The global municipal bond market is a worth an amazing US$ 3.8 trillion a year. As one might imagine the owners of these bonds are highly motivated in wanting to protecting their investments.
Growing awareness of climate risk in the form of rising sea levels, floods and wildfires and their impact on the value of bonds is driving new ways to understand and quantify these new risks.
Using the information provided by satellites above the earth allows companies to view what is happening to the earth in real time and react accordingly. Constant surveillance by hundreds of satellites and drones allows every part of the globe to be constantly analysed in minute detail for change.
This wealth of data combined with powerful computing techniques promises a real time picture of how the world’s environment is changing. Analysts can view crop production, forest fires and floods, this can be used to try and calculate financial benefits or losses to companies affected by this phenomena. This merging of satellite data and finance led to the emergence of a new term – spatial finance.
The Rise of Spatial Finance
To help promote this new idea the Spatial Finance Initiative was launched by number of prestigious organisations, namely the Alan Turing Institute, the Green Finance Initiative and the Satellite Applications Catapult.
Its mission is to:
“Mainstream geospatial capabilities enabled by space technology and data science into financial decision-making globally”Spatial Finance Initiative
The emergence of spatial finance has come at a critical time where the assessment of climate risk has become increasingly important to banks, insurers and major corporations.
The launching of the Task Force on Climate related Financial Disclosures (TCFD) recommendations has meant companies need to understand how their assets will be affected by climate risk. Spatial finance has the potential to pinpoint shifts in the environment and map those firm’s assets.
Spatial Finance in Action
For instance an agribusiness with farms across different regions and countries will be able to see how drought, sea level rise and rainfall has changed over time. Of course, satellites cannot predict the future. But by identifying current patterns of change they can give a glimpse into the future.
Capturing information on the environment is the spatial section. The financial part comes by understanding how the world’s environment is changing in microscopic detail. Putting the two together will allow financial decisions to be made more accurately.
Realising ESG Goals
Farms and agribusinesses can be monitored for their adherence to Environmental Social and Governance (ESG) goals. For example farmers in the Cerrado region of Brazil signed up to a zero deforestation pledge in order to protect forests. Satellites can monitor whether these pledges are fulfilled.
Deforestation has also been linked to lower rainfall in the region which in turn reduces hydropower production capacity. The deforestation pledge is monitored by satellites which can assess whether farmers are encroaching on forests.
Geospatial data techniques are being considered in linking sovereign debt risk with environmental risks. This way both governments and investors can see changes in environmental risk and which can drive sovereign debt risks.
If a country fails to care for its environment it may be considered more likely to default. Early signs of drought in an agriculturally dependent region could be an early warning of poor harvests and financial problems. At the same time crops can be tracked daily to estimate yields and future revenues.
Implementing the TCFD
Implementing the Task Force on Climate Related Financial Disclosures (TCFD) recommendations will drive predictions of climate change on physical assets. Measuring the impact of a sea level rise, drought, flood and a variety of other climate related risks can destroy the long term viability of a project.
Geospatial data can be used to track other environmental issues such as illegal fishing. Satellites spotting boats in marine reserves can provide the information required to fight the illegal fishing. However, considerable political will and resources are still required to actually stop and catch the perpetrators of environmental crimes.
Nature related financial disclosures are on the menu for the landmark biodiversity conference in Kumming in China. Companies could be encouraged to disclose their impacts on biodiversity in a similar way many are disclosing their emissions or exposure to climate risk.
Satellites can track a changing environment in real time and identify where and how companies are making an impact on the environment.
Satellites and Finance
Hedge funds have been using satellites to get an inside track on changes in demand or the movement of key individuals.
When an Occidental owned private jet was spotted at Omaha airport (home of Warren Buffett). It was a sign that the company were seeking the investor to help on their purchase of Anadarko.
Ten days later Buffett announced he was investing in Occidental. Alternative data companies routinely track private jets as prior knowledge of deals is a powerful source of information.
The danger to human life from flooding following the catastrophic events of Hurricane Harvey in 2017 was tracked using geospatial satellite imagery. The same data was used to speed up insurance payments requested after the hurricane damage.
The power of satellite imagery and ever larger data sets will increase the ability to spot relationships between geography and financial indicators. Spatial Finance will be an ever more powerful tool for identifying geopolitical risks and improving financial performance.