risQ’s Phase II effort centered around three parallel activities: (1) Rapid and iterative product development based on frequent engagement with prospective financial institution clients, positioning risQ to create a stable and profitable business model; (2) Generalization of the hazard modeling technology developed in Phase I to include additional climate change related phenomena and hazards, including climate-conditioned projections of wildfire, hurricane and flooding events, as well as projected changes in drought, heat stress, temperatures and temperature extremes, wind perils, and sea levels; (3) Tailoring modular software to client’s interests in understanding climate-driven risks to the municipal debt and mortgage-backed securities markets.

Beyond these mission-critical threads of research and development, risQ’s Phase II project ultimately culminated in the completion of a framework for characterizing the ‘ESG’ (economic, social, governance) profiles of municipal debt investments. “E” and “S” quantify the environmental and social obstacles that debt-issuing communities face that in turn create risks for all stakeholders of the market, and “G” aims to quantitatively capture multiple dimensions of policy conditions and fiduciary competence at the local- and state-levels. This ESG framework is rigorously data driven, objective, transparent in methodology and underlying data sources, and aims to help market stakeholders identify and address the systemic threats posed by climate change. risQ’s financial institution clients -- in response to increasing mandates to engage in socially responsible investing -- have a strong demand for a quantitative ESG solution that can be applied to investment decision-making.

Funding from the National Science Foundation SBIR program has enabled risQ -- over the period of more than 5 years -- to develop what is now considered by many a best-in-class solution for municipal debt ESG investors to capture this burgeoning opportunity within the financial sector to effect climate change mitigation and socioeconomic impact in a scalable and data-driven way. The demand for ESG investment options has grown rapidly, and is expected to continue to grow with increased focus on global challenges like climate change and socioeconomic inequality. While investors have a fiduciary responsibility to prioritize financial returns and tax benefits, they now need to be able to show a deeper understanding of their investments as well as measure the impacts that their capital has on these global challenges. Capital investment within the municipal debt sector has a tremendous direct-impact on real communities and people. Municipal bonds serve as one of the few asset classes in which one can invest money directly toward local climate resilience infrastructure or educational equity projects that could have clear positive impacts on communities. While ‘corporate ESG’ is certainly the most well-established variant within the broadly defined ESG domain, the societal impacts of allocating money to vehicles like corporate ESG indices can differ in many respects to the impacts that can be achieved by socially responsible, forward-looking municipal governments. The risk-reward tradeoffs for allocating money toward corporate equities versus municipal bonds will surely always exist, yet there is a significant opportunity for the municipal market to become a central focus for socially responsible investing.

Last Modified: 09/14/2022
Modified by: Evan A Kodra