Katherine Gorman (00:07):
You are listening to Climate Now. I’m Katherine Gorman.
James Lawler (00:09):
And I’m James Lawler. And in this episode, we’ll be discussing climate-related financial risk. That is evaluating how properties and assets that are owned by a company or organization might be affected by climate change, and putting dollar signs on the projected risk to these assets in the coming decades. We will cover how this risk is quantified, and what is driving the increasing demand for services that assess climate-related financial risk.
Katherine Gorman (00:34):
Our guest expert today is Tory Grieves, vice president of analytics at the Climate Service, a software company providing a risk analysis platform for companies, financial institutions, real estate investors, and communities to assess their climate financial risk. Tory, thank you so much for taking the time to join us. We’re really excited to have you.
Tory Grieves (00:53):
Oh, thanks so much, Katherine and James, it’s my pleasure to be here.
Katherine Gorman (00:57):
So, it seems like a pretty specialized corner of the world. Can you tell us how you got where you are today?
Tory Grieves (01:02):
Well, climate risk certainly is a specialized corner of the world, and I’m lucky to do this work in a special corner of the world too, which is Asheville, North Carolina. So it is, I think, like a lot of fun career stories filled with serendipity of how I got here. Coming out of undergrad, I did an environmental studies degree at Hamilton College, then worked as an environmental consultant. I also worked in international development for a time in Nepal, and throughout those experiences, I became really interested in better understanding how to engage the private sector as a partner in environmental conservation, as opposed to the potential adversary that it seems like, particularly in the nonprofit space, it was just a lot of struggle. And I just started to kind of change my own perspective of how I could be a most effective agent of change. So that inspired me to go to the Yale School of Management and to pursue an MBA.
Tory Grieves (02:01):
And also the Yale School, now School of the Environment, where I did a master of Environmental Management, and I was really interested in social entrepreneurship and impact investing, just really finding those market-based solutions to environmental challenges. And I first got a job out of school working for the Collider, which is an organization that was accelerating climate data analytics startups kind of leveraging this wealth of climate and weather data that exists in Asheville, and trying to develop solutions for the private sector, finding ways to democratize access to that information because it tends to be more, more technical… requires a certain level of expertise to access. And it was through that, the Collider, that accelerator, that I met James McMahon, who is our CEO and co-founder of The Climate Service. And they were quantifying climate risk in financial terms, which seemed like a great way to leverage everything I’ve learned in my MBA program with knowledge of environmental science, and that all just happened. And that was in 2019.
James Lawler (03:07):
Can you tell us where that vision came from? What was the motivation behind creating a company that quantifies climate risk?
Tory Grieves (03:13):
Yeah. So in addition to James, Dr. Terry Thompson, is our other co-founder, and both James and Terry were working kind of as consultants for NOAA in the climate data space at the time. And TCFD, the Taskforce on Climate-Related Financial Disclosures, was formed in 2015. They came out with their first recommendations in 2017. That was around the time that James and Terry said, well, now there’s this whole group that’s really focusing on climate-related financial risk, and I think they just were kind of visionary in seeing that there was going to be a huge groundswell of demand for this kind of analytical information. So yeah, they set up the company, I believe it was 2018. And I started when we were about four or five people in 2019. And we’ve been off to the races ever since.
Katherine Gorman (04:00):
Can you actually give us a brief explanation of the TCFD? It sounds like they play a huge role in the climate risk space, but I just want to make sure that we’re actually clear on what they do.
Tory Grieves (04:11):
TCFD, Taskforce for Climate-Related Financial Disclosures was established in 2015 by the Financial Stability Board. It’s chaired by Michael Bloomberg, and there are 30 some odd, I think, institutional members ranging from big corporations to investment managers. And I think they primarily serve as an advisory role to make sure that those recommendations are salient and decision-relevant, things like that. The first set of recommendations was released in 2017, really with the goal of increasing transparency around climate-related risks to inform better decision-making around investing decisions, underwriting decisions, just to really highlight climate-related financial risks, and also provide a means for companies and investors to sort of have at least a semi-standardized way to be reporting on these risks, and assessing them because climate-related risk is such a new topic that I think it was really helpful for them to establish a starting point at least to say, here’s some things you should consider if, you know, that we’re suggesting you consider when you’re thinking about assessing climate-related risk and also disclosing it.
Katherine Gorman (05:20):
So tell us about The Climate Service. How is it different from other companies that do this kind of risk assessment?
Tory Grieves (05:25):
Yeah, so The Climate Service, or TCS as we’re known, is a climate risk analytics startup, and there are a number of others out there, not a ton, but it’s still a pretty niche space. But what really sets us apart is first and foremost, that we quantify risk in financial terms. So some other climate risk providers out there will sort of stop at the hazard exposure level. So they’ll give you a sort of a coastal flooding risk score, 0 to 100, or a drought risk score. And that, for us, is the first step of what we do, but we take it two additional steps which is that we characterize vulnerability and ultimately quantify risk. And for us, that was really core to our foundation as a company, again, kind of intertwined with the TCFD because we know that people, particularly in the private sector, decision-makers make decisions based on, you know, financial cost-benefit analysis, quantifying climate challenges into financial terms is one of the best ways that you can make that information actionable and decision-relevant. So that’s one of the main things that sets us apart from some of the others.
James Lawler (06:36):
Tori, what’s the demand like right now, when it comes to companies seeking to assess their climate risk in financial terms, how many companies are you at TCS working with at the moment, and how has demand grown since you’ve been there?
Tory Grieves (06:49):
So in 2019, I would say we had a handful of really visionary companies primarily that we worked with, some investment managers as well, who started to take climate seriously in the early days. But we were sort of like, please pay us to do this work. This is valuable. But the use case and the value, I think, wasn’t really super clear even in 2019. Well, fast forward two years, here we are in 2021, you have the central bank in the UK making TCFD disclosure mandatory by 2025 across the entire economy. So there has been a lot of change even just in the two years since I’ve been working at TCS. We now work with dozens of the world’s largest companies, investors with trillions of dollars of assets under management. We work with some of the major pension funds in the world, and the demand has really been going through the roof.
James Lawler (07:46):
Not surprising. I mean, it seems like you’re already working with some of these, you know, major entities and your doors will be flooded not to use too corny, sorry. (Laughter)
Client risk instead of climate risk.
Right. Well, it’s certainly an exciting moment in the development of the company, isn’t it?
Tory Grieves (08:10):
Yeah, that’s absolutely true. And you know, I’ve talked to a few undergraduate classes, grad school classes. I keep saying that anyone’s looking for a job. I highly recommend the climate risk space.
James Lawler (08:21):
Can you add, and do you know Excel?
Tory Grieves (08:27):
Exactly. I mean, truly we are at the intersection of climate science, which is in and of itself its own beast, requires a lot of not only technical know-how, but also just big data analysis skills. We’re talking about just huge amounts of data. We project climate risk now through 2100. So that’s a lot of data to be managing across different emissions scenarios. Then there’s the whole financial quantification. And that really takes an understanding of, you know, everything from corporate finance to credit risk analysis, and then interpreting that information and helping customers sort of think through some of the elements of their risk management strategies is a whole other component. So there is room for a lot of different skill sets in this area, and it’s growing like crazy. And I think it’s really inspiring because it’s an opportunity to really drive change towards the transition to a low carbon economy, and a just transition as well.
Katherine Gorman (09:25):
So I have a pretty basic question: how do you actually do it? I mean, how do you measure the risk that someone is exposed to? Is there a systematic or a standardized approach that every risk assessment provider uses?
Tory Grieves (09:39):
Yeah, so I think the two interesting things that we could touch on here. First is the guidelines of how to do this analysis, which the TCFD has been the foremost framework and organization that’s been driving the guidelines in this area. However, there still is quite a bit of lack of standardization, so as you said, Katherine, you could go to different providers, and get a different sort of approach to this analysis. But let me paint the scene of how we do this at TCS, because this is what I and my team work on day in, day out. So for us, if we’re thinking about assessing climate risk, I think of a holistic assessment as kind of three primary components, which would be first measuring your climate-related risk, thinking about how to manage that risk, and thinking about how to disclose that risk. We at TCS specialized in climate risk measurement.
Tory Grieves (10:37):
And for us, as I mentioned previously, measurement is comprised of three main components: the hazard modeling, vulnerability modeling, and ultimately financial risk quantification. So maybe I’ll walk you through a physical risk assessment for a company because I think that’s one of the best kind of most straightforward examples. So if we’re working with a corporate client, let’s just say, for example, we’re working with Google, we at TCS do a bottom-up analysis of climate risk. So if we’re working with a company, we ingest data firstly about where all of their operational assets are located, where Google’s offices are located all around the world, where their data centers are located all around the world. If we’re working with an oil and gas company, it would be looking at where their refineries and pipelines and offices and all those different types of assets are located, down to latitude, longitude, elevation.
Tory Grieves (11:30):
Then what we do is also consider the asset type. And this is that vulnerability component of if we’re assessing in a given location, that data center or that office, and that’s important because at any given location, you know, we’re pulling from 21 different global circulation models, or GCMs, the daily temperature and data, and translating that into a drought metric, a wildfire metric, we cover seven different physical hazards, coastal flooding, fluvial flooding, et cetera. The vulnerability of a data center to something like water stress, is going to look different than it does for an office because data centers are water-intensive assets. They’re going to be more vulnerable to water stress conditions than an office building, and that financial materiality mapping of, okay, we’re going to see potentially some business interruption for that data center. That’s how we ultimately get to the financial quantification. So our customers also provide us with a value for each of those assets, and we do some calculations on our end with the vulnerability to ultimately say output of figure of modeled average annual loss for each decade now through 2100 under different emission scenarios.
Tory Grieves (12:35):
We currently have RCP 8.5, which is the higher emission scenario that is saying we’re expecting a higher level of radiative forcing by the end of the century, due to anthropogenic greenhouse gas emissions, versus RCP 4.5, which is a lower emission scenario. We would expect less of that radiative forcing, and that affects those physical climate models because we see increased frequency and intensity of high temperatures, droughts, floods when we have more radiative forcing in the atmosphere and all of this is done through our Climanomics platform. So we have a pretty slick interface online that our customers then interact with, which allows them to aggregate that risk up to let’s say, business unit level or corporate level, but then drill all the way down until looking at that individual data center or office and seeing how everything is stacking up side by side.
James Lawler (13:37):
So you take property assets and analyze them against these various emissions scenarios, what about supply chains? You know, the risk that climate will disrupt the flow of goods and the ability to produce goods that are essential to companies making what they make. I imagine that would be much, much harder, but is that part of your calculus?
Tory Grieves (13:58):
When we work directly with a company, we have done some supply chain analyses for, for example, a large food and beverage company where they provided us data for all their suppliers and we have assessed the risk to them. The transport networks can be pretty tricky. We do assess the risk of, you know, railroads and roads as well. And to really get the full supply chain view, you would have to sort of account for both where the goods are created, or grown or manufactured, and then also those transportation routes, but all of that is doable from a climate risk perspective as well.
James Lawler (14:33):
Could you clarify how you take these emission scenarios and then create the assessment of the likelihood that some kind of destructive event will occur, like how does that math work?
Tory Grieves (14:44):
That process does vary depending on which hazard we’re talking about. So for something like drought, as mentioned, in terms of the atmospheric data that’s coming from the global circulation models, the primary variables we’re getting are daily temperature and precipitation data for the different emission scenarios now through 2100. From temperature and precipitation for drought, for example, we’re calculating something that’s known as the Palmer Drought Severity Index, and then assessing for any given location, what are the really likely conditions that you would have a severe drought based on that Palmer Drought Severity Index. And then we’re calculating the annual frequency of you having those really intense droughts. And so the annual probability of that based on those temperature and precipitation variables tends to increase over time, especially under the higher emission scenario. The atmospheric ones are a little bit more straightforward, for something like a tropical cyclone, we actually have our own simulation model because there, the increase in temperature that we experience in a generation zone of a hurricane in the Atlantic coast of the US, for example, we have to translate that to sea surface temperature increase, and then run simulation models to say, if the sea surface temperature is increasing by a certain amount in that hurricane generation zone, what is then likely to happen not only to the frequency of storms and the intensity of those storms, but also the tracks.
Tory Grieves (16:11):
And what’s really interesting is that we see over time that those variables are likely going to affect the paths that storms take over time. So some areas might actually see slightly fewer tropical cyclones, but others might see increased frequency.
Katherine Gorman (16:26):
Okay. So clearly in the emission scenarios that you’re using, temperature is increasing with time, and presumably, so are the risks associated with these climate-controlled hazards? Do your analyses put things in terms of timescales? Are you doing any sort of estimation around when these catastrophic losses or events might occur?
Tory Grieves (16:47):
Yeah. So for us, there is a time series element. So we project out and model out to 2100 on sort of a decadal basis. So we have average annual losses for the 2020s, 2030s, 2040s, et cetera. And that’s really important to allow our customers to understand when certain spikes and risks or certain magnitude of losses is expected. One example, there would be for real estate investors, you know, they have their holding period, and then there’s typically an assumption that in 10 or so years, you’re going to be able to sell that asset or that property for a particular price. Well, if we happen to see that there’s a huge spike in coastal flooding risks, which we tend to see around the 2040s in a lot of locations, or 2050s under the higher emission scenario. Now it’s 2021, so we see, okay, your holding period might be okay, but your potential buyers holding period is now looking dicey. And the price that your buyer might be willing to pay for your property might be in jeopardy or might be reduced because they’ll be looking out, you know, 10 years or 20 years at their levels of risk. So time is a really, really important decision-relevant variable.
James Lawler (18:04):
Can I ask a question related to that? Like what about banks and lenders, those who have provided funds to purchase assets in various places and have all kinds of loans floating around. Have you done any work for these organizations in providing an assessment of risk on those assets?
Tory Grieves (18:19):
Yeah, we are. We’re starting to eat more and more. We’ve had a lot of conversations with banks and there is a lot of interest, particularly around mortgages. You could think about, you know, residential mortgages, commercial mortgages, anything really tied strongly to physical assets, regional banks, and regional risk too, because that physical climate risk tends to be more concentrated rather than diversified over a large area. So we have been having a lot of those conversations. The banking world has also been undertaking a lot of movement on climate risk with the NGFS, Network for Greening the Financial System. And they’ve been doing a lot of work on stress testing exercises for banks. As mentioned, the central banks like that in the UK have become really active on climate risk in some countries, Australia, Japan as well. So there is increasing attention being paid to banks. And one thing that we’ve been doing at TCS has been expanding our capability from real assets and real estate, which is where we started, to moving more into financial instruments, like listed equities analysis, corporate bonds, sovereign bonds, et cetera, because banks, investment managers, anyone, pension funds, those who are invested in a lot of different asset classes are now saying, oh, we need this climate risk analysis across everything we hold.
Tory Grieves (19:44):
And on the transition risk side, you know, financed emissions, there’s a whole conversation going on about not only your operational emissions but also those that you finance. So there’s a lot going on in the banking world as well, for sure.
James Lawler (19:57):
So Tory, we’ve had a great conversation here so far about what it is you’re doing and, and how you go about it. I’d love to shift the focus a little bit and talk about why this is important work. Can you discuss why there is a need for this kind of assessment? Is there nothing already established at the corporate level that is accounting for this risk?
Tory Grieves (20:14):
Yeah, and I think that is a really great anecdote that to get to the heart of why I think climate risk analysis is so critical and important, which is that, so in climate risk, this is actually a point I probably should have made at the outset, which is that climate risk is really comprised of two main categories. There’s physical risk from things like coastal flood wildfire, et cetera, and then transition risk associated with the transition to a low carbon economy. Both of those risks are essentially unpriced in financial markets today and are unpriced in real estate markets. And this is a huge issue. Not because I care tremendously about the return on investment that any big bank is getting, but that anyone who is managing funds on behalf of let’s say, you know, retirement savings, or I think a lot about the pension funds that we work with.
Tory Grieves (21:10):
These are teachers, these are people who’ve worked their entire lives. And I get very concerned thinking about the kind of financial crisis that we could be headed for if we see, as I do every day, the magnitude of the risk that’s increasing and the lack of pricing it that’s happening, and that historically doesn’t work well with financial markets. So I think it’s really critical. I also think secondarily, one thing that I appreciate about physical risk analysis is that I think it’s often easier to comprehend the costs that are associated with a transition to a low carbon economy because we know that there are changes we have to make in terms of getting out of oil and gas, for example, investing more in renewable energy. If you’re a business, this might mean changing your business model. There are costs associated with the transition to a low carbon economy, but there are also costs associated with not transitioning.
Tory Grieves (22:11):
And those come in the physical risk category. You know, there’s been one degree of warming today from pre-industrial levels already. We’re seeing the effects of climate change in the increased frequency and intensity of events as mentioned before, that has real financial impacts on people today. And those are only going to continue increasing if we continue warming the Earth’s atmosphere at the rate we are, or even more so. There’s a cost associated with not reducing our greenhouse gas emissions, and I think that it’s really important for us to quantify that risk and be aware of it.
Katherine Gorman (22:49):
That makes a lot of sense. And particularly, I’m thinking about this awareness, you mentioned earlier that an aspect of this risk assessment is disclosure, and I guess sharing the findings of an organization’s individual assessment. Can you talk a little bit more about the idea of disclosure? Why is it important to disclose these risks, and who are the companies even disclosing to?
Tory Grieves (23:10):
Yeah, so I think disclosure is really important for the same reason that we expect and require publicly listed companies to disclose their financial statements, their 10 Ks, we expect and require nonprofit organizations to issue their financials through nine nineties. It’s so that there’s accountability and transparency for all other actors in the economy who might be investing in those companies, who might be managing finances on behalf of someone else, investment managers, pension funds, et cetera, to really be fulfilling their fiduciary duty and understanding what the climate risk is of those companies that they may be invested in. I think it also encourages just accountability across the board. It’s one thing to say that, you know, you’re TCFD aligned, you’re taking climate risks seriously. It’s another thing for you to report what your climate related financial risk is, and then also be accountable to a plan to address that risk.
Tory Grieves (24:11):
So I think that disclosure is important for those reasons, just to have those, you know, primarily transparency and accountability. I believe that, you know, we haven’t seen that many required TCFD reports yet that the sort of mandatory requirements are coming. So I think to whom will be specified a little more clearly, I’ve seen some that are just published, you know, online as financial statements would be our sustainability reports. Oftentimes, there’s a section in a sustainability report that will be publicly available that has the TCFD sort of section to it. To date a lot of them have been qualitative and not super strict. So I think that that’s something that we’ll see increasingly.
James Lawler (24:53):
So if the regulatory pressure to disclose this kind of information is not there yet, what’s driving your clients to do the work and seek out these analyses?
Tory Grieves (25:02):
So, I think on the one hand, like those really early customers that we had at TCS back in 2019, I do think there’s a growing number of companies and investment managers, asset owners, who are seeing, you know, things like the devastating California wildfires that we’ve had in recent years, or seeing the increased frequency of devastating hurricanes that we’ve experienced on the east coast of the US, and are feeling the financial impacts of those events year after year and just, or seeing their peers dealing with those, and awakening to the fact that these are climate related events that are financially material, and they’re increasing in frequency and magnitude generally speaking across the board. So some companies I think are really taking a strategic approach where they’re saying – we want to get ahead of this curve. We want to make proactive, strategic, and risk management decisions to address climate related risks.
Tory Grieves (26:03):
And it also, there can be a first mover advantage too, you know, to get out ahead of the curve, adapt your supply chains, adapt your operations, get ahead of your peers, so to speak, and have a little bit more of a competitive advantage in that respect. On the other hand, we do see, like the, increasing regulations or requirements that are coming out. I’ve also heard a lot of corporate customers coming to us now saying our investors are asking us about this and we need to have an answer. So investor pressure is also a key driver.
James Lawler (26:35):
Do you imagine that there’ll be some kind of tipping point where you guys go from a couple of dozen customers that you have today to suddenly hundreds or thousands of people rushing and scrambling to analyze their climate risk? Because everyone’s realizing, oh, we actually do need to figure this out. There’s not, like, let’s wait.
Tory Grieves (26:51):
Yeah, absolutely. And that’s why Terry and James are co-founders from the outset, envisioned this as a software as a service platform. And we’re a product company as opposed to a consulting firm for a reason that’s really to democratize this information, make it accessible, have a platform that digests a huge amount of information, and makes it really decision-relevant for our customers. So, you know, we’re ready for that grand swell. I think it’s coming. Biden issued an executive order around climate risk just a couple months ago, so that’s been really an exciting shift, you know, especially here in the US although our customers are global. So I think that spike will be coming. And we’re really excited about that. I mean, the more people who are making climate risk informed decisions, I think will all set us up for a better future.
Katherine Gorman (27:40):
So I’d love to hear your thoughts on policy. You said you were starting to see some things developing within the Biden Administration, but what do you think is coming next?
Tory Grieves (27:48):
I think there’s generally been a lot of support. We’re seeing increasing support among regulators for first of all, acknowledging climate related financial risk as a key area of risk. Much like cyber risk was several years ago, this is a new area of risk that’s really important to be priced and factored into decision-making and disclosed. So the G7 ministers recent announcement, the Biden executive order, these are all really exciting developments in the regulatory space. And I think the mandatory nature of these disclosures, as mentioned, the UK has made it mandatory starting in 2025. So I think the next few years are going to be everyone scrambling to figure out how they’re going to measure and disclose. And one other thing is, before you disclose, you have to have a management strategy in place, because as soon as you’re disclosing certain figures of risk, you’re going to get questions about how you’re addressing it. So I think those conversations are happening probably now. And we’ll be increasing into the future.
Katherine Gorman (28:52):
So is anyone lobbying against having a climate disclosure requirement?
Tory Grieves (28:56):
I might be totally living in a vacuum, but I think we’ve overwhelmingly seen support. There have been a few, I think it was a few months ago, Republican senators writing to the fed that the fed basically back down, you don’t have jurisdiction over climate risks, yada yada yada, but they’re always going to be, I think when there’s change those who try to oppose it, but at least from my view, those have been lesser than those who are really pushing for these regulations.
Katherine Gorman (29:25):
Well, hopefully that doesn’t change. And we can continue to focus on building this high level culture of corporate transparency when it comes to knowing our climate risk.
James Lawler (29:33):
Tory, thank you so much for your time. It’s been a really fascinating conversation and really fun to talk to you.
Tory Grieves (29:40):
Thank y’all so much for having me. This was really fun, and thank you again for the great questions, it was a really interesting discussion.
Katherine Gorman (29:48):
That is it for this episode of the podcast, you can check out our other interviews, watch our videos and sign up for our newsletter at climatenow.com. And if you want to get in touch, email us at contact@climatenow, or tweet at us @weareclimatenow. We hope you’ll join us for our next conversation.