
The Climate X team have a strong moral compass around the power that climate data can wield, as they know climate change will disproportionately affect the poorest in society: both the costs of physical damage, and the costs that come with a disorderly transition to net-zero: from rising food costs, housing shortages and rising insurance premiums.
When Texas suffered the energy blackout, we saw this inequality play out. Poorer quality housing infrastructure meant that historically marginalised communities lost power first. When Hurricane Maria hit Puerto Rico in 2017, it took nine months to recover power in some of the poorest towns and still today there are still blackouts today. Changing weather affects every corner of the globe, but those who have the least resources to adapt, are often the most affected. Mia Mottley, Prime Minister of Barbados, addressed this in her speech at COP26: “What must we say to our people? Living on the frontline in the Caribbean? In Africa, in Latin America, in the Pacific… What excuse should we give for the failure?”. Climate change is projected to create around one billion climate refugees by 2050, and leaving adaptation to the last minute is no longer acceptable.
Whilst climate risk data won’t allow us to avoid extreme weather events, it will enable us to prepare: to model risks as we move to net zero and as we face future climate disasters. Most of us have only recently realised the devastation of what climate change will do to our planet and societies if we don’t act. The data to predict the future is available, and it is long overdue that financial institutions and corporations use it to mitigate not only climate disasters but also future financial crises. Climate X will be launching their product at Slush on 1st December, in Helsinki at 10.57 CET. Save it in your diary here.
Looking to have an impact? Check out the latest roles from Climate X here.
Check out all our new portfolio roles here.
💡 P.S. We’re open-sourcing our research for everyone to see. Check out our public Notion database here, and read our research into climate risk.