Climate change has an adverse effect on almost all aspects of life, its impact ranging from affecting our planet's biodiversity to employee productivity, public health, and global finance. While the United Nations Framework Convention on Climate Change (UNFCCC) has been divulging information on climate-related risks since the beginning of the millennia, its impact was not entirely grasped by most of the population. However, as the effects of climate change are becoming increasingly apparent, the subject is also garnering more traction.
The impact of climate change specifically on corporate firms and their supply chains has gained major attention in recent times. With the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), there has been an increasing demand to understand and articulate the threat of climate change to corporates and develop strategies to mitigate these challenges. A new domain known as climate intelligence (CI) has emerged to meet these demands. Climate intelligence uses historical and current data to develop insights for climate mitigation and adaptation. It also uses the existing wide sets of data to predict potential climate threats in order to prevent them. Climate intelligence has thus emerged at the heart of financial decision-making.
Growing Relevance of Climate Intelligence
As the risks associated with climate change become more evident, it has increased stakeholder pressure on business entities to disclose their vulnerabilities to climate change. Risk reporting practices such as ESG disclosures have thus gained traction in recent years. In this context, Climate Intelligence has an important role in managing the threat of climate change to businesses. The importance of climate intelligence in the financial landscape was demonstrated in Larry Fink's annual letter to CEOs, in the first quarter of 2022. In his letter, Fink, the CEO of the world’s largest asset management firm, BlackRock, urged the companies in which Blackrock invests to “disclose climate-related risks in line with the TCFD’s recommendations".
The United Kingdom too published a roadmap in November 2020, which outlined a plan for such obligations in conjunction with the recommendations of the TCFD. Likewise, in July 2021, Gary Gensler, the SEC Chair, announced that the SEC is considering adopting regulations concerning mandatory climate-risk disclosures for public companies. The relevance of climate intelligence has thus grown exponentially in recent years.
These developments emerge as unanticipated financial losses are experienced by businesses across the world, due to climate change. There has been increasing pressure on companies by stakeholders and investors to develop sustainable policies to deal with the associated risks of climate change. A lack of action towards this end has led to many investors pulling out of businesses. For example, investment manager Legal & General recently divested four companies, including the American insurance giant AIG, citing “insufficient action to address the risks posed by climate change.”
Importance of Climate Intelligence
Climate intelligence helps business entities in several ways. These include:
- Helping businesses monitor their exposure to climate risk: In 2016, a Nature Climate Change study estimated that up to $24.2 trillion (or 16.9%) of global financial assets could be at risk due to the ongoing climate change crisis. Yet, 76% of global CEOs revealed that they are under-prepared for climate change. Climate intelligence plays a crucial role in helping companies monitor and manage vulnerability to climate risks.
Discovering business opportunities: The climate change crisis is also leading to the rising demand for low-emissions products and services. As a result, the market for sustainable products is growing rapidly. Climate intelligence also helps corporates in developing innovative products and services for the new-age green economy. Climate intelligence, therefore, helps in the strategic thought process of a business in discovering new business opportunities also.
Leverage emissions data to improve accountability for climate targets: Companies today are increasingly trying to develop sustainable practices. However, an impediment to doing so is the huge existing data gap. Climate intelligence plays an important role in bridging this gap. It does so by providing insights to companies on their vulnerability to climate change and ways to reduce their carbon footprints and by providing essential data and understanding in meeting their disclosure requirements. In this context, Climate intelligence can facilitate better quality disclosures in a more accurate and time-efficient manner. In extension, climate intelligence also aids financial authorities in developing metrics and standards for climate-related disclosures.
Role of Satellite Data
As the importance of climate intelligence becomes more apparent, several new approaches and tools are being developed to monitor climate risks accurately, including open systems, edge processing, space-based systems, cloud computing and artificial intelligence, among others. This is driven by unprecedented advancements in science and technology. Among these approaches, satellite data has emerged at the forefront of the climate data landscape because of its ability to capture huge troves of data at various resolutions at high frequency and at an economical cost.
Since Vanguard 2- the first weather satellite, was launched in 1959, earth observation (EO) satellites have played a crucial role in climate research. Within a decade, satellites provided insights into the consequences of human activities on the environment and helped reveal the ozone layer's widening hole. Since then, satellites have played an important role in monitoring climate change. Currently, over 50% of Essential Climate Variables, key indicators of the earth's changing climate, can only be tracked through satellites. Satellites help monitor these indicators and track extreme climatic events, such as floods, wildfires, droughts, heatwaves and melting of glaciers. It also helps in creating predictive models that could help tentatively forecast floods and predict other extreme events such as droughts.
In addition, satellite data can make up for the shortcomings of traditional monitoring tools such as IoT monitors, forest guards, etc., which are expensive and time-consuming. They have thus emerged as effective tools for articulating credible ESG reports. In this regard, satellite data provides objective data that can replace the self-reported data in disclosures, which tend to be subjective and have challenges in verification. Satellite data thus provides access to credible data that is essential to shape effective climate actions and risk mitigation strategies.
Though satellite data plays a crucial role in climate intelligence, the terrabytes of such data are of low value, unless appropriate intelligent modelling is used to carve out actionable climate data sets from the mountains of raw data. Only climate intelligence firms with strong analytical skills and computational capacity can derive and consolidate actionable data sets from various satellites and disseminate them through APIs.
Credible climate intelligence is one of the most pressing requirements for companies today to minimize risks.
The risks posed by climate change to financial firms in this regard are calculated to be almost $300 Billion in physical risks and close to $400 Billion in transitional risks.
Mitigating these risks is possible only through strategies powered by accurate, high-frequency data sets covering a variety of physical risks for various latitudes and longitudes across the world.
According to a recent United Nations report, climate-related disasters saw an 83% increase in the past two decades alone. Immediate action is paramount to tackle risks from climate change. However, the first step towards action is measuring climate risk which requires credible climate data sets.