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Eyes in the sky: Investors reach out for new tools to measure climate change risk

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LONDON (Reuters) – In the twilight years of past civilizations, astrologers would clear the skies for signs of impending disaster. In an age where climate change is eroding old security, a new cast of characters is looking for answers in heaven.

FILE PHOTO: Houses land in flooded waters caused by Hurricane Florence, in this aerial view, on the outskirts of Lumberton, North Carolina, USA on September 17, 2018. REUTERS / Jason Miczek / File Photo

A small but growing network of asset managers, academics, start-ups and campaigners are working to exploit a recently deployed satellite armament to better predict the economic impact of global warming.

While climate scientists warn that discipline is in its infancy, lawyers say early findings have an extra virtue: the dynamism of any residual complacency about the degree of decay that lies in the store.

“That’s the missing piece,” said Michael Hugman, a portfolio manager at London-based asset manager Ninety One, where the fixed-income team earns $ 44.3 billion in largely emerging market debt.

“What we can do now is specifically set high numbers for what climate change means for countries over the next 30 years. That’s a whole other way to think about risk and return.”

While investors have long used satellites to track specific metrics such as activities in shopping mall car parks or ore shipments, the new approach known as “space finance” is much broader.

It works like this: analysts gain satellite imagery and other data, filter them using algorithms, and use the results to design how climate change can affect anything from a single plant to an entire economy.

Unlike standard risk models, based largely on historical data, spatial financing aims to predict how rising heat could bring about a radically different future.

Ben Caldecott, director of the Oxford Sustainable Financing Program, a research unit at Oxford University, compares the depth of possible acquaintances with the revolution in biology unblocked by human genome sequences.

“We have had this massive explosion in Earth observation capabilities which means we can see what is happening at every point on planet Earth, and we can interpret it and use it for financial analysis,” Caldecott said. , which has launched a space funding initiative to expand discipline applications.

“What’s so transformative is adding another dimension to the information you have as an analyst.”

Managers of assets specializing in emerging market debt have been among the first to explore opportunities, recognizing, for example, that hurricanes or larger heat waves can boost the finances of countries that depend on agricultural exports.

The results can be dizzying. Hugman decided to model how climate change could affect a hypothetical debt restructuring plan for Argentina, which is trying to pay its creditors.

He focused on two of the many potential risks to the prospect of the most ambitious global moves to curb deforestation, which could hit farm exports, and the most frequent droughts, using numbers based on space techniques. The result: what appeared on paper as a viable plan to manage the country’s debt was no longer sustainable.

Green swans

Environmentalists hope such findings could in turn be used to arm governments in Latin America, Africa and Asia with the data needed to identify the most promising investments for the pillow population from climatic influences.

“What it gives you is a much richer way to engage with governments,” said Susanne Schmitt, nature and leading space finance at the World Wildlife Fund, a conservation group.

Working with Hugman and other asset managers, Schmitt aims to use space finance to mobilize investment in climate-friendly projects such as manganese or forest marsh conservation.

Others question whether the development of increasingly specific levels of analysis can prove a double-edged sword, enabling smart investors to charge potentially convicted assets to its climatic counterparts rather than help those affected.

“The big question for me is, what happens when certain companies, assets and entire countries are identified as at risk?” said Kate Mackenzie, a Sydney-based adviser who has advised companies and regulators on climate change.

“Are those assets sold in markets and buyers that have the same view of this risk?”

Even before the coronavirus pandemic gave investors a chance to crash into the fragility of the global economy, concerns were growing about the far greater risks posed by the climate crisis.

In January, the Basel-based Bank for International Settlements (BIS) released a report warning that markets were unable to see the so-called “green swans” high-impact environmental shocks.

To change the climate, none of the investment models took advantage of the “size we have today” risks, warned Luiz Pereira da Silva, deputy general manager of BIS, speaking on a podcast recorded when the report began.

“We need to use more and more novel approaches, far-sighted scenarios that instead of just trying to repeat the past, we extract from the knowledge we are gathering with climate scientists,” he said.

A research group has blocked the house the scale of the dangers coming from the middle of the century, if greenhouse gas emissions continue to rise. In January, the Global McKinsey Institute noted that cities in parts of India and Pakistan may be among the first countries in the world to experience heat waves so hot as to kill a healthy person, under a high emission scenario.

West Africa may have 70-90 days more per year with dangerous heat levels than currently, according to World Bank data. And even if emissions start to fall moderately, rising sea levels are projected to hit land in China, Bangladesh and India which is now home to 171 million people, according to a study done by Central Central.

ALGORITHES IN THE WORK

With investors ’concerns about climate growth, entrepreneurs have spied on an opportunity to refine a stream of data flowing from space into products for money managers.

In Britain, new start-ups in space finance include Oxford Earth Observation and Global Sust. Based in Charlottesville, Virginia, Astraea Inc. mines data from about 1,500 satellites that observe Earth in orbit at any given time.

The company is working on Caldecott’s space funding initiative to create an open database for all cement plants in the world, which can encourage investors to put pressure on the most polluting operators to clean up their act.

“We give you the tools to be able to train an algorithm to look for specific things and then apply it to whatever geographical scale you want,” Chief Executive Brendan Richardson said.

With investors in emerging markets increasingly engaged in talks with governments on sustainability, some are exploring whether the risks identified with the use of spatial finance can give more tooth to discussion.

“We’re investing our clients’ assets in the long run … where climate change and environmental factors will actually be important,” said Mary-Therese Barton, head of debt market development at Pictet Asset Management. “Here dialogue becomes really important.”

Long before the big data and space exploration, in 8th-century Baghdad, a star with a star known as Masha’allah ibn Athari inspired generations of future astrologers with a theory that the cycles of Jupiter and Saturn predicted a global rise.

Slideshow (3 Images)

While none of the beginnings of space finance claim prophetic power, climate scientists advise caution. Climate-related shocks that tend to cause larger market gyrations are generally extreme weather events, such as hurricanes, which cannot be predicted with any precise real scale.

Andy Pitman, a climate scientist at New South Wales University in Australia, says there is no doubt that investors have to contend with climate risk, but worries that some companies may exceed what they can do.

“It’s certainly a 10-year moon to close that gap between what businesses want to know, and what climate scientists can safely provide,” Pitman said.

Edited by Crispian Balmer

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