Climate risk advisory firm of the year: The Climate Service

Energy Risk Awards 2021: Risk analytics platform crunches petabytes of data to model financial climate risk on multiple asset types

James McMahon, The Climate Service

In the midst of the unprecedented transition to a low carbon economy, regulators and investors are pressuring companies to measure and disclose their climate-related financial risk. In addition to the impacts they face from climate risk, they also need to know their impact on the climate. The Climate Service provides a risk analytics platform that models climate-related financial risks so that companies can treat climate risks like any other business exposure, such as cyber or political risk.

“The Climate Service was founded with the vision that every economic decision on earth should incorporate climate change,” says James McMahon, co-founder, and chief executive. “From the start, our goal has been to enable organisations to measure their climate risk by combining the expertise of leading climate scientists with the most powerful and secure technology available. Fundamentally, what gets measured gets managed.” 

The platform is designed to allow the measurement and reporting of transition and physical risks and opportunities globally. It crunches petabytes of physical and socioeconomic data, including over a thousand proprietary econometric functions that describe the financial impact of the climate on multiple asset types.

Founded in 2017, and based in Durham, North Carolina and New York, The Climate Service brings together technologists, economists, finance professionals and climate scientists, including several climatologists whose work with the Intergovernmental Panel on Climate Change was recognised with a Nobel Prize in 2007.

As well as public databases of climate data from the likes of Nasa, the US National Oceanographic and Atmospheric Administration, and the IPCC’s emissions scenarios, the Climate Service’s Climanomics model has been refined using data from corporate and financial sectors. “Working for multinational corporations and energy companies as well as investors has afforded us valuable perspectives and findings that we have been able to bake into our platform along the way,” says McMahon.

After selecting the geographic locations and asset data, the client can adjust the platform to assess various risks including temperature extremes, drought, wildfire, coastal flooding, cyclones, fluvial flooding and water stress. From there, the platform delivers simple charts, graphs, narratives and data feeds that provide insights into the location, severity and timing of climate-related risks faced by the client, based upon different future emissions scenarios.

Given the breadth of climate exposures faced by large companies, and the uncertainties that exist around the magnitude and timing of likely impacts, the value of a product like Climanomics is its ability to identify the most material exposures, says McMahon. “There are so many potential risks and questions facing companies when it comes to climate change. The key is to focus on decision-useful questions to generate data that will be as impactful and strategic as possible,” he says.

He gives the example of work that The Climate Service has done for an oil and gas major, helping it to analyse threats to its assets and opportunities it could pursue on its pathway towards net-zero emissions. “We were able to pinpoint vulnerable assets in their vast portfolio. The platform also revealed new market opportunities, such as biofuel crops that will thrive in warmer temperatures,” he says.

Climanomics also allows users to generate, with a single click, reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures, the voluntary initiative designed to bring greater consistency to climate disclosures.

As might be expected, given the growing demand for climate analytics, The Climate Service is growing fast, says McMahon, with its headcount quadrupling over the last year to reach 25.

This year the capabilities of the Climanomics platform will expand dramatically with the launch of products specifically for real estate, listed equities, corporate, sovereign and municipal bonds, and real assets. 

“Our approach to climate risk continues to evolve to match the needs of the maturing market,” says McMahon. “For example, as forward-thinking real asset owners have begun considering market-level impacts – such as municipal adaptation, insurability, and liquidity – as integral to measuring climate change, we have developed a toolkit to enable this work.”

“Innovation at scale is core to our work,” continues McMahon. “This is especially important in industries such as energy where the unprecedented shift in the world’s response to climate change puts urgent and immediate pressure on energy leaders. Energy companies must work swiftly and decisively prepare for the transition to a low-carbon economy, and climate risk analysis is critical to this process.”