A Guide to Climate Tech Finance

The news in 2021 has highlighted climate change like never before. Storms and hurricanes wreaked havoc across the US as far north as New York. Floods in Germany and temperature records across the globe were smashed. Public opinion has shifted towards a demand for more action.

In Germany the Green Party looks set to play a key role in government following the recent election. The US administration passed a flawed US$ 1 trillion infrastructure bill which promised funds for electric charging points, climate resilience and support for decarbonisation.

At the same time governments, businesses and entrepreneurs are realising that there is huge potential in zero or low products and services. Climate tech is cross sector cutting. Nearly every facet of life needs to be decarbonised rapidly if the world is to avoid a climate crisis. This is attracting serious money from venture capital to multilateral banks to giant corporate investors.

BlackRock Chief Executive Officer Larry Fink described climate investing: “I look at this as one of the greatest investment opportunities over our lifetimes.”

Choosing to decarbonise early is a competitive advantage. Carbon emissions will become more costly and less socially and legally acceptable.

Climate tech promises to harness technology to accelerate the transition to a low carbon world. Renewable energy firms are the most visible climate tech champions. But there are many other ways to reduce carbon, through artificial meat, green chemical companies, and low carbon construction firms.

Recent Global Shifts Include:

Election of US President Biden who has acknowledged climate change as the critical burning issue of the day.

China, US, Japan, EU, UK and Korea have all recently promised carbon neutrality in the next 30 years. Of course, political promises can be reneged or ignored, but the political momentum is clear.

The pandemic changed perceptions about the environment, cut carbon emissions (at least temporarily) and showed the world that rapid social and economic shifts were possible and for some desirable. It is much harder for companies and governments to make the excuse that change is too difficult, or that reforms must be slow.

Many companies have followed up on their Paris Alignment pledges and committed to go carbon neutral, car companies saw the writing on the wall and the shift to electric cars became real. Many governments have set targets and dates to achieve zero carbon economies.

Financing Climate Technologies

Money is gushing into Climate tech right now.

Below I look at how climate technology is financed and how this could change in the future. Funding for climate tech is as varied as the sector itself which is largely defined by its goal. Angel investors, venture capital and government funds are heavily backing zero-carbon technologies.

A recent PWC report identified around 2700 investors backing around 1200 start-ups. The industry went from around US$ 418 million funding in 2013 to around US$264 billion last year. This might seem a lot. But the reality is that this number needs to be much higher for technologies to make a dent in reducing carbon emissions.

The scale of change required is awe inspiring. Entire sectors such as transport, infrastructure and energy require complete transformation and billions of dollars to make it a reality.

Petrol driving cars need to be replaced, energy systems shifted from fossil fuels to clean energy. Sectors such as construction which many do not even associate with carbon emissions will have to shift to using low carbon materials and processes.

The scale of this transformation means that the clean tech sector has the potential to grow and grow. Its rise will emulate that of social media in the last decade and its impact will exceed it.

Capital Needed

But for this to happen the entrepreneurs and businesses need funding to match their dreams. Like all new sectors climate tech is risky.

Many new innovations will not work as planned, some will find it hard to scale and of course many start ups will be picked off by rivals or larger competitors.

Climate technologies are also often capital hungry, developing and promoting new technologies can be extremely expensive.

Financing the first deep sea shipping lane powered by methanol or green ammonia will cost US$ 700 million in up front capital investment.

Venture Capital

Venture capital is now heavily backing the climate tech start up scene. According to one survey start-ups raised US$ 16 billion across 250 deals across the first half of 2021. This also represented a 50 percent increase on last year’s figures.

Venture capital firms are of course a fixture in the tech scene and the lure of climate focused start ups has grabbed their attention.

Well known funds such as Sequoia Capital which backed many of Silicon Valley’s biggest most successful stories are now backing climate focused ventures. Other VC firms like Clean Energy Ventures specialise in just climate tech.

Others like The Engine a MIT backed fund take a different approach providing long term capital to ventures trying to solve the world’s toughest problems. Climate change among them.

Start-ups are the most exciting and innovative creators of climate solutions. But established companies have the size and reach to really push decarbonisation.

There are many net-zero levers: alternative proteins, renewable energy or green construction. Climate tech is cross sector cutting which means that it will attract money from a variety of different sources, not just funds with an energy focus.

Corporate Venture Capital

Corporate Venture Capital is another rapidly growing source of finance for Climate Tech.

The funds have been created by major corporations who wish to back a fast-growing sector for financial and strategic reasons. The big tech firms like Amazon, Google and Microsoft have all seen the value of net-zero and backing their own climate tech finance divisions.

This could be to gain market share in emerging technologies or to counteract the fact that major companies are traditionally poor innovators.

Firms that have created climate tech funds include Chevron, Maersk, Microsoft and Unilever. These funds are backing firms which are pushing zero-carbon solutions such as Afresh which uses AI to unify logistics arrangement in delivery and transportation to increase efficiency and reduce waste. Chevron have backed Eavor a Geothermal technology company which hopes to drill deep underground to tap geothermal energy.

The king of the climate tech capital pile is Breakthrough Energy Ventures. Founded by Bill Gates over 5 years ago it has raised over US$ 2 billion for climate technology start-ups.

Emerging Markets and Traditional Banks

In emerging markets, multilateral banks such as the Asian and African Development Banks, the World Bank and European Investment Bank are major backers of climate finance.

In 2020 Multilaterals backed US$ 38 billion in investment into the climate sector. Much of this will be backing the renewable energy sector, energy efficiency and green infrastructure projects. Multilateral banks are also backing climate adaptation and resilience projects.

In a similar fashion Temasek the Singaporean sovereign wealth fund in conjunction with giant investment firm Blackrock are also getting in on the act. The two investment giants created a venture called Decarbonisation Partners which is placing US$ 300 million into a seed fund for climate tech.  

While traditional Banks are clearly a major source of finance they typically back well established renewable companies rather than innovative tech firms.

The emergence of the Taskforce on Climate Related Financial Disclosures (TFCD) has forced firms to disclose their strategy in adapting to a changing climate (with the recognition of climate risks), but this has also made firms think about how they can take advantage of the transition to a zero carbon.

This has seen mainstream banks measuring how climate risk will impact their balance sheets. Spelling out financial risk in this way will push banks to back climate friendly projects and companies

The green bond market has exploded in size over the last few years. US$269 billion was raised in green bonds in 2020. The market is led by the US, Germany and France, most of money raised will go towards green mortgages, renewable energy and transport (such as railway companies).

The green bond market tends to be focused on financing established climate technologies. However, funds that are backing green mortgages, low carbon buildings and other green projects and fall under the green bond taxonomy can directly spark demand for new climate technologies.  

Looking to the Future

Financing climate tech does not have the luxury of time. The sector needs to see a rapid increase in financing levels, this means that other sources of finance need to be tapped. Firstly, governments need to ensure that policy shifts on decarbonisation are matched by action.

For example, passing laws that encourage green construction, taxes on carbon or even meat. These measures will spark demand for climate friendly technologies.The private sector should be following the lead of venture capital and corporate VCs and backing more innovative climate tech firms as well as established technologies.

In the news

Climate Opportunities

Green growth offers opportunities for South Africans. The shift to renewables and a net-zero world creates new industries with often highly skilled positions much needed in South Africa and elsewehere.

Green economy growth is a silver lining for the planet and job-hungry South Africans (iol.co.za)

The Singapore Exchange makes climate related financial related disclosures reporting mandatory. As TCFD reporting becomes the norm the opportunities for climate risk reporting will grow. The sector will thrive and mature as reporting becomes more widespread.

Singapore Exchange proposes mandatory climate reporting in key sectors from 2023 | S&P Global Platts (spglobal.com)

Chevron plans to spend US$ 10 billion on renewable energy and reducing its carbon footprint. But is this just greenwashing and a reaction to recent actions by activist investors?

Chevron to spend $10bn on clean energy push | Financial Times (ft.com)

Climate Risks

A new threat from climate change. As ice melts it could set off huge tsunamis by reducing the weight on the crust below and unleashing intense seismic activity.

Chevron: Despite the company backing climate solutions with one hand it remains very much a traditional fossil fuel company. The oil and gas sector is increasingly fighting off activist investors that are challenging plans and pushing these giant companies to decarbonise.

Chevron prepares to head off challenges at investor presentation – Institute for Energy Economics & Financial Analysis (ieefa.org)

Could restoring Woolly Mammoths via gene editing be a way of restoring lost biodiversity caused by climate change. It does not stop the root problem but open up ways of restoring lost species once habits are restored or rewilded.

How Colossal sold investors on a quest to resurrect a woolly mammoth | TechCrunch

All talk of economic costs in addressing climate change tend to ignore the long-term costs of doing nothing. Climate risks in India, extreme heat, flooding and drought make a mockery of any attempts to protect the economy today, particularly if climate changes further disrupts the all important monsoon.

Economic impact of climate change on India | LinkedIn

A Guide to Climate Tech: How Technology, Innovation and Entrepreneurs Can Build a Zero Carbon World

Tiny brightly coloured microbes live in Yellowstone park’s volcanic springs which can thrive in incredibly hot temperatures up to 235 C. These so called extremophiles are bright yellow, orange, blue and survive and by turning light into energy. Scientists have long been fascinated by their unique habitat and properties.

The microbes caught the eye of Thomas Jonas the CEO of Nature’s Fynd. The company now takes these microbes and with the aid of water has created a process which can turn sugar into protein. This protein can then be used as the basic building block of an artificial meat product.

Nature’s Fynd was founded to tackle greenhouse gas emissions through food production. The company can produce “meat” with 99 percent less land and greenhouse gases than the livestock equivalent. Nature’s Fynd is part of new wave of companies focused on utilising new technologies to reduce carbon emissions.

Why Climate Tech is a Critical Sector

As the threat of global heating grows the need for solutions grows more urgent. Climate tech is an industry focused on solving humanities biggest problem. 2021 has seen record breaking temperature across the world along with more instances of extreme weather, floods, wildfires and hurricanes. From rocky beginnings as cleantech a decade ago which saw a lot of money pumped into firms but few success stories (Tesla a notable exception).

Now a new wave of exciting companies is emerging which are utilising technology to transition society to a zero carbon future.

Proterra is a leading provider of heavy electric vehicles, producing buses, trucks and shuttles all with zero carbon emissions. Founded in 2004 the company is taking advantage of the fact that more companies and governments are switching to electric vehicles for their fleet. As the number of charging points and policies favouring electric vehicles grows so will the market for these vehicles.

Each degree of warming will make climate tech a more attractive sector. As the problem of global heating grows, the solutions needed will become more urgent.

Pachama allows companies purchase carbon credits and restore nature through forest projects. They use artificial intelligence to monitor the forests and protecting older trees and growing new trees to restore habitats.

Aclima measures greenhouse gas emissions and pollutants at a local level which allows its customers to identify where and how they are contributing to greenhouse gas emissions, giving them the information they need to take remedial action.

Climate tech firms can be divided into seven broad areas:

  • Creating zero carbon transport (electric vehicles) or mass transport solutions.
  • Developing solutions around agriculture, farming and forestry which reduce emissions or even create negative emissions (this could mean a venture like Pachama or vertical farming solutions).
  • Decarbonising the built environment, firms that can decarbonise heating systems or make them more efficient. Or firms that can that make buildings with low carbon materials come under the climate tech umbrella.
  • Renewable energy companies, the most obvious solution for many observers, this can mean the production of solar panels and wind turbines or firms which can optimise energy efficiency, distribution and usage.
  • Companies which decarbonise industry through new techniques such as low or zero carbon cement.
  • Companies which utilise machine learning and artificial intelligence to make use of data sources such as satellite imagery, physical sensors and temperature readings which create a detailed information around the rise of climate change.
  • Carbon Capture and Storage is the most uncertain and unproven climate tech, but if deployed successfully could suck carbon out of the air and store it safely. Reducing the amount of carbon in the atmosphere could represent a silver bullet for climate change. But CCS has yet to be proven at scale.

The huge of scale of change required to get the world to net-zero is breath-taking. Estimates run into US$5-7 Trillion over the next couple of decades to hit current 2050 targets. The good news is that the sector is fast growing. In 2020 companies in Climate Tech raised capital three times faster than artificial intelligence. PWC put this figure at US$16 billion, a large amount but tiny compared to what it required.

How Disasters Could Drive the Climate Tech Sector

Perhaps ironically what will drive more investment and more demand for the products is each new piece of bad climate related news, every natural disaster will raise awareness about climate issues. The many pledges made at international conferences and by individual governments are also driving change.

For example, the EU recently published its sustainable finance taxonomy defining climate friendly activities. While many of the pledges are flawed and some may end up unfulfilled or ignored it does create a powerful sense of momentum.

Global giants Microsoft, Unilever and Amazon have all seen which way the corporate wind is blowing. These firms have all set up venture funds to back climate tech start-ups joining a stampede of new financial backers looking for the next growth story.

43 Unicorns and Counting

The business opportunities in this space are likely to rival previous tech booms and produce new Unicorns (tech firms worth a US$ 1 billion or more) and major new companies. Already there 43 Unicorns in the Climatetech sector, but many start-ups will get absorbed by rivals or simply not survive.

Climate tech differs from Cleantech (which experienced a boom/bust cycle a decade ago). Climate tech is focused on activities which reduce carbon emissions. Cleantech is broader and includes activities which help protect the environment such as water filtration or recycling, but not necessarily reducing carbon emissions.

Why Now? Climate Tech has hit a critical inflection point thanks to various factors:

Both demand from consumers and regulation from governments is driving the corporate sector to find new low carbon alternatives. The Paris Agreement, the EU Sustainable Taxonomy and the Task Force for Climate Related Climate Disclosures (TCFD) are all relatively new policy initiatives which

Energy is the most obvious sector for climate tech to disrupt. Solar and wind energy has already made a major impact on global energy production. Falling costs over the last decade (85 percent in the case of wind turbines) means that renewable energy is competitive with fossil fuels. But climate tech is wider than just energy production. For example, battery storage for cars or on an industrial level is increasingly a vital driver of decarbonization.

More efficient energy storage means that renewables become more effective as they can avoid the vagaries of the wind and sun. Grid management tools using machine learning and other techniques can also make for more efficient energy use. The market for electric vehicles pioneered by Tesla and the batteries which drive them is set to grow rapidly as car manufacturers shift production and governments look to ban their use.

Climate tech solutions can be divided into the vertical which deal with carbon emissions in one industry. For example, reducing the carbon loss from soil through precision agriculture or manufacturing process to make low or zero carbon concrete.

Alternatively horizontal solutions address carbon emissions across multiple sectors. Electric car batteries are a good example of this as they have allowed the car industry to shift to electric cars (EV), this encourages the use of solar and wind energy to produce the electricity to run the cars.  

Machine learning (ML) is another horizontal tool which can cut across boundaries and solve problems. ML uses algorithms which can perform a task normally done by humans, such as identifying pictures of friends on social media, act as a IT support chat bot to solve software issues or collect and identify patterns in satellite imagery.

The seven broad areas in Climate Tech are outlined below:

Transport

Moving people and goods by land, air and sea takes up a lot of energy. Most transport is run on oil products which of course leads to greenhouse gas emissions. It makes sense that many climate tech firms are looking to shift and upset this sector.

Electric vehicle production whether this be car, bus or truck is a highly visible sign of climate tech. Of course, the source of the electricity is key. If the electricity is supplied by fossil fuels, then electric cars are not climate friendly. Electric vehicles are only as green as the source powering them. The production of electric vehicles can also be problematic thanks to the need for rare earth metals in the battery which can be environmentally destructive.

NIO is a Chinese car maker which focuses on making Telsa like electric autonomous vehicles. NIO are luxurious vehicles with ultra modern autonomous driving features. With many countries promising to phase out petrol driven cars, manufacturers are shifting to electric models.

Food and Agriculture

Farms and agriculture are increasingly recognised as both major source of greenhouse gas emissions (around a quarter of all emissions) and a difficult problem to solve because of humans need for huge quantities of food and in particular methane producing livestock. Many policy initiatives are unlikely to impact on agriculture as it has been exempted from carbon pricing.

This challenge has resulted in many of the most climate friendly and innovative solutions. Meat production is a major and growing source of greenhouse gases (especially methane) and there many ethical concerns around livestock farming. The answer is a global shift to a plant based diet.

But of course this desire clashes with people’s love of meat. Food production companies such as Viva and Beyond Meat have used technology to create alternative proteins – which taste and appear like meat or fish but are plant based. These products typically represent 90 percent less carbon emissions than their meat equivalents.

The market for plant based products has grown rapidly. The number of vegans and people demanding more plant based foods has grown rapidly in many western countries. The Michelin Guide recently awarded 81 stars to vegan and vegetarian restaurants. A powerful symbol that the world is taking vegetarian food seriously.

The earth and soil and peat are also a major source of carbon storage and depleted soils and. Regenerative agriculture can mitigate climate change and involves activities which improve soil health and sequester carbon and enhance water retention.

Regenerative agriculture includes practices such as cover cropping and conservation tillage which farmers have been doing for many years but too much of modern farming has become destructive to the land and the result in billions of tonnes of carbon being released from the soil each year

Gingko Bioworks are encouraging sustainable agriculture through testing strains of microbes. These microbes can be used to fix nitrogen in the roots of plants. This  improves yields and reducing the need for nitrogen fertiliser (around 3 percent of global emissions).

Heavy Industry

Heavy industry is the fastest growing source of carbon emissions. The world’s demand for goods and products is seemingly never ending. Metals, concrete, fertilisers, plastics, and fertilisers all produce large amounts of greenhouse gases during their creation. Companies that can reduce emissions, reduce the amount of raw materials or used or make production processes more efficient can be classed as climate tech.

For example, 3D printing companies such as EOS and GE Additive can reduce transportation costs by allowing companies to print components reducing emissions. Hybrit is a Swedish firm which is trying to develop zero carbon iron and steel production from energy source to manufacturing process. Hybrit are experimenting with using hydrogen instead of carbon or coke to aid the reduction process. The reduction removes the oxygen from the iron which is a key part of making steel. Traditionally it is done in a blast furnace and relies heavily on coke (a major carbon source).

The Built Environment

Buildings emit large amounts of carbon thanks to heating and cooling systems emitting heat. But the materials that are used to build houses, factories, road, bridges and all our other infrastructure needs also involve large amounts of energy. Just cement production alone amounts to around 8 percent of all carbon emissions globally.

Efforts are underway to try and reduce this amount by trying to capture the carbon emissions during the manufacturing process. Ideas include switching to different more climate friendly fuel sources and by substituting materials such as using coal ash and blast furnance slag instead of clinker.

Through energy efficiency measures such as modern heating systems, improved insulation, plus smart heat management (often using machine learning) emissions can be reduced. These measures can be introduced into existing homes, but of course it is easier to be put into new builds. Green construction methods cut up front carbon costs through green materials.

Airex is a UK company which uses sensors and smart ventilation to help reduce heat demand in buildings. By cutting energy use Airex can cut fuel bills and using sensors can identify poorly ventilated areas and improve air quality.

Renewable Energy and Storage

Wind turbines and solar panels are the most obvious symbols of climate tech. Across the world renewable energy options are becoming more widespread and cheaper. Widespread industrial battery storage now promises to store energy and overcome the problem of when the sun is not shining or wind not blowing.

Hydrogen promises to be an exciting new carbon free energy source. Hydrogen burns like natural gas but without the carbon emissions. Excess renewable energy created in times of low demand can create hydrogen. This hydrogen can be then stored, transported and used as a zero carbon power source. However, this technology is still in its infancy

Climate Capture and Storage

The most uncertain, controversial, and risky climate tech area is carbon capture and storage (CCS). This is seen by some as the holy grail of decarbonisation but by environmentalists as a distraction from carbon reduction efforts.

Extracting carbon from the air and storing in the ground on a massive scale could theoretically solve global heating. Environmentalists view CCS as a risky distraction from decarbonisation which offers false hope. It is perhaps no surprise that funding has been patchy in this sector. The uncertainty and long-time horizons around CCS make it unsuitable for venture capitalists which prefer faster returns and more established technologies.

However, one source namely oil companies have been the biggest backers of CCS – although results have been poor so far. Expect these experiments to continue as if successful it would potentially allow oil companies to capture the carbon they are responsible for releasing into the atmosphere. Some have speculated that the technology for injecting carbon into the ground after capture uses similar techniques to the deep underground drilling that oil companies have such strong expertise in .

Climate Data and Analysis

The launch of many nano satellites has led to an explosion in the amount and quality of earth data captured. This has led to many new companies emerge to provide data on climate risks and forecasting. Companies like Jupiter Intelligence and Sust Global provide detailed information on physical climate risks for organisations. Understanding how the climate may create risks on a granular level allows clients to how extreme weather, drought, sea level rise and many other factors impact their assets.

Firms in this space use machine learning to process and sift through the huge amounts of data and turn them into actionable insights or financial signals. As well as climate risks this information can be used to monitor crop production, deforestation or reforestation rates (which can feed into sustainability ratings) and tracking natural disasters in real time to aid recovery efforts.

What’s Next?

For the success of Climate tech to continue there are several hurdles which need to be overcome. Firstly, financing needs to continue at an even faster rate, which in turn is dependent on the success of the companies involved in the sector.

Secondly the regulatory environment needs to shift further towards climate tech. This means actions like the phasing out of fossil fuel subsidies which prop up the oil and gas sector. It also means more initiatives like the EU sustainable Taxonomy which determines climate friendly activities. However, the problem is that if the legislation or regulation is too complex there is a risk that it will prove difficult for start-ups to navigate. This gives an advantage to larger firms with existing resources and could stifle competition.

Another limiting factor is lack of talented people in the industry. Climate tech is a young industry and its use of cutting-edge concepts like artificial intelligence means that there is a limited pool of workers to drawn upon. However, as the sector grows and the demand for such skills grow, so will the number of people attracted to it and they will develop the appropriate skills.

The rise of social media industry shows us how quickly a new sector can arise and dominate. The combination of new technology, the growing urgency of the climate crisis and the shift in the regulatory environment means that Climate Tech has a bright future.

The Machine Learning Revolution: How it can be used in the fight against Climate change

2020 was a devastating year for flooding across Africa. The Nile rose to its highest levels in half a century and Ethiopia and Sudan saw large areas swamped with water devastating farms and rural areas. Many African cities are ill prepared for natural disasters and with the continent’s urban population rising fast floods will increasingly devastate cities as well as rural areas.

As well as washing away crops, homes and livelihoods, floods can bring malaria and other water borne diseases to a weakened populace.

Climate change is making a hotter and wetter world with more unpredictable rainfall a perfect recipe for devastating floods.

The floods that shocked Germany in the summer of 2021 were proof that rich countries will not escape climate risks either. But wealth and technology can play a role in adapting to and measuring climate risk.

The World Observed

Across the world thousands of earth observation instruments, satellites, sensors and cameras are constantly collecting millions of points of data. This data includes temperature, greenhouse gas emissions, polar ice melt, wildlife statistics, forest cover (often using LIDAR which measures the density and carbon content of a forest) and lots of other useful information.

These critical indicators help capture the sadly declining health of the natural world and spiralling climate risks. But the enormous quantities of data collected by these instruments can appear overwhelming.

However, as the world is discovering machine learning techniques can be applied to the data, allowing organisations to sift through the information and turning into useful indicators.

Machine learning is a branch of artificial intelligence which uses data and algorithms to imitate human learning and therefore improve in efficiency over time.

Three Magic Ingredients

The three ingredients which make this possible are the collection of huge amounts of data via sensors, satellites etc, allied to powerful computing power which can handle the data and the application of machine learning systems which can improve the way in which they collection and interpret data.

Machine learning is a sub-division of artificial intelligence, and it means that systems can learn and improve the way in which they collect and interpret data independently.

Satellite data can used to track climate risks like drought, flood and deforestation which can be transformed into financial indicators with the help of machine learning helping firms monitor their risk profile.

Machine learning can be used to sift through the information provided by camera traps in wildlife reserves. Trailguard cameras use AI to spot different species and send an alert when the camera detects humans (or more importantly poachers) rather than animals.  Within minutes of poachers entering one of Africa’s wildlife reserves wardens are alerted and can respond to the threat.

Climate is Data Problem

Machine learning techniques are being deployed in an ever-wider number of settings.

Google have created the Environmental Insights Explorer which monitors the carbon dioxide footprint of buildings and transport networks allowing users to calculate their carbon footprint.

Satellite technology can monitor large scale carbon emissions, while sensors collect energy use data in buildings which can be used to optimise heating and cooling systems.

Climate risks are now a stark reality and machine learning can be used to help the world adapt. This could be through using data to predict floods or weather changes more accurately. Machine learning can also be used to effectively forecast energy usage to optimise renewable usage.

What Does the Future Hold

Identifying the scale and intensity of climate risks is a major challenge for governments and companies. Banks and insurers want to understand the physical risks to their portfolios. In other words: how much and where will sea level rise, how and where will extreme weather and wildfires impact on their assets on a granular level.

This is a problem for machine learning – collecting billions of points of data about the land, climate and sea and using them to accurately predict the future.

For example, researchers from Montreal Institute for Learning Algorithms (MILA) simulated what would happen to homes in Canada after damage by intense storms and rising sea levels. The objective is to try and make the risks of a changing climate real to people and businesses and provide them with actionable information.

How Can Machine Learning Aid the Battle Against Climate Change

Machine learning (ML) is particularly well primed to help the battle against Climate Change. Below are just some of the many methods and sectors Machine Learning can be harnessed to help mitigate, measure and adapt to a fast changing climate.

Energy Usage

Machine Learning (ML) can cut the leakage of methane through the monitoring of seepage data from pipe sensors and satellite imagery. ML can also be used to pinpoint where repairs are necessary in electrical infrastructure, cutting wastage and therefore increasing energy efficiency. However, ML could help the fossil fuel industry by making oil and gas more efficient and cheaper to extract and emit more fossil fuels.

ML can be used to model carbon emissions and energy mix helping planners to optimise the usage of renewable sources.

For countries without universal electricity ML can identify which electrification methods would be most suitable for a particular region. Normally this could require intensive resource heavy surveys. ML can use satellite imagery to speed the process up.

Transportation

Transportation is the source of around a quarter of global greenhouse emissions and represents low hanging fruit in terms of decarbonization. Cars and planes are the usual villains in this sector, but cargo ships are a major source of emissions.  

There are four ways in which to decarbonize the transport sector:

  • Reducing transport activity
  • Improving fuel efficiency
  • Switching to Alternative fuels
  • Moving to transport alternatives (car to train)

ML is in a prime position to drive these strategies. Firstly, ML can be used to collect large amounts of data about transport habits and patterns. For example, traffic can be monitored, and models created to forecast future demand which can help drivers and planners avoid congestion.

Predicting public transport usage and aeroplane take off times can make for more efficient, less energy using and time wasting travel. Similar techniques can be used for freight, using ML to consolidate trips to avoid empty trains/lorries and ships therefore driving efficiency and cutting the number of journeys.

Driverless cars driven by artificial intelligence are a particularly controversial transportation topic. In theory using driveless vehicles would be more efficient and safer (taking the quickest routes) and would free up time for humans.

However, this technology is unproven at scale and there remain many ethical concerns about the use of these vehicles, primarily who is responsible when things go wrong. The driver, car company or the programmer.

Electric Vehicles (EV) by contrast are now a familiar sight on the roads in many countries. ML and EV dovetail in climate friendly ways. Manufacturers can monitor EV and use ML to predict faults, battery management and usage. Over time as more drivers use EV more data will be collected on their usage. This can be used to improve performance by proactively spotting fault and identifying battery state degradation.

Cities and Buildings

Building, cities, towns and workplaces are a major source of carbon emissions. But they also offer some of the easiest fixes. Many modern state of the art buildings consume virtually none or no energy. Smart buildings using sensors and control systems can monitor energy usage identifying where more is required and using tech like windows with built in solar panels to collect energy for the building.

ML can be used to model energy consumption and in modern buildings with sensors optimise energy usage.

Energy efficiency also comes with major cost savings for occupants as well as the environment.  

The challenge is that you cannot replace building stock very quickly. Buildings also vary widely in size, shape and usage so one size fit solutions will not work. This means that these solutions take a long time to implement.

Climate Forecasting and Modelling

The many satellites orbiting the world are constantly producing huge amounts of data about land use, weather and climate patterns of the world. This data can used by scientists to build ever more complex climate models. ML has been utilised to classify crop cover, pollutants and many other kinds of data.

Deep neural networks could be used to account for cloud cover, a major source of uncertainty in climate models. Clouds can block sunlight and trap heat but are difficult to account for in climate models. Deep neural networks (an extension of ML) can be used to simulate cloud behaviour which and learn over time to improve the accuracy. Putting more accurate cloud behaviour into climate models should make them more reliable.

ML can be used to make climate predictions at a local level. Knowing which areas are likely to flood or suffer more wildfires is valuable information for firms trying to map the climate risks to their assets.

For example, an agribusiness dependent on the land will be impacted by any shifts in long term rainfall, while flooding and extreme weather could also drastically alter the productivity of the land. Understanding and modelling future shifts in climate at a very granular level will help businesses adapt.

Forests and Farmland

Huge amounts of carbon cycle through the biomass of trees, soil, bogs and peatland. Thanks to unsustainable farming practices and deforestation along with intensive cattle and livestock farming around a quarter of all greenhouse gases are released through agriculture.

As the world heats tinder dry summers cause ever bigger forest fires and permafrost which release ever more greenhouse gases. Carbon release in agriculture is not only a major contributor to greenhouse emissions but also one of the most difficult to tackle given well established agricultural practices and growing demand for meat in much of the world.

ML along with satellite imagery can identify how much carbon is released from the ground and how much is held within forests and soil. This would make is easier to identify how to manage land to where regulations are being breached and to help governments avoid further carbon release.

ML can aid reforestation by ensuring that trees are planted efficiently – by locating planting sites and then analysing data about tree health and biodiversity. ML could also be utilised to predict the direction and speed of fires, allowing firefighters to decide where to fight and where to try and stop the spread of the fire.

Adaptation to a new Climate

A new era of climate change or Anthropocene will be one of rapid adaptation. Humans will have to quickly adapt to a new world of painful extremes. Navigating a world of devastating natural disasters, disappearing coastlines and blistering heat will mean a wholesale shift in how societies function. Current infrastructure and agricultural systems will buckle under the stresses of these changes and new ways of working and living will have to be rapidly improvised.  

ML will be a critical part of mapping and planning this new world. ML has applications from predicting disasters, to designing and maintaining new infrastructure. From monitoring ecosystems to detecting carbon release from soils and forests.

ML is not a replacement for the political and economic shifts that are required for a zero-carbon economy, but they represent a potent tool which can aid the policy decisions which drive reductions in carbon emissions.

ML could also be used to measure and coordinate individuals and groups to push for action on decarbonisation. By identifying and predicting how individuals or groups will react to changes like carbon taxes, governments can assess their impact prior to implementation. This could help avoid protests and strikes that could hold up meaningful climate action.

Speculative Technologies

ML could also assist some of the speculative technologies which have been proposed to tackle global heating. Carbon capture and storage would collect C02 direct from the air and store it in the ground. The technology has been trialled, but it is extremely costly and unproven at the scale required to make any difference. ML could help model and detect where the prime underground storage places for carbon might be.

Solar geoengineering is the idea that reducing solar radiation would cut temperatures on Earth and the impact of global heating. Proposals include cloud whitening, robot boats crossing the ocean, mirrors in space reflecting the sun. All of these proposals are speculative but as desperation about climate change grows the incentive and temptation to try these moonshot ideas will grow.

Machine Learning is far from a solution or silver bullet for global heating. Instead it represents a potent tool which can be deployed in many different approaches that can aid in the battle to mitigate and adapt to the climate era.

Geopolitical Aftershock: Climate Change and Commodities

Food security and the dangers of a hungry population are a major global risk and geopolitical flashpoint. Corn, rice, soy, coffee, copper, iron, nickel, crude oil, natural gas and propane are just a few of commodities traded in huge Supertanker sizes quantities across the world.

Commodity trading is worth billions a year and is a cornerstone of the global economy, the glue that connects farmers, miners to merchants, industrialists and refiners to consumers.

However, a sobering new report by the Commodity Futures Trading Commission highlighted the fact that financial markets are not recognising the risk that climate change poses to commodity trading. These risks could plunge commodity markets into chaos even if they are recognised.

Millions of people already suffer from food poverty and insecurity in India, Africa and Latin America, but even in the wealthy United States around 10 percent of households suffered food insecurity last year as the country experienced a sharp pandemic sparked recession.

Climate change over the next couple of decades will dry rivers, disrupt traditional weather and weather patterns such as monsoons. A warmer world means more wild fires, drought and sea level rise which will destroy coastal farmland and river deltas.

All this spells bad news for agriculture, climate change will decimate crop yields across the world while population is still predicted to be growing.

The FAO expects the global population to rise by 2 billion and food demand to grow by 60 percent by 2050. But by 2050 without drastic action catastrophic climate change will be ravaging agriculture.  

For example India, Vietnam and Thailand are the world’s premier rice exporters, a major drought in two or three of these places would see a major global rise in the price of rice.

As these effects take hold over the next decade and the realisation that agricultural produce is less secure, there will be a concerted effort to monitor and protect food sources so exports do not mean local people starve.

Food Nationalism

Food nationalism will take hold across the world as populations demand government’s prioritise local food chains. During the pandemic a number of countries put exports controls in place to ensure their own people got fed first. Export clampdown will in turn create further prices swings.

There are many ways which humans will combat these problems, many innovative solutions exist including:

  • Vertical farms growing crops inside away from the vagaries of weather, such Danish venture Nordic Harvest.
  • Growing more climate resilient crops which are better able to withstand heat and drought.
  • Farming and agricultural production could also be boosted through improved technology or by utilising more farmland

However these measures are unlikely to stop the full force of climate change, some crops such as rice and wheat cannot be grown at scale indoors and there is limit to resilience measures and how far crops can be adapted.  

Insecticides and pesticides are already decimating insect populations across the world and much of the world’s land is already severely degraded. Given so much land has already been put under the plough there is a limit to how much more can used.

The trade in metals and minerals are not immune to climate risks. It might appear that mining would be unaffected by climate change, but droughts, extreme weather and extreme heat could all make certain mining operations much more difficult. Mines that rely on regular water supplies could see those dry to a trickle.

Global Supply Chains

Global supply chains which bring these metals from deep inside the earth to be processed and sent onto to manufacturing plants in an intricate series of steps will be under more threat than ever before. Extreme weather events, flooding, greater incidence of disease and growing geopolitical tensions are just a few of the factors which those governing supply chains will be concerned about.

In geopolitical terms fluctuating commodity markets will create major price fluctuations and supply problems will push suppliers to look for more stable sources of commodities.

Crops and agricultural produce will be sourced from new more climatically suitable areas. So the South of England could become a major wine growing region while the Spain and Italy suffer as their crops suffer in excess heat. Innovative companies like Nordic Harvest could be big winners as the world turns to innovate climate friendly solutions.

Coffee Shortages

Countries most exposed to climate change – South Asia and Africa will suffer most acutely will also see the commodities such as coffee, chocolate, rice are likely to be hit hard.  Coffee the drink which powers people’s mornings in every corner of the world is a US$ 70 billion a year industry. Now warmer temperatures are encouraging the fungal diseases which are destroying crops.

Changes in rainfall patterns are also costing coffee growers, too much rain can make the fungal infections worse, too little and the crop will not grow. Adaptation is hard because of the unpredictability of rainfall and heat, if you invest in a drought resistant crop but then experience excessive rainfall and widespread fungal growth any resilience measures will be unhelpful. Right now customers are not feeling any change, but in time they could see prices rises and many varieties wiped out.

Instability and the effect of climate on commodities has not been priced in by global markets which means any correction could be painful and expensive. Investors are increasingly turning to risks assessment like the Task Force for Climate Related Climate Disclosures which attempt to measures a company’s climate risk exposure.

Commodity trader and suppliers will have to pay close attention to climate risks as they disrupt global markets over the next decades.

Taking the Long View: Climate Change and the Military

The new US Defence Secretary Lloyd Austin has declared that climate change would be recognised as a global risk and a major security threat. The contrast with the Trump administration which ignored climate change or actively took measures to make it worse could not be starker. Recognising the problem is the first step to addressing it. Unfortunately, climate change is a major systemic issue which cannot be wished away through policy changes.

Environmental and political groups have long made headlines about climate issues but much less noticed militaries around the world have also been expressing concern and quietly making plans. Climate change is not on its own going to make the world more violent. Instead, it is a threat multiplier, a changing climate will create the conditions that will result in a more dangerous world.

Sea Level Rise

Sea level rise threatens to start destroying many of the world coastal cities in 20 to 30 years time. Thousands of seaside settlements and millions of acres of farmland will be lost to the incoming sea. Migration will start from low level island states in the Pacific. This will be politically explosive as it will effectively mean countries disappearing under the sea and homeless migrants turning up to neighbouring countries.

But the real impact will be felt when megacities like Dhaka, Shanghai and Mumbai start losing their battles with the sea. While some metropolises may try building walls or other defences, ultimately the sea will be unstoppable.

This process is already underway in Jakarta. The wealthy and governments will flee inland or go the new capital planned for the neighbouring island of Borneo leaving the poor to suffer in decaying, drowning cities. The chaos and mass movement of people will cause conflict as people try move to different regions of their homeland or to cross borders in huge numbers creating social upheaval on terrifying scale.

Tensions will flare between newcomers and existing residents, rich and poor. To make matters worse tropical storms and extreme weather will increase in strength creating more disasters which will make living in coastal cities even more undesirable.

Military Installations

Military installations such as naval bases are also vulnerable to rising sea levels and extreme weather. These factors can overcome infrastructure built for different era. It will not have escaped the US Military Command’s attention that a wealthy well developed part of the country, Texas, was devastated by cold weather and snow. The Lone Star State ground to a halt in February 2021 with many losing power and water as result around 80 people died.

The US military has been trying to find ways to cut down on its massive fossil fuel consumption. More use of renewable energy and greater efficiency will cut the bill and reduce carbon emissions and cut energy bills.

Militaries around the world constantly develop scenarios which may occur and test their response. Most obviously this would be war with a rival, but militaries have to respond to many different situations.

All Hell Breaks Loose

One Scenario the Pentagon have imagined is the “All Hell Breaks Loose” where other countries are torn apart by conflict and extreme weather creating overlapping and never-ending disasters. At the same time the military are dealing with trying to provide relief efforts at home.

The US military’s own installations could be at risk. Naval bases are threatened by sea level rises and more frequent storms will mean installations have to be evacuated.

Competition for scarce resources such as water and food are also likely to cause conflict particularly in poorer countries and those with limited resources or that are already experiencing conflict. Covid has squeezed the price of food which has shot up along with many other commodities recently.

Prices will likely fall as the world eventually returns to normal. However, this could take a few years as the world readjusts after Covid which gives plenty of time for unrest or revolution to be encouraged by a hungry fed up population suddenly released from the bonds of Covid isolation. Some analysts linked the Arab Spring to dramatic food prices rises, while this may be simplistic, empty stomachs are a potent reminder of the poor governance and inequities suffered by many.

Food Security and Ethiopia

Covid disruption is one factor then the effects of climate change truly hit home the impacts will be much harsher. Rising temperatures in Africa and the Indian Sub-Continent are likely to reak havoc on agriculture.

Food security are already major concerns in these regions, climate change will make it far, far worse. For example coffee production in Ethiopia and maize growing in Mozambique could be disrupted by 2030 seeing a drop in yields from anywhere between 10 to 25 percent.

The widespread failure of crops will result in food shortages and famines but likely result in export bans which will cause food prices to shoot up across the world. This instability and chaos will put pressure on militaries who might be forced into action to try and stop large scale migrations, act as a humanitarian forces and intervening in conflicts.

Water Wars

As resources such as food and water become scarce, the potential for conflict increases. Egypt and Ethiopia recently came close to war over a dam the Ethiopians were building which threatened to cut the flow of water to the Nile.

Pakistan, India and China face potential conflict over the headwaters of the many rivers which flow from the “third pole” the Himalayas. When disappearing glaciers threaten the flow of the Brahmaputra, Ganges or Indus tensions between the countries facing existential threat could explode into war.

Militaries around the world are waking up to the reality of climate change and threats it poses. While they will not be the biggest advocates for change or mitigation around climate change they could be a group that effectively highlights the risks that a changing climate poses.

The Green Futures Index: How to Rate the World’s Climate Progress

If the world is to hit ambitious climate goals over the next ten years and avoid the worst effects of climate change, we need huge shifts in our economy. This means mass uptake of renewable energy, rapid decarbonization policies and the development of sustainable economies.

There are signs this is happening, the pandemic has seen the oil industry hit hard in 2020, losing 40% of their revenues due to a huge drop in demand. In turn this helped greenhouse emissions fall 7% (relative to 2019). But the fossil fuel industry still made US$ 1.5 trillion in revenues over the same period, five times total investment in renewables which indicates the scale and difficulty of transitioning to a sustainable, climate friendly economy.

At the same time there is an appetite for change across governments, the corporate sector and the public. But how should this progress be measured, the new MIT Sustainable Green Futures Index attempts to do just that. The Index rates 76 leading countries on their progress and ability towards building a low carbon future. The index measures countries across five pillars; carbon emissions, energy transition, green society, clean innovation, and climate policy.

It is probably no surprise that European countries dominate the top of the index with 15 of the first 20 places. Iceland is the leader, followed by Denmark – both countries renowned renewable energy and climate policy leaders.

Norway is third in the table thanks to measures such as leading the adoption of electric cars and rapid transition to a low emission economy. However, Norway remains a major oil exporter and contributor to other countries carbon emissions, which may be reflected in its poor score in the green society pillar.

The energy transition pillar was dominated by African countries; Ethiopia, Angola, Uganda and Cameroon are all leading a move to clean energy.

Much of the continent has seen rapid adoption of solar and wind energy. Ethiopia has been in the news thanks to its construction of its monster dam near Sudan and conflict in the Tigray region but its Green Climate Resilient Economic Strategy has been in place since 2011 and has led the way in promoting a clean future.

Morocco is also prominent in the Index as an African country which has pioneered clean innovation. Morocco made an early decisive shift toward renewables, lacking the oil or gas reserves of its neighbours (such as Algeria) it grasped the future with both hands.

Now the country is on track to have a 52% renewable energy share by 2030. The Moroccan Agency for Energy Efficiency has become a centre for expertise – it hopes it can promote and share expertise on renewable energy across Africa.

The green society pillar is driven by preserving the environment, recycling levels as well as meat and diary consumption. Singapore tops the pillar thanks to its advanced recycling program and low use of meat and dairy.

New Zealand despite being a high performer overall is last in this category thanks to its high meat consumption and lack of green buildings plus a poor recycling rate.

New Zealand does top the Climate Policy Pillar, which is the most important element contributing 40 percent of the total score. This pillar measures countries climate ambition as determined by the national determined contributions (NDCs), as well as the effectiveness of the policy frameworks that will deliver these targets.

Policy is also defined as the development of carbon pricing measures, sustainable agricultural policies and the so called “pandemic pivot” – in other words what do stimulus packages offer towards decarbonisation such green infrastructure and transition. Denmark and France excelled in this pillar. Denmark’s recovery program placed EUR 5 billion to make homes more energy efficient.

While each pillar can contain some interesting results, it is the overall index score which counts. There is no real surprise that the countries at the bottom of the chart are the so called climate abstainers.

These are typically fuel exporters like Saudi Arabia and Russia who have consistently blocked climate initiatives. We can probably expect these nations to delay meaningful change until it is too late.

Arguably the most critical countries are those which will drive global decarbonisation due the size of their economies and emissions. Right in the middle of the table (40th Place) is the US, it should and must improve this position under the new Biden Administration.

China sits just below the US at number 46. While the country is a leader in renewable technology it also remains heavily dependent on coal. But China should now feel the pressure from the US to up its climate game.

India is perhaps surprisingly just outside the green leaders at 21 in the table overall given its high carbon emissions, but it partly makes up for this thanks to its rapid uptake of renewable energy, primarily vegetarian diet and ambitious climate policy.

The Green Futures Index will help judge the relative performance of nations in the drive to decarbonise and develop sustainable economies. In time the Index could become a well known benchmark like the World Bank’s Doing Business Survey.

Decarbonisation and sustainability will become a growing factor in judging whether to invest or even broker alliances with other nations (climate diplomacy). As the world faces climate breakdown understanding who the laggards and the heroes are will be ever more critical.

Climate Risk: A New Frontier for the Corporate Sector

For millennia climatic factors have threatened humans. Farmers have been at the mercy of droughts, storms and floods. Harsh climates such as rainforests, deserts and tundra have shaped human development forcing people to move or adapt.

The modern world appeared to offer some deliverance from harsh climatic conditions. People can build huge cities in the desert or snow thanks to central heating, air conditioning and modern technology. Infrastructure can now be built to withstand extreme weather and technology such as early warning systems can effectively assist in managing disasters.

But now the steady but certain onset of climate change has changed these old assumptions. The world’s rapidly changing climate throws up a host of new risks and uncertainties. Climate change can be understood as a giant lens, which magnifies existing risks making them more frequent and more deadly.

Hurricanes have always posed a threat to humans, climate change will make them stronger and more regular.  The deadly effects of droughts have been around for millennia, but climate change and overuse of water supplies is already shrinking places like Lake Chad, the Aral Sea and many other lakes and rivers.

Rising sea levels will drown mega cities like Jakarta, Mumbai and Shanghai. Despite billions being spent on sea defences, the sea will eventually simply overwhelm urban areas, forcing people inland. The destruction of so much infrastructure will dwarf previous economic losses.

Climate risk is the impact of the environment on humans. For many years we have been concerned with our impact on the environment and infrastructure, pollution and all the other activities of humans will damage the environment. The world’s fast changing climate over the next few decades will make profound changes to our existence.

Climate Risks

  • Higher sea levels as ice sheets melt and oceans warm.
  • Stronger and more frequent cyclones, typhoons, and extreme weather.
  • Drought and famine, higher temperatures & lack of rain will result in mass crops failure.
  • More deadly wildfires, with higher temperatures and drier weather this provides the conditions for fire.
  • Flooding, this seems to be in contradiction with drought, but more unpredictable and sudden heavy rainfall is likely, creating the conditions for devastating floods.

Organisations must now face up to climate change and act to preserve the planet as well as their themselves.

Below I explain climate risk and how it will impact businesses and organisations. I look at how the Task for Climate related Financial Disclosures (TFCD) framework can help banks and other organisations identify how they will be hit by climates risk.

Topping the Global Risk Charts

Authoritative think tanks such as the World Economic Forum placed climate related risks in the top four places of the top ten risks in their landmark 2021 global risk report.

Extreme weather, failure on climate action, natural disaster and biodiversity loss were selected by respondents as the key long-term risks facing the world.

For both businesses and individual’s climate change is often viewed a slow burn threat that always appears to be in the future and that will happen to someone else. Some detractors claim that organisations will be able to adapt to the new conditions.

Companies that fail to act on climate change will face a major backlash from investors, the public and consumers.

Firm’s emissions and supply chains will be identified in close detail for risk. Labels that detail the carbon footprint of products like food labels measure sugar and fat could become a feature of new products.

Companies still require consistent, reliable data on climate risk to finance climate resilient projects and to price climate risks correctly. There are also opportunities for firms that act to identify climate risks. These firms can gain advantages over rivals and pre-empt many threats and even offer products and services for a decarbonising world which faces huge unprecedented threats.

How Climate Risks will materialise

Shrinking ice sheets in the Arctic, Antarctica and the “third pole” the Himalayas where glaciers are melting. Shrinking glaciers in the Himalayas endanger the two billion people that rely on the glacier fed rivers. The melt of the glaciers will reduce the flow of the rivers cutting available water for agriculture and for dams.

The result will be a crash in agricultural productivity and in heavily agricultural economies like India and Bangladesh, as well as much of sub-Saharan Africa this will lead to widespread social unrest, migration and political anger.

The shrinking of ice sheets in the poles will feed sea level rises. Many of the world’s mega cities have exploded in size but will with little thought or preparation towards changes in sea levels.

Shanghai, Karachi, Dhaka, Miami are just a few of many cities threatened by rising seas. Jakarta the already sinking into the sea and the Indonesian government are looking at moving the nation’s capital to a new purpose-built city.

The Risk Multiplier

None of these risks are new, humans have dealt with them for millennia, but climate is best viewed as risk multiplier. It will increase the number and size of these climatic risks.

How far and fast climate risk will impact us is partly down to how fast humans can stop carbon emissions and therefore runaway climate change. Right now, there are signs that mitigation efforts or decarbonisation are taking hold.

Renewable energy continues to fall in cost and investment in the sector continues to grow. But the oil and gas sector’s hold over the energy sector is strong and modern economies remain wedded to oil, at least for now.

The increase in global temperature appears to be minor, ranging between 1.5 C to 4 C. However, it is important to consider this is an average and many critical areas (such as the Antarctica) warming much faster than the average. Even small temperature changes can lead to a catastrophic impact.

The effects of climate risk can be non-linear, so a 1 C temperature increase may reduce crop yields by 5%, but a further 1 C increase in temperature may see a dramatic fall in yields.

However, there are other emitters of greenhouse gases such as agriculture (particularly cows), deforestation and transport. It will take major political change and technological advancement to decarbonise these sectors.

Even if carbon emissions stop or peak now, we will all face unprecedented climate change and all the devastation that goes with that. The longer carbon emissions continue, the worse the risks we will face.

How Should Companies Act?

For companies it means two things: First they need to do more to reduce their own emissions which is the central plank of the 2015 Paris Agreement. Reducing emissions will mitigate climate change slowing the rate at which climate changes.

Secondly: Organisations need to consider their own exposure to climate change. The impacts described above will affect entire societies but will also hit companies and organisations in a variety of different ways.

Climate risk is fast growing discipline. The Intergovernmental Panel on Climate Change (IPCC) outlined many of the climate risks faced by world in various reports.

The Task Force on Climate Related Financial Risks (TCFD) was created in 2017 to create a framework for banks to assess the climate risks they face. Above all the TCFD was set up to make banks realise that climate is a financial risk. Companies and banks could lose billions if they fail to take climate risks seriously.

For manufacturers considering their investments, existing factories will be emitting carbon in 10, 20, or 30 years’ time, Decisions need to made now to cut emissions or companies will be left with outdated infrastructure designed for a fossil fuel world.

Planning new investments and projects should be viewed in the context of changing climate. When water shortages, desertification and sea levels rise become the norm, companies need to adapt to this reality. Within a decade all major companies will report on climate risks.

Climate risk will intensify and compound existing threats and twisting them into tangible threats. Climate risk can broadly split into two areas: Physical climate risk and transition risk.

What are the Hurdles?

Climate risk is making waves in the corporate sector leading firms scour their portfolios for climate related risk. It has taken a time for organisations to understand, accept and implement the principles.

For many businesses’ climate risks are too far in the future, are too uncertain, others many feel they can mitigate against the risks. For most businesses planning 2,3 or 4 years ahead is the norm.

Beyond that time frame risks become too abstract and difficult to predict. Companies are often dealing with a raft of urgent issues so the problem of climate change can seem distant and unimportant.

Applying the TCFD

How can my firm discover its climate risks ?

Financial organisations can apply the TCFD principles, in practice this is difficult, given it is such a new set of principles in a new area of risk. But over time its application will become easier as firms become more experienced and skilled at applying the principles.

How does the TFCD work?  

The TCFD was driven by Mike Bloomberg, founder of the financial information firm and ex-Mayor of New York.  The framework is a set of recommendations and principles which will allow organisations to understand and measure the concentrations of carbon related assets in portfolios and the financial sectors exposure to climate risks.

Many banks and financial institutions have signed up to the principles. However, it is not yet clear how it will work in practice. Whether there will be a unified approach and standardisation or will organisation diverge and use their own approaches.

The TCFD process includes a disclosure of climate related risks. They should be adoptable by all financial organisations, which will provide useful forward-looking information, will focus on the risks and opportunities related to a low carbon economy and that recommendations should have a financial impact.

There are four pillars:

Governance

Disclosures around climate related risks including the role of management and the board.

Strategy

This should disclose the actual and potential impact of climate related risk and opportunity. Describe the impact on climate risk on the organisation’s strategy, financial planning and overall resilience.

Risk Management

This should identify the organisation’s processes for identifying and assessing climate related risks. It should also describe how these are integrated into overall risk management.

Metrics and Targets

This should disclose the metrics used by the organisation to measure climate risk. Disclose scope 1,2 and 3 greenhouse emissions and describe the targets used to manage climate risks as performance against these targets.

Scenario Planning

The TCFD also recommends scenario analysis, this provides the “what if” analysis which can help a firm tease out what might happen in a significantly warmer world, or one where there is rapid transition. Scenarios are not predictions, but rather a plausible narrative of what might realistically occur.

Physical Climate Risk

Climate change is predicted to result in more extreme weather, rain, typhoons, as well as longer term conditions such drought, flooding and sea level rise. None of these things are new, but what will change is the intensity of impact.

The devastation caused by these changes will result in political instability, economic damage and migration as people move in search of better conditions. This can be internally or across borders. Although poorer less resilient countries will be hit harder, more developed cities such as Shanghai, New York and Hong Kong will be under threat from sea level rise.

Water stress could spark conflict in places such as North Africa and Iraq. As droughts and water shortages become more common, problems with food supply and production will result.

Drought, water shortages and crop failures are as old as time, but the speed at which they happen will be shocking. Mass migration started by long term collapse of countries especially in the Middle East, Africa and South Asia will send millions of people in search of food.

Physical climate risks can be divided into two types, acute and chronic:

Acute physical climate risks:

  • Extreme heat/heatwave
  • Flood
  • Drought

Chronic Risks

  • Higher long term temperatures
  • Lower rainfall
  • Drier climate

Some examples of physical climate risks impact on businesses:

  • Supply chain interruption and damage from extreme weather
  • Higher insurance costs due to high risk of assets being damaged
  • The recommendations should lead companies to be able to identify what assets in their portfolio are threatened by climate risks. For example:
  • A power plant which relies on rivers and streams for cooling may find that if the river dries up and the average temperature rises the cooling system does not work and the factory is untenable.  
  • Rising sea levels will mean many ports are unusable as the ocean engulfs the infrastructure due to rising sea levels, any new infrastructure should take this into account.
  • For an agribusiness reliant on food products, more frequent droughts will reduce crop yields making the business less profitable.
  • Along with physical climate risk there so called second order impacts meaning that one impact will result in further often unpredictable events and impacts:

Some examples of second order impacts:

  • Droughts and famines will result in millions of migrants as marginal land in hot countries becomes arid wasteland.
  • Many coastal towns, cities and communities become untenable due to sea level rise and flooding (Florida & Jakarta for example).
  • Poorer more vulnerable communities/countries will be hit hardest as they have fewer resources, and less ability to adapt to a changing climate.
  • Ecosystem collapse which will result in fish or food supply failure.
  • Communities in hurricane zones are devastated with ever more frequency making their existence untenable.
  • Crop failures due to a failure of rains, excess heat or even pests (able to breed faster due to increased temperatures) could result in shifts in the food chain, food price increases for some and starvation for others.
  • Epidemics – rising temperatures will make it easier for disease to spread, making the spread of viruses and diseases more likely.

Transition Risk

Transition risk is the threat that policy shifts around climate change will result in losses for companies and banks. As economies decarbonise to mitigate against climate change, what is the risk to your firm. Germany closing its coal plants is a transition risk for the owners of the coal plant.

In oil dependent countries like Saudi Arabia the risk is probably lower as the government will stick with fossil fuels for longer. But energy is not the only sector at risk, changes in technology are also a factor.

The move from petrol cars to electric will see many car companies change production models. However, not all will be successful and doubtless go bankrupt. This shift is already visible, Tesla which makes exclusively electric vehicles is the world’s most valuable car manufacturer by market capitalisation.

Other disruptions could be the move towards vegan diets which is already threatening meat processors and farmers. Other shifts driven by social change could be tricky to predict but could include a widespread boycott against flying or at least people cutting back on flying (the covid pandemic could accelerate this by making remote meetings the norm).

Somee examples of transition risk are:

  • Early write of equipment due to policy changes
  • Increased compliance costs due changes in law and policy
  • Falling demand for carbon intensive products
  • Increasing costs due to rising input prices in water, fuel and other raw materials

Disorderly Transition

Transition can be orderly or disorderly. An orderly transition is a well-planned decarbonisation of the economy with the broad backing of society, government, and the private sector. Germany is a good example, the government has steadily shifted its power production towards renewable energy.

Disorderly transitions will be seen where countries that have stuck with fossil fuel dependent economies.The country is then faced with a need to decarbonise very quickly to meet obligations under the Paris Agreement, national legislation, or peer pressure from other countries.

This could well translate into geopolitical risk as sectors of the economy such as coal mining are threatened and unable to adapt, they collapse resulting in energy shortages.  

Geopolitical Risk and disorderly transition

Countries that fail to meet decarbonisation objectives will be put under pressure by those countries that have achieved their goals. As climate risks intensify, the political pressure on the worse greenhouse gas emitters will grow. Naturally a blame game will emerge where developing countries will accuse developed ones of carbon debts and hypocrisy.

This could escalate as the carbon sinners; countries that continue with deforestation or expanding fossil fuels use and those who have decarbonised. As climate risks engulf the globe the pressure on sinners will become acute.

Already politicians and others launch political attacks on Bolsonaro and Trump due to their lack of environmental credentials. While Trump could afford to largely ignore them, Brazil faces its trade deal with the EU being derailed thanks to disregard of the environment.  

Climate Risk Analysis

Climate risk means each organisation will analyse their assets for physical and transition risks. This can be a time consuming process using climate models or policy analysis to identify risks, but also taking into account time scales and the criticality of asset locations. Assets with a short tenor do not pose so much of a risk, whereas those with a 20-year life span are far more likely to be impacted.

Locations such as distribution hubs or HQs are likely more critical to companies’ operations than a small branch office. Therefore these key locations should be analysed for climate risk ahead of less critical locations.

Eventually organisations should analyse their assets for exposure of both physical and transition risk and quantify that in their financial statements. For many this will involve a painful and frank analysis of their company. For those will heavy exposure to climate risks – this could involve major losses or at least a reduction in the value of the firm.

The key objective of the TCFD is to ensure that banks avoid investing in assets with climate risk.

The TCFD outlines some key principles for effective disclosures.

Principles for Effective Disclosures

1 Disclosures should represent relevant information.

2 Disclosures should be specific and complete.

3 Disclosures should be clear, balanced, and understandable.

4 Disclosures should be consistent over time.

5 Disclosures should be comparable among companies within a sector, industry, or portfolio.

6 Disclosures should be reliable, verifiable, and objective.

7 Disclosures should be provided on a timely basis.

Climate Opportunities

Climate risk is a significant risk for companies and the analysis should consider and mitigate against these risks. For the most resilient and nimble firms there will be opportunities.

Adaptation measures

Some countries and regions may see benefits, such as wine growers in the South of England to Russian farmers who may enjoy longer warmer growing seasons. While overall the risks of climate change will outweigh the benefits, there will be advantages for some.

Resource efficiency

By reducing the amount of material or energy used in production and distribution processes companies can save a great deal of money, as well as curb emissions. Innovative ideas such as using electric vehicles, retrofitting buildings, embedding circular economy ideas, introducing LED lighting can all assist the transition to a low carbon future.

Products and Services

By offering low carbon products and services companies can enhance their competitive position against rivals. Any product that reduces emissions whether this is because of local production, low energy consumption or reduced materials has the potential to be attractive to consumers who increasingly favour goods that do not damage the environment.

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