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Moody's climate intelligence exec on finding opportunity in risk

Emilie Mazzacurati, founder of climate intelligence firm Four Twenty Seven, says systemic climate risk isn't adequately priced into investments.

Emilie Mazzacurati

Illustration by Melanie Loon

This article originally was published by Climate & Capital. The organization's Leadership Interviews are an ongoing series of in-depth discussions with a wide range of leaders in the climate economy. The pieces explore the nuance and tension in leading bold transformations — of individuals, organizations and markets — at the intersection of climate and capital. 

Emilie Mazzacurati is founder of climate intelligence firm Four Twenty Seven and global head of climate solutions at ratings, research and risk analysis firm Moody’s. With visibility into both climate risk data and the analyses we draw on in making business decisions, Mazzacurati offers a unique perspective on the assumptions we make and our blind spots. The transcript was edited and excerpted for length.

David Garrison: What’s the burning opportunity in climate change?

Emilie Mazzacurati: There’s a lot of opportunity around investing in adaptation and resilience. 

When we’re speaking of climate change, we think most often about reducing, capturing and going negative on greenhouse gas emissions. There’s a collection of transformative technologies that may help solve the problem, but we also need to be rethinking a wider range of things to adapt to a changing climate. 

What I see is a need for adaptation across every market, from consumer products and households all the way to public needs. Because whether we want to or not — whether we act or not — we’re going to experience the impact of climate change everywhere. 

The challenge is that very few companies or investors look at this as a space. It’s just not an investment thesis. 

Garrison: Why do we have trouble with this kind of investment thesis? 

Mazzacurati: Because it’s systemic. The thesis is that things are going to change dramatically, that we need transformative technologies across sectors. That’s a diverse set of technologies that doesn’t fit into clear buckets — it cuts across fintech, agriculture, data, water, mitigation. 

My work is around risk, but this isn’t all about divesting or about fear-based decisions. There’s a set of things that are missing to make the positive investment case a reality. We need more clarity, for example, on the technologies and practices to invest in: How do we understand what the results will be? How might we quantify the benefits?

Investors are stuck on the negative aspects of risk because the opportunity isn’t something that they can go and invest in.

Garrison: Where, specifically, do you see gaps?

Mazzacurati: Understanding and identifying pricing risk is the first step in creating return on investment in adaptation and resilience. And because those risks are not priced right now, it can be difficult to make the business case.

If you’re an investor, say, in equities, and you’ve become aware of exposure in your portfolio to physical risk, you might seek ways to invest in the positive counterpart of that — either companies that are good at building resilience internally or companies with products, technologies and services that will be in greater demand because they answer problems related to climate change. 

But right now, there’s no easy way to do that. Investors are stuck on the negative aspects of risk because the opportunity isn’t something that they can go and invest in. 

Similarly, for corporations, there’s barely anything in our standards about physical risk, let alone opportunities around adaptation and resilience. They’re asked to report on exposure in their operations and supply chain, for example, and they can speak to how they manage those risks, but there isn’t an agreed-upon way to measure how well they’re doing against that. 

Garrison: What kind of questions do you see leaders and companies getting stuck on?

Mazzacurati: One question companies struggle with is when information becomes sufficiently relevant and robust that it affects an investment or lending decision. 

The data we have is rarely integrated into financial decisions in a way that would alter the outcome. We’re starting to see more of this, but it generally takes a few years of observing before individual companies understand where it’s material to outcomes. 

Real estate investors, for example, typically look at the data for context. They might have conversations where climate is part of their due diligence, but they won’t systematically take a signal of high risk at face value and say, "OK, that affects my decision."

Take a real estate investor in Florida — either direct or through traded REITs. The science says Florida is at very high risk. But it’s a booming market and you would be missing out if you weren’t investing. So, this becomes a question of timing horizon: How can I stay in and get away just before the tipping point?

Garrison: Are there aspects of risk that we don’t pay enough attention to in the climate conversation?

Mazzacurati: Yes. There are, of course, risks that can be managed as part of a company’s management processes with well-understood tools and processes and methodology. For those, you can mitigate, transfer, manage, absorb, etc. 

But there are also risks that lie outside the scope of what any company can manage on its own. These are risks of coordination. The fact is that risk mitigation actions that can be taken by individual stakeholders are often just shifting things around; nobody’s solving the bigger problem of climate change and the unsustainable use of resources. 

Take my example of Florida and sea-level rise. There’s an assumption that it’s not any individual’s problem — a belief that this is such a big problem that there’s nothing one person can do to manage the risk. 

Garrison: You’re touching on the idea that the cumulative risk of all of our individual actions is important, but that Scope 3 calculations are difficult — we’re not generally very good at thinking outside our own limited worlds. 

Mazzacurati: Yes. Companies can have a good understanding of physical risk through their operations, but they have a harder time understanding and modeling risk in their supply chains — both for direct suppliers and for underlying commodities. 

This speaks to the complexity of modern economies. Nobody — even the largest corporations in the world — really knows much about who they buy from, about how things are used, or about the full lifecycle. 

Supply chains are a really big problem — and not just for environmental and climate-related reasons. Farms are realizing, for example, that they have dependencies on thousands of other farms that they don’t know anything about.

Garrison: Your work focuses on six major risks: heat; floods; water stress; sea-level rise; hurricanes and typhoons; and wildfires. But as you point out, this is a systemic issue, and there are a set of smaller, more difficult-to-assess risks, like hail, that are emerging. How should we be thinking about the sum of all those smaller risks? 

Mazzacurati: Good question. 

One of our limitations is our ability to forecast extreme weather events with localized risk. Climate models are really good at telling us how overall earth systems are going to shift over time — what that means for things like temperature and precipitation. But everything beyond that is derived in order to understand changes in the underlying conditions that may increase the probability of single extreme weather events. That’s true for wildfires and hurricanes and typhoons as well as for hail and wind storms. 

So, when we look at wildfires, for example, we’re not predicting single occurrences, because you never know where that spark will be or what the circumstances are. Rather, it’s how conditions relating to heat, drought, soil moisture and humidity are going to change in such a way that we have a greater propensity for wildfire. If and when there is a spark, it will be devastating.

The market is moving very fast — sometimes faster than the models and the science are really ready to support.

For something like hail, it’s similar in that it depends on complex local conditions that climate models don’t forecast well — they’re just not at that resolution. The big gap is in short-term, local projection. 

The other thing we’re not good at projecting is second- and third-order effects. The impact of water stress and heat on food systems, for example, drives migration — hurricanes in Central America are a driver of immigration into the U.S. And public health impacts can be very long-term: We’re going to see respiratory impacts from wildfires, for example. 

We’re unfortunately not good enough at modeling, projecting and taking these risks into account in a systematic fashion. 

Garrison: This isn’t just about known risks, though. Are there types of risks where you think we have blind spots?

Mazzacurati: We have blind spots everywhere. And we’ll never have a complete picture of the risks of every location and circumstance. What that means is that understanding the limitations of data is really important. 

There are different types of drivers of flood, for example. The models we use are really good with riverine and fluvial flooding (that’s flooding from rain and from rivers), but not from underground flooding.

There are places where differences like this are meaningful, where we’re drawing on a totally different set of data points and data sources. This suggests a blind spot. 

Another blind spot is the return period. If you look at frequent floods — one-in-a-hundred-year-type floods — you may find that an area is low risk. But it becomes much higher risk when you look at floods that are very unlikely but happening because of climate change. Think about Houston, for example, with a one-in-4,000- or one-in-10,000-year flood. Did that come at high risk levels when looking at more frequent floods, which we also need to prepare for? 

Garrison: In the past year, we’ve seen a sea change: Leaders share how they’re now making decisions that impact not just their companies, but also the people and communities around them, in very short timeframes. That’s exhilarating, but fiduciary responsibility can also make it scary. How is that increased pace and sense of urgency impacting the work you’re doing? 

Mazzacurati: We’ve certainly experienced that. Within a few years, we went from limited recognition of a need for this type of risk data to a lot of interest and now to growing expectations on every client call. 

The market is moving very fast — sometimes faster than the models and the science are really ready to support. And you’re starting to see pushback from scientists on how climate data is being used. We need to make sure that the way it’s incorporated in decision-support tools for the financial sector adequately reflects the underlying uncertainties and limitations of the data.  

But there’s a tension in saying, "No, you can’t use the data this way; the science doesn’t support that." Because investors and banks need to make decisions. That discrepancy is in part because financial and economic modeling are catching up with demand.

Garrison: What would you like to see the market pay attention to that it’s not?

Mazzacurati: I’d like us to pay more attention to our limitations in modeling beyond primary impacts — impact on human societies, on migration, on food systems, on natural resource supply. Right now, there’s a disconnect between the physical impact science says we can expect to see if we don’t shift (or even if we do) and how that’s translated into economic projections. 

This is partly because we don’t have a historical track record to calibrate our models. But it’s underwhelming: It makes physical risk look really good compared to transition risk. 

I’d also like to see more government action to support private-sector innovation around adaptation and resilience. There’s a lot that governments can do that they’re already doing in other sectors. We have an ARPA-E in the U.S. for energy, for example. Could we have an ARPA-A for adaptation to focus systematic research around measuring the results and benefits of investing in adaptation technologies?

Garrison: As investment and interest in the climate economy increases over the next few years, how will markets respond? Are there different types of investment responses or vehicles that will emerge?

Mazzacurati: I don’t know if there’s going to be a shift in vehicles, although you do have a few thought leaders working hard to create investment opportunities related to adaptation and resilience. I can think of one — maybe two — interesting firms that are moving the ball forward. But the fact that I can only think of that many is terrifying. We need a lot more than that.

There’s a private equity firm, the Lightsmith Group, for example, that’s lining up technologies that are valuable in terms of adaptation and resilience. It’s an investor portfolio they’re offering where the common thread is demand driven by climate change. It cuts across data providers, tech companies, analytics, agricultural technology, flood prevention. 

There’s also an insurance company, Nephila, that offers insurance products targeted to climate change impacts — they integrate forward-looking climate data into how they structure their instruments.

And there’s a risk financing facility, supported by the World Bank, that has a strong resilience component. 

So, there is innovation. But it’s early-stage. And because it’s a new concept, we need to invent vocabulary and ways to frame and quantify and make the business case.

The answer to your question is 'both.' We are, and we are not, too late.

Garrison: Are we already too late? Is this now less about mitigation and more about adaptation and resilience? 

Mazzacurati: In some ways we are. And I don’t think people acknowledge that. 

I find that it’s hard to have a conversation about committed warming and processes that, because of self-reinforcing effects, may not be stopped. That’s a hard conversation to have with policymakers who are trying to make the argument — as they should — that we need to reduce greenhouse gas emissions. They want to prevent all the things that can still be stopped. 

So, the answer to your question is "both." We are, and we are not, too late. There are things that we’re not able to fix; that we need to adapt to. And that is truly heartbreaking. Especially if you have children, and they look at you and say, "Why did you do this to me? Why are there not going to be these species when I grow up? Why are the ecosystems going away?" 

But there are many areas where it can still get a lot worse. For those, we’re not too late. 

I’ve made it my life’s work to raise awareness of physical risk and build the business case for investing in adaptation and resilience. This transformation is not either/or and it’s not notional — it’s happening and we need to adapt.

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