To infinity, and beyond: climate risk startups face

the future
Executives at climate risk tool vendors share their perspectives on the
evolution of a fast-moving market

Louie Woodall

Feb 3

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Last decade, high-tech startups pioneered tools and services to school financial institutions
on the impacts of climate change. Entrepreneurial outfits — including Four Twenty Seven
Inc. (427), Carbon Delta, The Climate Service (TCS) and Jupiter Intelligence — sprung up with
cutting-edge analytics to help banks, insurers and asset managers take their first steps into
this new risk management arena.

Towards the end of the decade, big names started to sit up and take notice. Eager not to be
left behind, some went shopping for startups in order to acquire their own climate risk
capabilities. In 2019, 427 was absorbed by Moody’s and Carbon Delta by MSCI. Other legacy
firms struck up partnerships with the newcomers — like Aon with TCS in 2020 — while still
more built out their own capabilities in-house: Oliver Wyman and BlackRock among them.

With established behemoths muscling into this space, the landscape for climate risk startups
has changed. Buccaneering enterprises will have to raise their game to carve out their own
niche in a increasingly crowded market and cater to a clientele that’s growing in
sophistication.

Still, there’s little sign the pipeline of new entrants is running dry. In fact, the way the wind
is blowing, demand for top-quality analytics is only likely to increase as financial institutions
get more climate savvy.

“Climate change is simply too complex and big for any one organisation to offer all the
answers,” says Joseph Lake, chief operating officer at TCS. “You need multiple backgrounds,
perspectives and experiences in order to answer the questions from different industries.
The entry of organisations like BlackRock to the space will raise the bar further on the
sophistication of the modelling approaches across the market, which is good news for
everyone,” he adds.

Content is king, platform is queen

To identify the latest risks and opportunities for climate risk startups, Climate Risk Review
spoke with executives at seven companies, all at different stages of the business lifecycle:
from brand-new entrants to Wall Street stalwarts.

One was Rowan Douglas, head of the Climate and Resilience Hub at Willis Towers Watson
(WTW) in London. Last November, WTW acquired physical risk advisory and analytics
company Acclimatise and in December the Climate Policy Initiative’s Energy Finance team
and transition risk modelling and analytics. Douglas says the new teams bring with them an
intellectual heritage on climate risk that will complement WTW’s existing store of
knowledge on natural catastrophe modelling and (re)insurance.

Going forward, he expects financial institutions to want to incorporate climate change with
their existing risk management processes, creating demand for analytics vendors that can
speak a language they’re familiar with: “It’s no good having a different method metric and
modality for climate risk to your other sorts of risks — ultimately, all these things have got
to be brought into a common risk framework. What we’re really wanting to do is to
integrate all these different sort of buckets of climate risk into a consistent framework
which can be consumed by our financial market clients”.

He adds this could favour companies that take a platform approach, so they can offer
financial institutions climate solutions that dovetail with other risk management services.
Clients will also increasingly want help differentiating between the bamboozling array of
climate tools in the market, he says, spurring demand for sophisticated advisory and
brokerage services.

“We’re really excited about a broad range of suppliers, because that creates both choice,
but also, frankly, risk — because which one do you choose? That’s where the role of an
advisor and a broker has real value. We want to be a one-stop-shop for advice and access,”
he says.

From hand-holding to hands-on

Newer firms argue that while some clients need hand-holding through the early stages of
their climate risk journeys, financial institutions increasingly want greater control over the
gadgets and gizmos on offer.

Take Vivid Economics, a UK-based strategic consultancy founded in 2006. It started out
offering an array of advisory and analytics, including the ‘Climate Risk Toolkit’, to help
clients put together climate-related disclosures and conduct stress testing and scenario
analysis. Its bundle of services has been used by Invesco, HSBC Asset Management and
Lloyds of London, among others.

In December last year, though, Vivid launched a spin-off company, Planetrics, that put more
power in client’s hands. The startup offers a suite of tools incorporating climate, economic
and financial models that allow financial institutions to project climate impacts to four asset
classes: equities, corporate debt, sovereign debt, and real estate. The model kit can be
accessed via the web-based PlanetView interface or API, for those wanting the full hands-on
experience.

“Climate risk analysis has traditionally been delivered in conjunction with consultancy
support. Now many of our clients are through that cycle and they want to become more
independent users of our analytics. That’s why we are moving to the PlanetView set up,”
explains Thomas Nielsen, chief executive officer at Planetrics.

Two early-stage start-ups are similarly betting institutions’ appetites will trend towards
highly-specialised, highly-quantitative offerings without the bells and whistles offered by
large consulting houses.

Quant Foundry is a UK-based micro company, founded in 2018, that is developing analytics
for institutions to project and quantify climate risks at the level of detail needed to set
internal capital requirements — a ‘Pillar 1 model’, in banking parlance.

“We’ve always been very quantitative. We have lots of banking experience, and have
worked on building Pillar 1 models for tier one banks for four decades, so we understand
that process, we understand the complexity,” says Chris Cormack, one of the company’s
four directors.

Though small, Quant Foundry has developed a Climate Change Credit Model (QF4CM),
which allows for a bottom-up analysis of climate impacts at the individual balance sheet
level. Right now, Cormack says they’re targeting those institutions that may have been
overlooked by the first wave of climate startups, such as private equity. “We want to plug
into that market, which essentially is pretty much untapped by most of the big
consultancies, and a lot of the smaller players [that] don’t have that footprint,” he says.

Cormack predicts a future where best-in-class models will rule the roost. “The banks
ultimately will start to build their own capability at some level, and especially when it comes
to new structures [and] new funding opportunities to help their clients, they may start
looking at more bespoke modelling techniques that they may be reluctant to engage
consultancies in”.

Cormack’s assessment is shared by Josh Gilbert, chief executive officer at Sust Global, which
provides a software-as-as-service platform based on geospatial analytics. This allows
financial institutions to gain insights on physical climate threats at the asset level. Sust was
founded in 2019 and has fewer than ten employees — though it expects to triple its
headcount this year.

“As that kind of last mile layer of technology, we’re saying we are the best way of
aggregating that physical risk data and turning it into something that’s usable as
a transparent and meaningful financial signal,” says Gilbert.

"It's a great time for innovators. As the market becomes more sophisticated around climate
risk methodologies and tooling, companies serving undifferentiated solutions will struggle
to survive,” he adds.

Details, details
This is a theme also picked up on by Lake at TCS. Formed in 2017, the US-based company
offers firms model-based climate risk capabilities through its Climanomics platform. This
uses peer-reviewed climate model projections to calculate the financial impacts of physical
and transition risks on clients’ assets.

“People are no longer finding a simple rating approach useful as it does not provide
actionable insight,” says Lake. “They want to know their climate risk quantified in financial
terms — dollars — because they need to plug this information into internal models and
present the outputs to the board, ultimately. The board can understand a metric like X
million dollars at risk from flooding, but cannot interpret an asset having a rating of 80 out
of 100 for water stress”.
Put simply, financial institutions are demanding more from analytics providers as the
conversation on climate risk shifts from disclosure and education to risk quantification, loss
estimation, and preparation for regulator-set stress tests.

It’s a rich opportunity for savvy startups with an eye for detail, says Emilie Mazzacurati,
global head of Moody’s climate solutions, whose company, 427, and its 20 or so employees
were acquired by the ratings and data firm in 2019.

“As we get closer to climate data having very material financial implications, through stress
tests and perhaps capital requirements down the line, then you’ll see the banks wanting to
have the most scientifically rigorous analysis of their climate risks. It won’t be enough to just
eyeball the numbers anymore. Getting a robust quantification of risk is hard, and the
market isn’t necessarily there yet,” she says.

All about the data

There’s plenty of scope for new startups to capitalise on this demand. True, financial
information giants like S&P’s Trucost and IHS Markit, which will soon merge to form an ESG
data powerhouse, and now BlackRock with its Aladdin Climate platform have name
recognition and deep, pre-existing client relationships. But the hunger for climate data will
be tough for even these big players to sate alone. Market participants’ demand for more
granular data, and data on the climate risk exposures of investments outside core asset
classes, should keep entrepreneurs plenty busy.

“Consolidation is expected out of the recognition that climate data needs to be

incorporated in every nook and cranny of the financial system. Like with ESG, though, there
will be different waves: it’s not one-and-done. I see a steady stream of new startups in the
space of climate data particularly, covering everything from the basic collection of scientific
data to its aggregation and combination with solutions to help firms understand that data,”
says Mazzacurati.

However, those wanting to make a splash with their own proprietary datasets may find it
harder to gain traction as the market evolves. One factor is the push to make climate data
an open source, free public good. Take OS-Climate, founded last September by the Linux
Foundation, Allianz, Microsoft, Amazon, Federated Hermes, and S&P. This team wants to
create a “global data compendium”, where corporate historical and forward-looking metrics
are aggregated in a free-to-access library. The Financial Times reports that Goldman Sachs
recently joined the group.

Collaborations like these may attract more financial institutions going forwards,
undercutting startups that only focus on data collection. It’s easy to see why. “There is a
desire from a lot of banks and investors to not have to deal with dozens of different
providers. They have to do this now, but going forward they’re going to want to consolidate
their data sources,” says Mazzacurati.

There is a dark side to the centralisation of data, though, that may help the little guys. If all
climate data is effectively ‘pre-screened’ by hegemonic providers, then the data pool itself
will be tainted by their own methodological biases, which could cause trouble for
institutions down the line.

It’s a danger that Nielsen at Planetrics is alert to: “Consolidation in data means you
ultimately get a single view of the world — if there’s only one provider you get blind spots.
We therefore constantly explore the data landscape to find new information but also often
have multiple providers for the same information,” he says.

Watch out for the watchdogs

Financial watchdogs’ and standard-setters’ evolving approaches to climate risk will
undoubtedly shape what institutions look for from analytics providers in the years to come.
In the 2010s, a number of initiatives were launched by industry groups and public-private
partnerships to promote climate risk analysis — the UN Environment Programme Finance
Initiative’s TCFD pilot for banks and the ‘Katowice banks’ being leading examples. The 2020s
will see more of this sort of capacity-building activity undertaken by financial regulators and
public authorities. The UK’s Climate Financial Risk Forum and 2021 Biennial Exploratory
Scenario (BES) on the financial risks of climate change offer a model of what’s to come.

Startups may have to tailor their offerings to these new initiatives to stay relevant. It’s an
evolution already underway at The 2° Investing Initiative (2DII), a non-profit think tank
founded in 2012 that oversees the Paris Agreement Capital Transition Assessment (PACTA)
model. PACTA has been used by over 1,500 financial institutions worldwide to assess the
temperature alignment of their investment portfolios with climate scenarios. A version for
banks to assess the (mis)alignment of their corporate lending books was launched last year.
PACTA has garnered interest from watchdogs including the European Insurance and
Occupational Pensions Authority and Japan Financial Services Authority, which see it as a
useful way to test the climate resilience of their supervisees. Their inquiries forced a re-
think at 2DII on how best to orient itself to meet this new demand.

“We’ve undergone some internal restructuring of our research program. [Now] we have a
stress testing stream in a separate stream. We are trying to separate that, because PACTA is
about alignment, but we also recognise a lot of conversations with supervisors we’re having
right now are on quantifying climate risk as well. We’re trying to be fair in terms of saying
PACTA doesn't quantify risk, even if it speaks to risk-related issues,” explains Jakob Thomä,
managing director at 2DII.

It’s likely that as regulatory mandates on managing, monitoring and reporting climate risks
start to be handed down in earnest, analytics firms will swoop in to offer both off-the-shelf
and bespoke solutions for hard-pressed institutions. “Regulators are being deliberately non-
prescriptive. Yes they provide input, but what hammer you use to build the house should be
up to each institution. That is how the market learns,” says Nielsen.

Still, one business risk startups will have to watch out for is supervisors making demands of
supervisees that some are better placed to fulfill than others. On the other hand, as
institutions move beyond regulatory compliance, they’ll want services and solutions that
help them extract value from their climate insights, instead of just using them to satisfy
watchdog’s wishes.

“I’ve heard some institutions say that certain providers’ actual tools aren’t fit for purpose
when you need to get more granular, when you’re going from regulatory disclosures to
embedding climate as an endogenous function within risk management processes,” says
Gilbert.

The next wave of successful startups, then, will be those that can see beyond the immediate
and speak to the desires financial institutions may have ten years from now. While the
climate risk analytics market may not stay a Wild West for long, what with the influx of
established names and financial regulators to the space, there’s still time for newcomers to
make their mark, says Douglas at WTW.

“We’re still at the early dawn of this space. Who knows what it will look like by 2030?”