Climate change is not an obscure construct in financial markets’ investment decision-making anymore.
As climate change and the implications of it increasingly reverberate around the globe, municipal market participants are creating tools to help investors and issuers alike make sense of these changes to manage risks and find investment solutions.
risQ, a Boston-based climate risk analytics startup, is bringing its quantifiable data to the municipal market through a partnership with Intercontinental Exchange’s ICE Data Services to provide analysis of climate risks for municipal bond issuers and incorporate those risks into project and investment decisions.
The relationship aims to provide analysis and comparisons from specific municipal securities to entire portfolios as an integrated service with ICE Data Services’ municipal pricing and reference data, offering a tool to “quantitatively measure climate risk in municipal bonds.”
ICE Data Services and risQ plan to launch the municipal climate package by the end of the first quarter of 2020 and risQ’s data is being provided exclusively to ICE. The tool is currently only available to ICE clients.
While various market participants — from ratings agencies, to in-house analysts at dealers and asset managers, to bond insurers, issuers, and advisors, among others — have criteria that look at climate, this is the first tool that directly links data from a quantifiable source and disseminates it through a pricing and reference data system in the industry.
Mark Heckert, chief product officer at ICE Data Services, said that risQ’s application of geospatial climate data to specific municipalities and securities has created a “ground-breaking data product that leverages our strengths in the fixed income markets.”
“We think that what risQ and ICE have developed is rather unique in that we have the ability to overlay different datasets, different geospatial parameters” that can articulate to the market interesting data points, such as property values, GDP, among others and map it directly to climate change in municipalities and for issuers across the country.
“These new capabilities enable us to offer a unique product that helps market participants better manage climate risk as part of their overall investing and risk-management processes,” Heckert said.
For its part, risQ has for the past 12 months worked with a range of industry participants and beta partners to prototype municipal bond climate risk analytics and tools.
“We have been targeting a scientifically rigorous climate risk analytics platform to enable informed decisions from the day we founded the company. The municipal debt sector emerged as an underserved $4 trillion market to target for our initial product,” Evan Kodra, CEO of risQ, said in a release.
“With their breadth and depth of data offerings and reach into the global financial markets, ICE is a natural partner for us,” Kodra said.
risQ said it has combined climate science, catastrophe modeling and geospatial machine learning technology, to develop its platform that is “capable of analyzing climate risk for all obligors and issuers of municipal bonds, delivering financially quantitative output across the key climate risks.” risQ looks at tax laws, property values intersecting with the credit linked to the obligor, among other criteria.
The platform currently focuses on obligors from the largest counties and school districts, to the smallest utilities and development districts, and hospital systems and transport authorities. So an investor can see data on a city with defined borders to a healthcare conglomerate or transit system that crosses regions. Comparisons can be made between a school on the Mississippi Delta to one in Cleveland to see how climate risks measure in various places across the U.S. and investors can use that data to determine whether an investment suits their needs and qualifications.
As of now, risQ has completed analytics and data on cities, counties, utilities, school districts and hospitals (and systems thereof) in its analysis, both in terms of obligors and, with our partners at ICE across to CUSIP-linked analyses, said Chris Hartshorn, chief commercial officer at risQ.
The firm is close to completing analysis on continuing care retirement communities, higher ed and charter school sectors. They have a large number of state-specific special credits, such as community development districts in Florida, a potpourri of California special districts, and they are on track to cover the remaining key sectors — transit, ports, among others — during the first quarter.
“For a lot of the beta testing users, there is enough built out that they can leverage good proxies for the obligors they want to look at from the analyses already in place,” Hartshorn said. “That said, we’re on track to not require users to rely on such approximations. It’s fair to say that having a solid cohort of asset management firms and the like beta testing the system has been really helpful.”
Hartshorn said the data that risQ is gathering has had different flavors of responses from participants. On the one hand, they want numbers, numbers that “mean” something: property value at risk within a jurisdiction; quantification of GDP impairment risk, and the like.
“They understand this kind of risk,” he said. “The moment you devolve to nebulous scoring and lose connection to real assets and economic value that can be understood, you’ve gone into a world that is less straightforward.”
So in some ways, partnering with a tried and true data service provider with CUSIP links and the ability to simply click on a map to drill down into the data and extrapolate it into their portfolios, made sense for both companies' goals.
Parallel to risQ’s market engagement, ICE has had preliminary conversations with various market participants including certain investors, bond insurers and others and the reaction has been “sufficiently strong” that ICE decided there is demand and a need for the type of data and analysis that risQ has and ICE can deliver via its current fixed income data.
Heckert noted this type of research has been done on a more ad hoc, traditional fashion in the market and there is an appetite for a service that brings the analysis together in a more data-driven and quantifiable manner that ICE can deliver.
Heckert said that in addition to using risQ analyses ICE itself is looking to build specific evaluation services for climate risks for its clients.
“What we see now is that there is not a high level of differentiation on municipal bonds as it pertains to climate risks,” Heckert said. The partnership allows the firms to present not only traditional data about a given municipal security — the terms and conditions of a bond, market evaluations, pricing, among other criteria, but also comparisons of various issuers and their exposure to climate risks and how that might affect investor preferences.
risQ, funded through National Science Foundation grants,
