How is the way investors look at climate risk in the muni market about to change? 100 meters at a time.

April 9, 2020

ICE Data Services is partnering with a company called risQ that is upending how investors manage risk in the muni market with spatial architecture that allows climate risk to be assessed for a precise area at the CUSIP level. We spoke to risQ Chief Commercial Officer (and PhD) Chris Hartshorn to learn more.

This is an interview with risQ. NYSE presents the information for informational purposes, but does not endorse, represent nor warrant the accuracy of the narrative, which relies solely on material provided by risQ.

Let’s start at a high level — what does risQ do?

risQ leverages economic and physical sciences to analyze climate risk and inform and drive climate adaptation. In the solution we’re delivering in partnership with ICE Data Services, we have taken a framework of catastrophe modeling used intensively in the risk transfer sector (e.g. insurance) and deployed this — via a series of advances in geospatial modeling and machine learning — into a data product serving the muni market.

What are the benefits of risQ and ICE partnering on this?

In short, scale and functionality. We are marrying the risQ data set with the ICE Data Services muni bond pricing and reference data offering, the most extensive out there.

  • Scale: Bringing together risQ’s unique data set with ICE’s existing customer base and data distribution capability will significantly increase the availability of this data for the investment community, and the speed at which it becomes available, allowing market participants to appropriately assess the underlying risks.
  • Functionality: Linking risQ’s comprehensive obligor and issuer data at the CUSIP level to ICE Data Services broad fixed income content enhances many users’ ability to seamlessly integrate and analyze at the individual security and portfolio level.

Together we are giving this data purpose and connecting it to actual investments at a specific level — down to a 100-meter grid in fact.

Why is it important for investors to have access to this data?

Climate-related economic impairment is increasingly being recognized as a clear and present systemic risk, which is only going to increase over time with a changing and more volatile climate. The insurance sector has been progressively reducing and transferring their exposure to climate risk, leaving federal, state and city stakeholders and individual property owners and residents to cover the gap. These represent key components in the revenue streams supporting municipal debt.

Numerous examples already exist in which climate events have impacted the financial health of bond issuers. In the health sector, for example, hospitals have been directly impaired by hurricanes and wildfires resulting in bankruptcy, while others have seen significant revenue impairment from the impact of similar events on their service areas.

Correlation is also emerging between declared climate-related disasters and downstream impact on property value and population in those locations. These are two key metrics in the tax bases that underpin municipal credit quality.

As climate related events increase in cadence and severity, the risk to property and population across general obligation and revenue bonds is critical.

Prior to risQ’s efforts and partnership with ICE Data Services, the data has not been available for investors to quantify this risk and therefore it has not been priced into the market.

What makes risQ’s approach unique?

Our metrics are built on rigorous science, designed for a financial audience, and are easy to understand, albeit necessarily complex. Additionally, our coverage is comprehensive — we can look at any obligor.

We can provide climate risk data at a very specific level, more precise than at the county and city level. And that’s important because risk can be markedly different for a utility, hospital service area, or education provider in a particular location.

The rigor and accuracy of our platform allows all stakeholders – municipal designers, resilience officers, financial officers, bond investors, insurers, underwriters, ratings agencies, and so on – to make informed, quantitative investment and resilience decisions. More specifically:

  • We incorporate an explicit, detailed focus on climate change, not purely current and historical risks. Municipal bonds often have typical maturities of 10 years or longer. Our analysis is targeted for the municipal finance ecosystem and is designed with the same timeframe.
  • We are laser focused on the U.S. municipal sector as opposed to global analytics or the corporate risk space. The data is inherently richer and deeper because of that focus and allows for comprehensive analysis across all cohorts issuing bonds in the public finance market: cities, counties, hospital systems, utilities, education, retirement communities, ports, and so on.
  • Our analysis covers risk for property broken down by property type, GDP broken down by industry and jobs, as well as breakdowns of demographic and socioeconomic risks for both resident and working populations, all in quantitative and granular detail.

What types of risks are you looking at?

There are four fundamental components of risQ’s underlying climate risk modeling platform:

  • Economic Exposure: risQ analyzes risk to fundamental economic exposures, or slices of an obligor’s tax generating assets, all on a universal 100-meter grid that covers the contiguous United States. Specifically, for each hazard, risQ quantifies risk to property value and GDP impairment. Exposure is modeled using a combination of sources, including satellite imagery, census data products, transit data and FEMA’s HAZUS data repository.
  • Hazard: risQ’s hazard coverage includes wildfire, flood (inland and non-hurricane induced coastal flooding, the latter modulated by sea level rise), and hurricane (wind speed, storm surge, and extreme precipitation-based flooding). Each hazard is a combination of probabilities and intensities across the U.S.
  • Damage Functions: Each of those probabilistic hazards are intersected with exposure through data-driven damage functions—developed over decades within the field of structural engineering—that translate probabilistic intensities (flood depth, wind speeds, fire flame heights) to both (a) expected replacement cost and (b) business interruption as measured by commercial and industrial property downtime.
  • Climate Conditioning: risQ’s climate conditioning explicitly incorporates projected changes in the climate variables that modulate the intensity and/or probability of the above hazards. For example, projected changes in Sea Surface Temperature, estimated by leveraging a collection of International Panel on Climate Change (IPCC) Global Climate Models (GCMs), are tied to the probability of witnessing the most catastrophic hurricanes (e.g., Category 3-5) making landfall.

All four of these components are modeled on risQ’s 100-meter grid. This flexible underlying spatial architecture allows for aggregation of comparable, financial climate risk metrics over any obligor’s boundary or service area.

What’s next for risQ in terms of applications and uses for the financial services sector?

Among other things, we’re already working on outputs and applications for real estate assets and securities including mortgage backed securities, REITs and real estate portfolios. We’re also actively thinking about extension into broader ESG analytics given the breadth of data we’ve already integrated.

We’re excited to see where our capabilities can be deployed and leveraged, and how risQ and ICE Data Services can expand upon our initial municipal climate risk partnership.