Don't just react: Proactively turn environmental risk into competitive advantage

The financial world is at an inflection point. Environment-related risk has moved from a peripheral topic to a core component of financial risk management. The perspective on this risk has shifted from reactive mitigation to proactive resilience. For decades, the focus was on reducing emissions. The current era is defined by active, data-driven resilience. The U.S. government has publicly declared that environmental change is an “emerging and increasing threat to the global financial system and economy.”

A reactive approach, which involves responding to a disaster after it strikes, is no longer sufficient. A proactive approach is required for organizations to maintain long-term financial stability. This shift from a defensive posture to a strategic one is already influencing capital markets. The ability to anticipate and manage a changing environment has become a key factor in asset valuation and business planning. The Federal Reserve Bank recently asked six of the top U.S. banks if they were prepared for the consequences of physical environmental risk, highlighting existing data gaps in quantifying real estate exposure.

Cotality's platform provides the data to enable this shift from a state of uncertainty to one of proactive, data-driven resilience.

A factual playbook for professionals

Cotality provides leaders with the data needed to embed environmental risk into core business operations and strategic decision-making. This factual playbook empowers you to:

• ‍Empower your clients with unseen insights: Go beyond generic risk assessments to provide your clients with a property's true long-term physical risk profile. For example, you can show a client a property's high Wildfire Conflagration Score, even if its wildfire hazard score is low, revealing a specific, hidden risk that would otherwise be missed.
• ‍Discover resilient markets and investments: Leverage Cotality's aggregated data to pinpoint regions with low environmental risk that are experiencing population growth. While Los Angeles has nearly 241,000 homes at moderate or greater risk, other metros like Austin, TX and Denver, CO are also on the list of at-risk homes. Cotality's hyper-local data can identify specific low-risk properties within these otherwise high-risk areas to support strategic investment decisions.
• ‍Secure and optimize financial portfolios: Financial institutions can use Cotality's analytics to stress-test loan portfolios against various environmental scenarios. This proactive process identifies and quantifies vulnerabilities before they become liabilities, helping to mitigate potential losses and maintain long-term financial stability.
• ‍Quantify risk for confident decisions: Equip your clients with a property's Composite Risk Score (CRS) and Average Annual Loss (AAL). These metrics provide a clear, quantifiable measure of risk that can be used to support financing, insurance applications, and overall investment decisions with confidence.

The three pillars of a data-driven framework

Cotality’s framework for resilience is built on three interconnected processes.

Pillar 1: Risk understanding

The first step in a resilience framework is to gain a quantifiable understanding of exposure. Traditional risk assessments, which rely on broad FEMA flood maps, historical data, and general overlays, provide an incomplete picture. A property on a slightly higher elevation with modern drainage systems may be less vulnerable than a neighboring building on the same street, a nuance that a broad model would miss. Similarly, an area could face a new threat from pluvial (flash) flooding due to extreme rainfall events, a risk that historical data does not capture.

To address these data gaps, Cotality’s platform assesses the environmental risk of over 150 million properties. Our platform processes over 100 billion data points from sources including satellite imagery, weather stations, topographic surveys, and building characteristics. This data is used to create a comprehensive account of physical risk.

This data ingestion engine powers CoreAI, which combines 13 industry-leading peril models with machine learning algorithms to provide comprehensive and precise insights. This process delivers over 20 detailed risk measures, including Average Annual Loss (AAL) and multiple Probable Maximum Loss (PML) calculations. These measures translate scientific data into quantifiable financial metrics.

By providing this level of detail, the platform allows for a precise understanding of exposure; enabling professions to answer specific questions, such as:

• What is the specific financial impact of a 5-year flood event on a portfolio?
• Which assets are at a higher risk of wildfire damage than current models indicate?
• How will a rising sea level affect the value of coastal properties over the next 30 years?

This foundational understanding of risk exposure is a basis for resilience.

Pillar 2: Strategic planning

The second pillar of resilience is planning with foresight. The accelerating pace of environmental change means that historical data is not a reliable predictor of future outcomes. For example, the International Monetary Fund (IMF) has concluded that the contiguous 48 states of the U.S. warmed more than the global average between 1963 and 2016. Clearly, a new approach built on predictive analytics and scenario-based planning is needed.

Cotality's models forecast the likelihood of future events. The platform provides a comprehensive model of the future at an unprecedented level of granularity, incorporating models from the Intergovernmental Panel on Climate Change (IPCC)’s 6th Assessment Report. The platform provides 30-year projections and allows users to test strategies against three distinct IPCC climate scenarios. This enables users to:

• Stress-test portfolios: Users can analyze how assets would perform under different environmental futures, from a conservative scenario to a more aggressive one.
• Inform capital allocation: By understanding which assets will retain or increase in value and which will become liabilities, users can make data-driven decisions about where to invest capital.
• Enhance ESG investing: The platform provides a quantitative foundation for assessing the "E" in ESG (Environmental, Social, Governance). It provides measurable resilience metrics that support both profitable and sustainable portfolio construction.

The platform translates complex environmental science into strategic business recommendations. This supports the transition from a mindset of compliance to a strategy of proactive planning. The White House invited Cotality’s Chief Scientist, Dr. Howard Botts, and EVP of Public Policy, Pete Carroll, to a meeting on macroeconomic forecasting, recognizing the importance of accurate data. Dr. Botts stated, “It was a real honor to be the only environmental risk modeling company invited… focused on identifying systemic risks to the U.S. economy.”

Pillar 3: Proactive action

The third pillar of resilience involves implementing a data-driven strategy. This proactive approach transforms environmental risk from a liability into a catalyst for business growth and a source of competitive advantage. Rather than simply reacting to environmental events after they occur, organizations can now optimize their operations, investments, and portfolios with foresight. A joint study with the U.S. Department of the Treasury concluded that there is a significant, and often hidden, uneven distribution of environmental risk across the U.S. property market. This means that while entire regions may be categorized as high-risk, granular data can reveal pockets of resilience and opportunity.

Cotality's platform provides the data to empower this proactive action. By translating complex scientific data into actionable financial insights, the platform enables users to identify which assets to protect, where to invest in new properties, and how to optimize a portfolio for long-term stability.

• For a financial services institution, this might mean stress-testing a loan portfolio against specific flood scenarios to quantify and mitigate potential losses.
• A corporation can use the insights to optimize its supply chain, ensuring critical operations are located in resilient areas.
• A forward-thinking investor can use Cotality's data to find properties that are undervalued due to a broad, regional risk profile but are, in fact, highly resilient due to their specific, hyper-local characteristics, such as elevation or building materials.

This data-driven approach is also crucial for public policy. The Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) included funding for climate adaptation to strengthen resiliency efforts across the U.S. As Cotality’s EVP of Public Policy, Pete Carroll, noted, “Optimal stewardship of these taxpayer funds requires the right modeling and data to identify risks and recommend tailored actions for geographies that have high concentrations of natural hazard risks, coupled with underinsured municipalities, homes, and businesses, now and into the future.”

Your path to competitive advantage

The management of environmental risk is no longer a niche concern; it is a significant, and in many cases, a defining factor in business today. The evidence is clear, from the unprecedented wildfire data to the negative home price growth in high-risk metros, that the traditional valuation model is broken. The hidden variable of environmental risk is already influencing markets and eroding asset value, and ignoring it is no longer an option.

The future belongs to organizations that can apply data to not only withstand these challenges but thrive despite them. By applying a data-driven framework based on understanding risk, strategic planning, and proactive action, you can transform today’s challenges into competitive advantages. Cotality's platform provides the data and tools to do just that!

By making the hidden visible, we help you protect your bottom line, gain a competitive edge, and ensure your assets are valued for what they are truly worth.

Ready to turn environmental challenges into opportunities? Join us at https://www.cotality.com/resources/webinars/making-the-shift.