In Innovation Spotlight, we explore some of the most promising innovations from around our community. This week, we take a look at Climate Risks for Asset Managers (CRAMS), an EIT Climate-KIC supported sustainable finance project.
Climate action is a new topic in the financial industry, and there is a lack of high quality data relating to the timing of climate change impacts as well as if and how these impacts are priced into the current valuation of securities.
CRAMS is unique in that it draws upon its proprietary databases – the most comprehensive of their kind currently available in the market – to quantify climate change risks and opportunities at a company and security issuer level. CRAMS was created in partnership with environmental fintech Carbon Delta and the Potsdam Institute for Climate Impact Research (PIK).
“The purpose of CRAMS is to take climate change risk data, process it and deliver it to financial institutions in a format that can be applied to investment managers,” said David Lunsford, Head of Development and Co-Founder, Carbon Delta. “The analysis enables financial institutions to report climate change risks and opportunities in a manner that is aligned with the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations.”
CRAMS leverages Carbon Delta’s Climate Value-at-Risk (VaR) financial model to help investors comprehensively access future costs and revenues related to climate change impacts as well as understand what those future impacts could mean towards the current valuation of investable securities. Climate VaR provides a stressed market valuation in relation to aggregated transition and physical costs and green revenue projections over the next 15 years.
The Climate VaR’s regulatory scenarios aggregate future policy costs based on a 15-year time horizon. Overlaying climate policy scenarios, future emission reduction price estimates and company data creates a hybrid top-down and bottom-up model which provides insights into how current and forthcoming climate regulations will affect corporations.
The physical scenarios evaluate the impact of several weather hazards, such as extreme heat and cold, heavy snowfall and precipitation, wind gusts, tropical cyclones as well as coastal flooding and sea level rise, and wildfires, based on methodologies developed in partnership with PIK.
“Our short-term goals are to continue to expand the dataset to include fluvial flooding as a new risk factor and compare our quantitative risk findings with those at PIK, so that we can identify if any model calibration could be helpful,” said David. “Our long-term goal is to hold a CRAMS launch event in the second quarter of 2019, to showcase the work that Carbon Delta and PIK have been doing together.”
Carbon Delta has scaled its operations and recently opened an office in Potsdam, Germany. It immediately hired a climate scientist, formerly from PIK, which further strengthens the connection between the two entities.