OBSERVER: Copernicus supports the Finance and Insurance Sectors in Monitoring climate-related risks

Why climate-related risks cannot be overlooked by the finance sector

In support of its awareness-raising efforts, the scientific community has presented data on the outcomes of inaction vis-à-vis climate change adaption and mitigation. In its Special Report: Global Warming of 1.5 ºC, the IPCC reported that the projected impact and associated risks linked to global warming of 1.5°C above temperatures in the pre-industrial period would engender more frequent and intense droughts, floods, sea level rise, loss of biodiversity, melting of ice sheets, ocean acidification etc. The impact of climate-related risks will affect people’s health, access to food and water resources, security and overall lifestyle. However, it is not just engaged citizens and the scientific community that have woken up to the reality of a warming planet. Perhaps one of the most affected industries, the finance sector, has come to acknowledge that climate-related risks represent financial risks. If not properly understood, such risks can result in improper valuation of assets which can in turn lead to misallocation of capital and – in the worst case – global financial instability. 

In two instances, established financial bodies have underlined the need to take climate change and its associated risks into account when assessing, quantifying and disclosing financial risk. Firstly, the European Central Bank announced that it will conduct new analyses on disclosure, pricing and greenwashing risks in financial markets. Secondly, the Task Force for Climate-related Financial Disclosures (TCFD) advises what companies should disclose to help financial actors (such as investors, lenders, and insurance underwriters) assess and price the risks related to climate change.

Opportunities for Copernicus to support the insurance and finance sectors

The development of Copernicus and the emergence of new commercial players in Earth Observation (EO) has led to a significant increase in the availability of EO data and derived products. This development, coupled with higher revisit rates, increased spatial resolution and other trends characterising the EO sector, enabled new use cases within insurance and finance, and resulted in an increasing permeation of Earth observation (EO) in this market segment. In 2021, EO data and services generated a revenue of €145 M with clients from the insurance and finance sector. This represents a small segment within an overall global EO market worth €2.8 billion[1]. However, growing with a CAGR of 21% by 2031, the segment is expected to experience the fastest growth and reach a total revenue of €994 million.  

The use cases of EO data in insurance and finance are multiple. In finance, EO data and derived products are used in commodity trading to monitor crop acreage and health, and can be combined with other data to estimate yield, develop price projections and ultimately inform trading decisions. These applications are thus relevant to a number of different sectors (i.e., agriculture, infrastructure, energy) and can be leveraged by a variety of financial and institutional actors (i.e., investment banks, venture capital firms, private equity). Moreover, products and services based on Copernicus data and combined with powerful analytics that can reliably measure, monitor, and report on environmental impact/parameters (i.e. carbon emissions) will be invaluable tools to assess the results of measures aiming to boost the green transition. This is all the more relevant given the European Commission’s intention to mobilise at least €1 trillion in sustainable investments over the decade 2021-2030, as part of the European Green Deal. Furthermore, in November of 2021, the European Investment Bank (EIB) and the European Centre for Medium-Range Weather Forecasts (ECMWF) signed a memorandum of understanding setting out a framework for cooperation on the enhanced use of Copernicus Earth observation data. The agreement formalises a collaboration to enhance the use of owned or brokered data, information and tools from the Copernicus Climate Change Service (C3S) and the Copernicus Atmosphere Monitoring Service (CAMS). This will inform the EIB’s approaches, decisions and strategies relevant to climate change adaptation and mitigation. These initiatives show that Copernicus supports both the public and private financial sector.

EO is equally vital for insurance companies.  As previously stated, a warming world will bring about more extreme meteorological events which will inevitably come at a high price for personal and public assets. For example, while coastal erosion may lead to cliffside property collapsing, the seasonal unpredictability of rainfall and the long-term changes to the growing season may contribute to the failure of crops. Copernicus in particular is uniquely placed to provide insights to the insurance industry regarding such risks, damages and losses. In the first instance, satellite imagery taken by Copernicus satellites support insurance adjusters to verify claims by comparing images taken before and after incidents. Geospatial data and satellite imagery effectively allow for the assessment of damages and the prioritisation of claims. Regarding agriculture, Copernicus data products and services can rapidly identify and map crops under stress due to drought, measure trends in yield due to unfavourable growing conditions and detect the presence of surface water due to flooding. Thanks to this information, stakeholders can react faster to minimise loss, boost performance or pre-empt destructive events. Moreover, extrapolating the data over the past even allows insurers to evaluate the likelihood of the next hazard and where it could occur. Copernicus real-time and archived data help insurance companies monitor, predict and evaluate the effect that floods, windstorms, wildfires, earthquakes, volcanic eruptions, landslides and soil subsidence, and pollution will have on premium and claim levels. In sum, EO offers a solution that simultaneously helps sustain the economy and protect society.

Copernicus-based business solutions to evaluate financial risks posed by climate change

The Copernicus Climate Change Service (C3S) is one of the six Copernicus Services and it is implemented by the European Centre for Medium-Range Weather Forecasts (ECMWF) on behalf of the European Commission. The C3S mission is to support adaptation and mitigation policies of the European Union by providing consistent and authoritative information about climate change. In addition, C3S offers free and open access to climate data and tools based on the best available science. In this way, it is supporting society by providing reliable information about the past, present and future climate in Europe and the rest of the World.

In order to provide climate data and information on impacts on a range of topics and sectoral areas, C3S has developed an online platform: the Climate Data Store (CDS). The CDS is designed to enable users to tailor services to more specific public or commercial needs.

The C3S user base includes scientists, consultants, planners and policymakers, the media and the public. Furthermore, their data and tools are used for a variety of purposes, such as assessment of climate change impacts on biodiversity, risk management for commodity trading, and sustainable water management.

One company that is already taking advantage of several C3S products to help its clients assess the risks and opportunities of climate change and climate-proof their assets and operations is the Spanish start-up Climate Scale. To produce their high-resolution climate projections (maps, time series and summary reports), Climate Scale’s uses the following C3S products and datasets:

• Global on-demand high-resolution simulations of the historical climate are based on ERA5, the C3S’s flagship reanalysis product, providing a comprehensive historical record of the Earth’s climate (“maps without gaps”). 
• Other datasets are used to examine specific impacts such as coastal flooding, and for quality control of Climate Scale outputs.

Acting as an intermediary between the C3S and individual end-users, Climate Scale provides further post-processing of the broad-scale C3S data, notably through the process of downscaling, which makes it relevant to more localised settings. Metrics which are not available in the raw input data are derived, including specific indices that allow for a better estimation of climate change impacts. Finally, these climate metrics or hazards are translated into physical risks, i.e. the input required to identify risks and plan for adaptation measures.

Wrap up

In conclusion, EO is increasingly recognised as providing key information for investment and asset management. Nevertheless, pressure to disclose climate risks is not limited to the financial sector. Indeed, the pressure to adapt to climate change and report on the physical risks posed by it is spreading to the private sector. Thanks to its quality and reliability, Copernicus data which is available on a free, full and open basis can help deliver on such growing needs. This is being demonstrated by companies like Climate Scale that leverage Copernicus Climate Change Service (C3S) data to provide high-resolution climate projections, which help businesses and other stakeholders (many of them coming from the financial sector) evaluate the physical risks of climate change.

[1] https://www.euspa.europa.eu/sites/default/files/uploads/euspa_market_re…;