Jan 7, 2022 - Energy & Environment

Why big financial firms are scooping up climate modeling companies

Illustration of a hand reaching for golden binoculars
Illustration: Annelise Capossela/Axios

Big ratings agencies such as Moody's and S&P Global, along with other financial firms, are vacuuming up companies specializing in modeling physical climate risks.

Driving the news: The latest consolidation in the "climate intelligence" space arrived this week with S&P's purchase of The Climate Service, a climate risk consulting firm. The Climate Service analyzes physical climate risks, including extreme temperatures, coastal flooding and water stress, along with so-called transition risks, including changing regulatory and market conditions.

Thought bubble: The consolidation in the climate intelligence space threatens to lead to an asymmetry of access to information. If you're a wealthy investor or large real estate firm, you can pay to find out which companies or regions will be safest from climate hazards, and make sound investment decisions.

  • However, ordinary homeowners, such as those in the Denver suburbs who faced down a horrific, climate-fueled December wildfire on Dec. 30, may be left with fewer no or low-cost options to find out detailed information about their mounting risk exposure.
  • That is unless the consolidation also drives an expansion of affordable, consumer-facing climate risk prediction services, which has not yet materialized, experts told Axios.
  • These companies' services and strategies differ somewhat, but overall they all do climate risk analytics, which is critically important as climate disasters mount, affecting more Americans, many of whom did not realize they were in dangerous areas.

The big picture: Two companies in particular have been vacuuming up firms that specialize in climate risk modeling, Moody's and S&P Global Inc.

  • They are doing so to feed into their environmental, social and governance (ESG) investing lines of business.
  • By incorporating climate risk analysis into their ratings of companies, sovereign funds and more, Moody's and S&P are meeting growing market demand for ESG funds.
  • They are also seeking to flag any systemic risks to the financial system related to climate change.

State of Play: In August of last year, Moody's paid $2 billion to purchase one of the leading risk modeling firms, London-based RMS.

  • Moody's has rolled out a variety of climate products for institutional investors, banks, private equity firms and individuals looking to invest in companies that are prepared for a more carbon-constrained world.
  • It purchased a majority stake in the climate intelligence firm 427 in July 2019, and a majority stake in an ESG insights company, V.E., in April 2019.
  • S&P also has a large ESG practice and has invested in companies that have bolstered its offerings, including Measurabl and TealBook, and taken a significant stake in Novata.
  • "These investments and acquisitions are part of our ESG strategy in action — to be on the cutting edge of the climate and ESG space to serve our customers' evolving needs," said Christopher Bennett, global head of S&P's ESG strategy, said in a statement.

Context: It is not just the ratings agencies that are recognizing the need to add climate risk expertise to get ahead of coming regulation and increasingly severe extreme weather and climate events.

  • Last month, International Exchange, Inc., a data provider for investment decision-making, purchased risQ and Level 11 Analytics, which map climate data onto municipal bonds, mortgage-backed securities and real estate markets, according to a statement.

Threat level: The concentration of climate modeling expertise among a small tier of companies can have significant downsides, according to Matthew Eby, the founder and executive director of First Street Foundation.

  • First Street is a nonprofit that provides property-specific climate change-related flood risk information directly to consumers, and is also pursuing climate-adjusted wildfire risk modeling.
  • "This data needs to be out there. We don't want more asymmetry of knowledge to exist, but that's exactly what we're seeing," Eby told Axios.
  • "Everyone that has all the money is now acquiring all the advanced data analytics, so that they can make the smartest decisions ahead of everybody else," Eby said.

The intrigue: Buying your way into climate risk modeling is complicated, since each system has its own scenarios and assumptions. Splicing models together risks a "Frankenstein" approach, Eby says, which could make predictions less reliable.

The other side: Rich Sorkin, CEO of Jupiter Intelligence, one of the remaining independent climate intelligence firms, questions whether many ordinary people have the knowledge and time required to access and adequately interpret climate risk information.

  • Jupiter currently serves the banking, power, insurance and national security sectors.
  • His firm is trying to address some of the disparities around climate data availability by providing underserved communities domestically and abroad with access to Jupiter's services at little to no cost.
  • "If we help an underserved community in Louisiana it's not going to make a dent in the rest of the business," he said, adding that it is a motivating factor for Jupiter employees to know they are benefiting those on the front lines of the climate crisis.

What we're watching: As the private sector consolidates, there's an opening for the government to step in and provide more precise climate risk tools for Americans. However, that is a tall order, given that there are 13 agencies involved in climate research and communication.

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