Toronto-based Riskthinking.AI is launching the world's first commercially available climate risk simulation engine that will enable banks, insurance companies, corporations and governments to better assess their exposure to climate change.
Marketed under the brand name Climate Digital Twin (CDT), this new data and analytics platform enables institutional investors and other organizations to more accurately model and thereby manage the impact of extreme climate events on infrastructure and operations well into the future.
Developed in part to provide clients with a better means of satisfying regulatory agency requirements, CDT is an AI-driven tool that allows for "realistic" modelling of the uncertainty posed by climate disturbances – wildfires, rising sea levels, droughts, floods, hurricanes – that are now exceeding previous parameters.
Riskthinking.AI's CDT tech is currently powering physical risk on Bloomberg terminals worldwide and is expected to see wider adoption moving forward.
"The challenge facing banks (and other institutions) wanting to integrate climate risk into their operations is that they need an 'engine', not a series of inconsistent products," Ron Dembo, CEO and founder of Riskthinking.AI, said in remarks accompanying the Jan. 25 announcement of the launch of CDT.
"They need to have a single source of truth that covers all of the complexity of their products and operations . . . (and) require augmentation with a climate risk simulation engine. CDT is the big E in ESG that everyone has been looking for."
The concept of the Climate Digital Twin
Riskthinking.AI is marketing CDT as a risk management "solution" that banks, institutional investors and corporations can integrate into their individual climate risk architecture and use to optimize their decisions. CDT allows for these organizations to seamlessly "add their own data, analytics, and assumptions without having the immense task of building and maintaining the system," according to a release.
The AI-powered platform has been designed by Dembo and his team to avoid the limitations of deterministic risk assessment models that are only focused on past data and events to offer reliable future projections.
Riskthinking.AI's approach has been to develop a stochastic model that allows for a superior means of calculating probabilities with respect to unknown and hence inherently unpredictable future events. CDT accomplishes this by generating a range of best and worst case scenarios that take into account extreme climate events that effectively fall outside conventional risk parameters.
"A digital twin is a software platform consisting of data analytics that actually mimics a real world situation," Dembo explained in an interview with Sustainable Biz Canada.
"Say you wanted to understand how our world might evolve in the future due to climate. Now, of course, there's a very uncertain climate and it's very uncertain how that might happen. So we have built a simulator that allows you to test and experience what the world might look like forward in time.
"When banks, for example, are looking at loaning money to a company, they will analyze its finances and historical profile but will have difficulty assessing what the physical nature of that company might be," he continued.
"But does that company own airports, pipelines, or buildings that are in the middle of hurricane zones that are growing in intensity and may be on sea level and are close to the shoreline? There's no bank I know of that has a good set of data on the physical nature of its counterparty risk. So Riskthinking.AI developed a program that is able to assess that risk."
The company's CDT platform studies:
- every listed equity in 49 of the top countries in the world;
- all of the sectors of those countries' stock market indices;
- all the stocks listed in those indices and sectors;
- all the subsidiaries of those companies; and
- all of the physical assets of the companies and the physical assets of their subsidiaries and their supply chains.
According to Dembo, that data set consists of approximately 4,700,000 entities or physical assets such as pipelines, water desalination plants, schools, hospitals, etc., that far exceeds anything else currently available with respect to climate risk assessment.
Helping corporations achieve sustainable regulatory compliance
Soon, every major economy will have issued regulations requiring corporations to report on their climate risk. As of Jan. 1, the European Union (EU) declared that 50,000 companies above a certain size that do business in the EU must now provide climate exposure assessments.
"There's a good reason for this, because climate risk isn't measured in our economy today," Dembo explained.
"Climate physical risk isn't measured in our stock markets today. Everything is mispriced. Every loan given out in every corner of the world is now mispriced. Before it didn't matter, because climate effects were roughly presumed to be negligible. But it's pretty obvious now that they're not negligible. The number of climate incidents and the cost of those incidents is growing.
"Last year was the hottest year on record. It was so hot that it was six standard deviations above the mean that we would have expected. That translates roughly into a one-in-a-billion-year event."
Succession of black swan events
The accelerating number of such outlier climatic disruptions obliges corporations, and institutional investors, to revise their models to take account of what Dembo describes as "a succession of black swans."
This is an allusion to the term first popularized by Nassim Nicholas Taleb, the economist who explored such highly improbable events in the context of financial markets in his 2007 book, The Black Swan.
"We're already expanding beyond the previous standard deviations and we're going to see many more of these major climate events occurring more frequently . . . We have to be able to price the world properly . . . In a global capitalist setting, we better know how to price climate so that our behavior actually reflects those prices. That's why I started Riskthinking.AI," Dembo said.
He believes CDT and other advanced tech solutions will advance the cause of a sustainable economy by taking the world to a point where every stock, every bond and every loan will have climate risk priced in, thereby altering consumer and investment behaviour.
Dembo's journey to Riskthinking.AI
After earning his PhD in Operations Research from the University of Waterloo in 1975, Dembo served as associate professor at Yale University from 1976-86, and was also a visiting professor at the Massachusetts Institute of Technology.
After leaving the academic world, he founded Algorithmics in 1989, which went on to become the largest supplier of corporate risk systems worldwide during his tenure until he sold his company to IBM in 2011.
Born and raised in South Africa, Dembo attributes his belief in the cause of sustainability to a love of nature fostered during frequent trips with his father to the country's many game reserves.
"That's probably where my interest in climate started," Dembo recalled. "I'd sit outside and enjoy listening to the sounds of animals and staring up at the beautiful blue sky. That was how I became nature lover. I'm a tree hugger."
Having already advocated on behalf of the concept of "resilient (sustainable) cities" as early as 2010, Dembo founded Riskthinking.AI in 2021 to narrow the focus of his previous theoretical work in the general field of financial risk analysis to climate financial risk in particular.
Climate risk modelling as a 'hedge' on survival
At age 75, Dembo is "hedging" his bets on the future survival of the Earth by helping us better adjust our investment thinking and behaviour to an era of severe climate disruption.
"There's a small chance that if we don't do something tremendously quick about reducing the carbon footprint of the world, we will hit runaway climate change and we'll destroy the life that we know today. The world we know will change.
"Now, that might be a small, unlikely event, but it has a massive consequence. What would you do? Well, I'd hedge, I'd cut down on carbon. The worst that could happen is you reduce the world's carbon footprint and you find out later that you didn't need to do that . . . But the best thing that would happen is you avoid runaway climate change," he explained.
Dembo likens decarbonization to taking out a life insurance policy on our planet.
"This has massive upside and very little downside in relative terms. And think of it, we are gambling against that today. We are emitting so much carbon that we risk killing our world."
He is deeply concerned about the possibility of a general black swan event regarding the pace of global warming. Citing the work of climatologists who believe that in a severe lag between "existing information about global warming" and the ongoing "buildup of emissions," current projections may be wrong.
"There may be a lag of 15 to 20 years that the worst of global warming will take place 20 years from now, which will upset all predictions, all existing modeling. Therefore, we have to do things even with greater urgency."