We now live in a world where climate gentrification exists: people and institutions are starting to assess and evaluate properties based on their sensitivity to climate impacts. The idea was largely hypothetical as recently as 2016, but over the past two years a body of job has emerged, largely from American academics, showing that mortgage lenders and home buyers take certain forms of climate risk into account.
It’s tempting to assume that more information on the impacts of climate change leads to increased efforts to quickly reduce emissions and build resilience. But the evidence for climate gentrification points in a different direction: regions and people most affected by climate change will face higher barriers to securing finance and investment. The money will just go away.
Knowledge about the impacts of climate change, whether accurate or not, already informs decisions by financial institutions which, in turn, affect livelihoods. Research by Jesse Keenan, associate professor at Tulane University, and Jacob Bradt, Ph.D. candidate at Harvard, found that lenders in some coastal and flood-prone areas already require higher deposits before providing mortgages . They are also more likely to take these mortgages off their books through securitization, including to government-sponsored entities Fannie Mae and Freddie Mac.
There is an embarrassment here for the world of sustainable finance, which respects concepts such as “doing good while doing good”, but it is also the home and market for these new climate data services.
Information arbitrage is an important driver of market activity. If, as a trader, I know or think I know something that others do not know, then I will try to profit from it. I will buy low so that I can sell high, or I will sell before everyone else. This information purchased to make financial decisions can range from technical analysis of stock price movements to data collected by helicopters wielding infrared cameras at major oil storage tanks in Cushing, Okla. The production and sale of such information constitutes a large part of the financial services industry with more clients and another reference.
Climate service technology, however, raises more sophisticated ethical questions than other forms of financial reporting.
This is in part because climate impacts, by nature, are location specific, and climate services technology aims to pinpoint exactly.
which areas are the most exposed. Yet wealth and disadvantage are strongly correlated with geography and mobility. This is true in cities and countries and across the world.
A second reason why information on climate impact risks is different is that these services often rely on publicly funded science-based models of the climate, combined with commercially collected information such as the location of assets, supply chains and financial risk models. Another article by Keenan, published last year, highlights the need for policymakers to “claim fundamental principles in the public domain – of science and data – to advance collective mitigation and adaptation to climate change. by the Society “.
Good and bad
My previous column examined the risks that these data are not robust or give a false impression of precision. But social equality issues can persist. Good and bad information can lead to price changes, as assets in climate-prone areas, real or perceived, are sold and large capital investments are directed to safer areas. The potential for opacity, and for perpetuation and amplification of discrimination, may have some similarities to redlining – the practice of U.S. mortgage lenders making credit less available or less affordable to those in areas that were home to black communities.
Some people will know that their neighborhood is already vulnerable even in the current climate, and there are initiatives to make this more accessible, such as the non-profit association First Street Foundation in the United States and Climate assessment in Australia. This knowledge of direct climate risks may not be sufficient to make an informed decision.
People may know that their risk of flooding or forest fires will increase, but they have no way of predicting second-order effects, such as when they can no longer obtain insurance or a mortgage. on affordable terms. It will also be difficult to predict when large companies will start to withdraw their services or when local governments will be strained by falling incomes and squeezing credit. People who have built their lives in what seemed like a safe area for many years can find themselves economically and financially stranded long before they are struck by water, heat or fire.
It is reasonable to assume that any effort to discuss and mainstream climate change will be good, especially when the shadow of climate “skepticism” still hangs in the minds of many. The potential to combine climate science with other forms of analysis is exciting, but if it is limited to those who can afford it and shape decisions that are hidden, it will only compound the disadvantage.
Copyright 2021 Bloomberg.
Climate change in the United States
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