Climate Alpha applies machine learning to thousands of data points to calculate the financial impact of climate volatility annually through 2050, empowering investors to enhance their market forecasts, modify hold/sell periods across the investment horizon, protect yield and ensure exit liquidity.
Our proprietary forecast of the likely change in a location's performance due to the impact of physical climate risk as well as its resilience characteristics.
Quantifying the Impact of Risk & Resilience
The Physical impact and Resilience-adjusted impact are coefficients that explain the divergence of a location’s financial performance under a given climate change scenario from its baseline (one that assumes no climate change).
Physical impact projects the financial impact of physical climate risks under a climate scenario, given as a percentage change from the location's historical baseline performance.
Resilience-adjusted impact modifies Physical Impact with a location's resilience profile in order to capture its capacity to offset climate risks.
Benchmarking Locations to Establish Risk & Resilience Profiles
Different markets respond uniquely to past climate hazards and resilience measures. A location's coefficients are determined by its historic sensitivity to hazards multiplied by its relative risk & resilience profile. The greater the divergence, the higher or lower the coefficients.
Sensitivity to hazards refers to the historic impact of climate hazards on real estate growth for each market. This is calculated by the difference in the ROI of assets in areas exposed to risk versus the mean ROI of its larger real estate market (e.g., Zip codes versus CBSAs).
Relative risk & resilience profile is the future risk and resilience rating of a location indicated by the location’s Z-score against the national distribution obtained by standardizing all indicators. The greater the divergence from the mean, the better or worse its profile will be.
Assessing the Impact of Climate Change
Both the physical impact and resilience-adjusted impact can be applied to the value of assets in that location to estimate their future economic performance.
For example, if the estimated value of a property is forecasted to be $10M in 2030 based on historical returns, a physical impact coefficient of –5% yields a risk-adjusted value of $9.5M. Yet if the location boasts robust readiness traits to offset climate risk, the resilience-adjusted impact could be just –1%, resulting in a projected 2030 valuation of $9.9M.
Locations that exhibit low risk, high resilience, and proximity to under-performing areas may achieve accelerated growth forecasts as a result of their "anti-fragility," gaining investment and migration at the expense of under-performing areas.
Assessing the Impact of Climate Change
In addition to Impact Coefficients, we offer qualitative scores for Risk and Resilience Indicators, enabling comparison of profiles across locations.
The overall indicator score, a qualitative index of 0-100, profiles a location's relative risk or resilience compared to others.
A risk score of 100 signifies the highest national risk, implying unfavorable future performance.
Conversely, a resilience score of 100 implies the top national resilience, indicating positive performance.
CLIMATE PRICE EXPLAINED
1) Create a Baseline Forecast
To understand the financial impact of climate change, we first created a baseline for comparison.
Our baseline forecaster uses a dense neural network with an optimal convolutional layer (a form of machine learning) trained on fifty years of historical data to generate a composite real estate index extending from the present until 2050.
Engineering Pipeline Sources
1500+ public and private datasets covering real estate performance drivers, market transactions as well as socioeconomic, demographic and fiscal data from providers such as MSCI, RCA, FHFA, and S&P.