Climate mapping in action: Investment case studies

Christopher Goolgasian, CFA, CPA, CAIA, Director of Climate Research
Jenny Xie, Venture Associate
2023-12-31
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

Climate mapping in action: Investment case studies

During our earliest visits to Woodwell Climate Research Center, our Climate Research Team realized the central role maps play in their climate science research and analysis. Maps provide spatial context for data and help viewers internalize information, and we immediately understood how additive climate mapping could be for the investment process. We had been synthesizing and sharing climate data with investment teams across Wellington since the start of our research collaboration with Woodwell in 2018, but we knew that for investors to be able to integrate climate projections into their investment process, they needed to translate climate data and insights into measurable outputs. To that end, we created our Climate Exposure Risk Application (CERA), an integrated spatial finance software that helps our investment teams visualize and quantify physical climate risks.

How CERA works

Available to all investors at Wellington, CERA displays Woodwell data on geospatial maps overlaid with financial securities and real assets. CERA shows climate-risk-projection data in five-year increments, up to 30 years out, giving investors a picture of how an asset’s climate risk may change within investable time horizons. By turning data layers on or off, investors who use the tool can see the risk exposure of almost any potential investment, from company property, plants, and equipment; to municipals bonds; to real estate investment trusts (REITs); to insured assets.

Users can identify assets located in “hot spots” that may warrant further fundamental research and/or engagement with company management teams. CERA also enables investors to assess the relative risk of similar assets. If two municipal bonds have similar valuations and terms, for example, but CERA determines that one municipality carries far greater economic risk of climate events, our investors can make more informed investment decisions about climate risks, based on that information. CERA gives investors who choose to use it the ability to compare securities on a climate-risk-adjusted basis and potentially assign more accurate values. We expect the tool to soon have 11,000 global public companies and 193,000 total facilities mapped, using location data from vendors.

Investment case studies

Avoiding assets on the basis of regional climate conditions

One of our investors wanted to understand the climate-risk exposure in his portfolio, which included utilities in the Iberian Peninsula (Figure 1). CERA’s scale showed high regional risk of more extreme heat days and water scarcity over the next 20 years. The investor became concerned that the earnings potential of Spanish utilities, whose highest-margin assets are often hydro-power generators, would suffer because of climate stress. In addition, given Spain’s large agricultural and tourism sectors, the investor worried that utilities might face public scrutiny around water allocation and usage. After seeing these risks mapped in CERA, the portfolio manager decided to avoid those investments, despite attractive near-term fundamentals.

Watch a video to learn more about CERA and how this investor used it in this investment case.

Figure 1
CERA images of lberian Peninsula

Deep-dive analysis on granular risks across an island

At our request, Woodwell conducts research and delivers “deep-dive” reports detailing geographic climate risks. To date, they have generated more than 15 country and regional case studies. Recently, our municipal bond team requested a climate case study to better understand how heat and flooding might affect Puerto Rico’s ability to attract new business over the next 30 years.  Woodwell’s analysis had to factor in non-climate data, including flood-defense infrastructure and population-level vulnerability to heat. Puerto Rico’s small geographic area and complex topography also meant that Woodwell had to use specialized tools to yield meaningful results. Their high-resolution data, specific to within one square kilometer, enabled us to see how spatially varied the island’s precipitation trends would be in the future. 

The data shows that in coming decades, moderate rainstorms will occur less frequently across the island. However, the probability of rare, more severe precipitation events is increasing significantly. Puerto Rico is experiencing a phenomenon shared by other global regions: Despite an overall drying trend, precipitation events are becoming extreme. Woodwell high-resolution data also projects more heat-danger days annually for heavily populated cities on the island’s coast. 

Combining Woodwell’s case study with our own research on adaptation, we shared our analysis with the municipal bond team showing that Puerto Rico has significant climate-risk exposure and current adaptation measures are unlikely to provide sufficient protection (Figure 2). The information made the team incrementally more negative on Puerto Rico’s credit trajectory. They adjusted their models to account for lower sales-tax growth and the possibility of larger and more frequent storms. They now have lower price targets because of the case study. Finally, the team will continue to analyze the potential effects of many more heat-danger days, which could lead to higher outmigration, lower productivity, or new adaptation investments. 

Figure 2
Granular maps showing climate risks in Puerto Rico

Corporate security risk assessment 

A global chemical company was building a production facility near a river in a low-lying region in Louisiana. The plant was going to take five years to build, at a cost of US$10 billion. A Wellington portfolio manager who owned the stock wanted to understand future flood risks for this location, as the company had estimated that the plant would generate approximately 20% of its consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) over time.

Using high-resolution data and granular flood modeling to account for rainfall infiltration, local topographic features, and existing flood-defense infrastructure, Woodwell produced maps showing significant risks of flooding (Figure 3). The maps showed the projected inundation from a 1-in-100-year rainfall event (1% probability of occurring in a given year) and a 1-in-500-year event (0.2% probability in a given year). Portions of the plant’s location would be flooded with more than nine feet (three meters) of water in the 500-year event. Our portfolio team considered this a reflection of poor governance and climate planning, and as a result, reduced its investment position in this company. Woodwell’s climate insights complemented the team’s fundamental analysis and resulted in a cap on its holding period.

Figure 3
Projected flooding at Louisiana chemical company

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