Insurers are really licensed bettors. They figure out the odds associated with the risk to themselves of paying out to clients more than they take in from the revenue derived from issuing policies. Knowing the odds is the difference between profit and loss.

Reinsurers provide financial backing to insurers so that they can issue policies. These are big companies floating hundreds of billions of dollars. For them, they want to know the facts regarding the risk they are underwriting.

Munich RE employs a battery of climatologists and econometricians to help them understand risks from flooding, tropical cyclones, thunderstorms, tornadoes, winter deep freezes, wildfires, droughts and heatwaves. They are out front in trying to analyze and report on anthropogenic climate change impacts, differentiating them from events that occur through natural climate variability. Their research is among the best in the world in illustrating what global warming is doing to us. It shows rising levels of financial losses associated with human-caused changes. In covering the growing risk the company is inventing new reinsurance solutions that come at a rising cost.

Swiss RE is in the same boat as the aforementioned reinsurer. The company has been documenting climate change risks. On its website it provides five charts that highlight losses and perils from extreme weather events, wildfires, floods and droughts. One chart, in particular, illustrates the growing annual losses in billions of US dollars from 1970 to 2020. The upward is particularly revealing.

In a revealing article published by Inside Climate News, Georgina Gustin describes the climate change financial risks US farms are facing. She argues that the banks that underwrite US farmers appear to not be looking at the data reinsurers are collecting and as a result appear to be ignorant of the peril that lies ahead.

Gustin interviewed a citrus grower from Southern Texas named Dale Murden, who after the Texas deep freeze that occurred in February described the experience to his farm as a St. Valentine’s Massacre (the infamous Chicago mobster event in the 1920s). The damage to his grapefruit groves was devastating exacerbated by a preceding withering drought in the previous summer. Murden stated that in over 40 years hehad never experienced anything approaching conditions like these.

He isn’t alone. Extreme weather has battered US farms and ranches for several years, the last two in particular. The words “frequency” and “intensity” keep coming up in the descriptions of various weather events that have impacted the American agricultural sector. And although government subsidies and programs have mitigated some of the financial losses being felt, farmers are feeling the global warming heat. But the banks that are their primary lenders seem to be ignorant of a foreseeable catastrophe.

The US Federal Reserve recently noted the financial risk to the banking system from the agriculture sector. It noted that both crop and livestock production equally face acute climate risks. Agriculture depends on nature: rainfall, groundwater, soil conditions, temperature, humidity, and more.

As an example of climate change impacts, in 2019 the US Midwest saw devastating floods. Farmers were unable to keep up with repayments with the Federal Reserve Bank of Chicago reporting that 69% of borrowers were falling behind financially. This is not an isolated case. The megadrought that has hit the US Southwest is having similar impacts on farmers elsewhere in the country as well as around the world. A recent United Nations report stated that globally natural disasters have increased 300% in the last 40 years with agriculture bearing the brunt of the financial damage.

In North America, US farmers are not alone. Canadian farms, particularly those in the Prairie provinces are seeing global warming impacts in the form of extreme weather events. The Canadian Prairies are home to more than 80% of the country’s agricultural lands, and have been subject to unprecedented summer temperature increases, higher than in any other region of the country. Natural Resources Canada reports that this type of extreme climate change is imposing much greater risk in both the present as well as coming decades. States Danny Blair, Geography Professor, at the University of Winnipeg, “there’s a lot of warming still to come.”

But have Canadian banks been any more prescient about farm risk than those in the US? Canada’s central bank has been studying physical and transition risks. But Canada’s Big Five banks still seem to lag in their understanding of what lies ahead in terms of potential loan defaults from the agricultural sector as the 21st century unfolds.

So if banks whether US or Canadian see more farms go under what will that mean to the stability of their respective country’s financial systems? What will it mean for long-term farm credit? We are talking about tens of billions of dollars annually to pay for seed, equipment, fertilizer, and more. And when these farms fail, what happens to food security?

The immediacy of the risk is understood by reinsurers who note that global climate change is locked in for the foreseeable future. We are talking about decades ahead just based on the warming to date. McKinsey & Company in its analysis of climate change on the agricultural sector predicts a substantial destabilization across North America. For banks, the hazard and risk from climate change cannot be ignored as profits vanish from loans to exposed farms.

What should the banks be doing? They need to do what the reinsurers have done. They need to dedicate resources and money to researching climate change. They need to develop climate-specific stress tests to fully understand the risks going forward. And they need to work with farmers on programs to ensure best practices in mitigation and adaptation are being implemented to lessen their financial risk exposure.

Two nights before our conversation the latest mid-term election results illustrated my point. Of seven climate-related initiatives being voted upon, only two passed. One in Florida, described as an environmental amendment, combined bans on indoor vaping with bans on offshore oil and natural gas drilling (a strange combination to say the least). The other, in Nevada, had voters saying yes to requiring public utilities to get 50% of electricity from renewable sources by 2030. The big disappointment of the night was the failure in Washington state to pass the first U.S. attempt to implement a price on carbon pollution outside of cap-and-trade initiatives.

Kim’s answer to my initial question was interesting. Four Twenty Seven, she told me, doesn’t debate the cause of climate change but rather focuses on existing evidence to provide climate vulnerability assessments. Instead of a debate, the company helps the governments and businesses that are its clients to integrate climate change into long-term decision making and policy.

Four Twenty Seven describes itself as a market intelligence firm looking at the climate risk exposure of its clients’ assets. Its efforts are location specific and data-driven. It measures economic and financial risk from climate looking at regional infrastructure, and adaptation funding needs. Kim uses the phrase “investable adaptation methods,” and says the key to the company’s success is in the balance between hard and soft policy, raising client knowledge so that the right questions are asked and answered, and the right decisions can then be made.

I asked Kim to give me some examples of recent work. She pointed to three:

• The California Heat Assessment Tool (CHAT) – a planning tool to help localities in California assess local Heat Health Events (HHE), temperatures and humidity spikes that have public health impacts for local populations. The tool projects the annual number of HHE events, event duration, maximum and minimum temperatures, and maximum and minimum relative humidity in each California census tract. Its audiences are city and community planners, policymakers, public health practitioners, and the general public, and its goal is to help users understand the local impacts of HHEs and plan for the vulnerabilities of specific communities.

• Denver Health and Climate Vulnerability Index –  a tool that maps Denver’s vulnerability to extreme heat looking at the interconnectedness of socio-economic and environmental conditions. Indicators include infrastructure that increases or decreases vulnerability. For example, impervious surfaces which contribute to the heat island effect, or tree canopy which mitigates heat vulnerability. Socio-economic indices look at the makeup of neighbourhoods focusing on incidents of heat-related illness cross-linked to household demographics, social isolation, age, educational attainment, and race. The end result is a Heat Vulnerability Score map combining all these measures which the city is using to plan its intervention and climate change adaptation strategies.
• Assessing Exposure to Climate Risk in U.S. Municipalities – a report that provides climate risk scores for 3,142 U.S. counties and 761 cities with a population exceeding 50,000. The dataset incorporates incidents of cyclones and hurricanes, sea level rise, extreme rainfall, heat stress, and water stress. Key findings show that in the east, the mid-Atlantic coastal states and Florida, and the San Francisco Bay area and Pacific Northwest at highest risk to flooding. Cyclone and hurricane risk exposure is greatest along the Gulf and Southern Atlantic Ocean coastlines, with cyclone risk more evident in the mid-Atlantic and Northeastern states. The Midwest is at greatest risk to floods from extreme rainfall events while the highest heat stress scores are across the Great Plains, the Mississippi River basin, and Florida. Water stress risks can be found in California’s Central Valley and the Ogallala Aquifer of the Great Plains. The risk exposure in this report is specific to cities and counties making it an important planning and policy tool.

Kim notes that providing reports and tools like the ones Four Twenty Seven has developed gives government and business insight into the distribution and nature of the physical climate risks they face, enabling the identification of entry points for implementing actions to build resilience. For the former, it helps in policy and budgeting. For the latter, it helps in planning and investment strategies. She states, “we believe that understanding risk is a critical piece of building resilience. You cannot protect a state, city, county or business from physical climate risks without good tools and data to understand which communities and assets will be affected and how, providing the basis for appropriate actions.”

Considering the level of risk exposure to climate change impacts it is a wonder that there are not many more companies around like Four Twenty Seven. The opportunity to consult on mitigation, adaptation and policy development with businesses and governments seems like a very profitable enterprise. But as I research the field there appear to be only a handful around of these types of practices. It’s quite surprising considering how the biggest reinsurance companies which underwrite insurance policies for the entire industry, have been talking about rising risk for several decades based on rising claims from climate-related events. As I have written in the past, companies like Munich Re and Swiss Re see preparing for climate change as non-negotiable. The costs of climate change cannot be ignored by reinsurers because for them it is more than a trillion dollar bottom line issue.

I thank Yoon Hui Kim for giving me the time and educating me to what her company is doing to help governments and business understand climate change risk. We need more of this type of expertise and we need it sooner than later based on recent IPCC reports. By the way, if you are interested in why the company is called Four Twenty Seven, it was established in October 2012 after Hurricane Sandy, and its founder chose a name based on the emissions target that California had established for the year 2020, 427 million tons of carbon.