What does someone who focuses on climate data at a pension administrator actually do? Lucas Wouters has been working as a Climate Data Specialist in APG's GRIG (Global Responsible Investment & Governance) team for six months now. So we took this opportunity to learn more about what his work exactly entails and what challenges he faces.
The reason for Lucas’ interest in climate data is less abstract than you might think. It began in his childhood, watching the National Geographic television channel and leafing through the ‘Bosatlas’ (Dutch atlas, ed.). “I saw maps of the Netherlands with indications of where the water level could be in fifty years’ time. I really like that visual and tangible aspect, so that's what I focused on at college.” After his bachelor’s in Earth & Economy and master’s in Hydrology, he carried out research in a number of areas, for example, on the impact of hailstorms in the Netherlands and floods in Africa. He now focuses on climate data in the broadest sense of the word.
What does a Climate Data Specialist do exactly?
“Climate change brings both risks and opportunities for our investments. This is why APG wants to integrate climate and climate change data into our investment analyses. These data are incorporated into models, for example to calculate the probability of floods or hurricanes and their severity. But in order to assess how effective a model is, you have to know, for instance, the formulas and assumptions on which it is based. I often worked with these types of models during my studies. Colleagues responsible for making APG’s investments, ask me to assess the climate models they use for their specific asset class. This is how we monitor whether the models we are using are correct and correspond to the most common climate scenarios and latest scientific developments. You could consider it an additional check.”
How does this help a pension administrator?
“APG and its pension fund clients want their investments to contribute to the goals of the Paris Agreement to keep the global warming below 2 degrees, and preferably below 1.5 degrees. We could reach a tipping point at 2 degrees, with disastrous and irreversible consequences for humans, animals and nature. If you look at the damage caused by the recent floods in Pakistan, it makes you want to prevent similar and even more serious catastrophes from occurring in the future. That is one side of the equation. At the same time, you also want to protect your investments because climate change is a risk you have to take into account. Our investments will be impacted even with global warming of 1.5 degrees. The better the available data, the better we – as pension administrator and investor – are able to integrate climate risks into our investment analyses and act on these.”
So, an important part of your work consists of checking models. How do you find these models?
“The information generated by the models comes from data providers. They sometimes use data from NASA or ESA satellites and radar data from meteorological institutes or measuring stations from all over the world that show, for instance, the quantity of water available on earth at any given time. Data providers first analyze the data and then it comes to us and I assess the relevance of the information and estimate the climate risks. We also gather data ourselves through different (online) sources to conduct our own analyses.”
What kind of climate risks should we consider?
“There are physical risks, like droughts or floods, and transition risks. The latter are related to the transition we are currently going through from an economy that runs on fossil fuel to a more sustainable one. Adjustments are needed to realize this transition, such as the implementation of a fees structure linked to companies’ CO2 emissions. Measures like this can have consequences for the value of investments in such companies, for example in the case of a cement manufacturer emitting a lot of CO2.”
Can such models help predict, for example, whether the risk of hurricanes in the Caribbean is increasing?
“These types of models are only accurate to a certain degree, especially when it comes to hurricanes. Although there is a risk that the climate will become increasingly unstable with a higher chance of hurricanes, some research also shows that although the intensity is increasing, the frequency is decreasing. There are also scientific simulations that show that hurricanes could reach Europe more often. The seawater temperature is rising, which means hurricanes that form in the Caribbean can retain their intensity for a longer period of time. Models show that these hurricanes may be diverted to Europe more often, coming ashore in Ireland, for example, just as hurricane Ophelia did in 2017. Although there may be a greater likelihood of this happening and scientists understand the underlying mechanisms in a broad sense, it is still very difficult to make accurate predictions. That said, we see increasing confirmation that in some places on Earth, the weather is being influenced by climate change.”
How do you translate climate data from a model into a specific investment?
“Not all data sources and analyses can be translated directly into a certain type of investment. When I started working at APG six months ago, our Real Estate Team had already made use of two data providers to create a tool for their real estate investments. That tool is now also being used to evaluate investments in other areas such as infrastructure and the agricultural sector. These are all physical assets, involving a company with one building at one location, for instance. In such cases, our models can be used to assess how high the risks of flooding is at that specific location. When it comes to an investment in a company with hundreds of locations all over the world, things become a lot more difficult. Let's say one of the facilities is disrupted because of a forest fire: What effect would that have on the company as a whole? This requires in-depth analysis of the company’s supply chain risks or, for example, the transition risks in one specific country where the company operates, and what the effects of this would be on its valuation.”
Which asset classes do you deal with most frequently in your work?
“When it comes to the physical risk, I often work with real estate, infrastructure and investments in natural capital, such as commercial forests and agriculture. In these areas, it is also a little easier to determine whether climate risk could have consequences for the investments. For example, a forest fire in a commercial forest. Ultimately, extreme weather is a problem for every investment, but its impact more difficult to determine for some asset classes. In addition to the data on physical risks, there are also data on transition risks. For instance, we envisage a certain scenario in which the world has no choice but to make a transition to sustainable energy, otherwise the problem of climate change becomes even bigger. If a company doesn't care about this and doesn't set any climate goals, alarm bells start to ring for us, and that affects our willingness to invest.”