Speaker 1:

From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism right here, right now at the NYC and at NYC exchanges and clearing houses around the world. And now welcome inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.

Josh King:

Out for a walk, the other day, I looked up at Black Dome, the highest peak in the Blackhead Mountains range of the Catskills inspiration for Thomas Cole and so many members of the Hudson River School realists. They would have enjoyed these quiet mostly car-free days in 2020. Can't be too much different from 1820, a couple of years after Cole immigrated to the United States, we see, like they did, leaves returning and spring flowers of the cusp bloom.

Josh King:

It reminds us of the power of nature, the possibilities that life has to offer, it's one of my favorite times a year. But seasons and weather patterns aren't always as pleasant. I'm mindful that even amid the pandemic 80,000 people remain without power in Nashville, more than two months after the March 3rd tornado that killed 25 people. And if that wasn't bad enough, looking at the calendar, June 1st, marks the start of the hurricane season, which runs through November 30th, peaking sharply between late August through the end of September. Some years are mild, to be sure, and we hope this is one, but other years had brought massive destruction in their wake.

Josh King:

I'm thinking about the damage rot in Houston from Hurricane Harvey and Puerto Rico from Hurricane Maria. Superstorm Sandy, which crippled the Northeast in 2012, of course, Katrina, which devastated states along the Gulf Coast in 2005. Even here, in Wyndham, in the Catskills, memories are still fresh about Tropical Storm Irene, which sent a 10 foot wall of water down Main Street in 2011, sweeping away homes and businesses and shuttering the local economy for the better part of a year. And the scars from that storm are still all around us.

Josh King:

Before everyone started talking about pandemics, everyone talked about the weather and they still will again, soon, and today we're going to get a headstart joining us inside the ICE House, are Chris Hartshorn, Chief Commercial Officer at risQ, and Lynn Martin, President of ICE Data Services to talk about the growing relationship between climate risk and the US municipal bond market. That's right after this.

Speaker 3:

It's more than an iconic building or a global financial marketplace. It's anywhere technology, commerce and people intersect. The innovation that makes people's lives better. Dreams that were once impossible are now realities. At the New York Stock Exchange, we help tech companies flourish and change the world. So go ahead, bring those ideas to life. We'll bring it to market. We are living [inaudible 00:03:32]

Josh King:

Today, for the first time we have two guests joining us on one remote podcast. Gathering with me via Zoom, are risQ, Chief Commercial Officer, Chris Hartshorn, and ICE Data Services President, Lynn Martin. So, a serial entrepreneur, Chris is the Co-Founder of Level 11 Analytics, and he joined risQ as an advisor in 2018, following a long career founding and working with some of the leading technology firms in the world. After earning his PhD in chemistry from the University of Canterbury, Chris began his career at UNC Chapel Hill, and as a senior scientist for the US Navy Research Lab before joining GE. That's NYC ticker symbol GE, where he held several roles, managing technology programs.

Josh King:

Lynn should be familiar to our audience. She is the President and Chief Operating Officer of ICE Data Services and our guest on episode 70 of this podcast, where we discussed her role overseeing ICE's market data analytics and connectivity businesses. Together, these businesses are the cornerstone of NYSE strategy to provide enhanced trading, valuation and data services to customers around the world. Lynn joined ICE as part of the company's acquisition of NYSE Euronext, where she was CEO of NYC Life, US. Chris, Lynn, welcome inside the ICE House.

Chris Hartshorn:

Great to be here.

Lynn Martins:

Thanks for having us Josh.

Josh King:

So Chris, let's start with you. Tell us where you are now and how you're managing through this time of self quarantine.

Chris Hartshorn:

I live about one minutes walk outside the Financial District of Boston, which means self distancing isn't a big problem right now, the only thing you've got to dodge when you're walking your dog through the financial district, it's the tumbleweeds making the best alive, doing the best to isolate and self quarantine when I can.

Josh King:

Boston's my home, I saw four Lauren pictures of a beautiful green Fenway Park, but no baseball players, no sound of the bat and ball.

Chris Hartshorn:

In deed. It's the same. We will come back.

Josh King:

We will come back, indeed. Lynn, you and I still see each other regularly through the computer screen, but how is your team at ICE Data Services transitioned to a remote environment?

Lynn Martins:

And I enjoy seeing you on that computer screen very frequently, Josh. As you know better than anyone, Josh, given the fact that I really runs a network of trading and clearing businesses around the globe, which are systemically important businesses, such as the New York Stock Exchange, business continuity preparedness is always the front of mind for us. The thing that we have prided ourselves on is to really stay close to our customers. That's one thing that's always been at the corner stone of our strategy is to do things in partnership with customers.

Lynn Martins:

And I actually think that we've been able to have even more customer contact, because of the technology that we employ. Because of Zoom, like we're chatting on right now, because of Webex, because of all of the proliferation of technology systems, I've been able to engage with senior level contacts at our customer base, our global customer base regularly. I can have a senior level meeting in Asia, and a senior level meeting in a [Mia 00:06:54], and a senior level meeting in America, all on the same day. So in some respects, I think we've actually developed closer relationships with our customers.

Josh King:

You were having pretty close relationships with your customers. The last time we spoke is late 2018, but since then so much has already changed. How has ICE Data Services evolved since then? I guess you've had the acquisition of firms like TMC Bonds and other expanded offerings.

Lynn Martins:

Yeah. And the acquisition of the TMC Bond platform and bond point execution services as part of our trading businesses, has really been part of the strategic pivot that we had already started the last time you and I spoke, Josh. And that is towards one of developing more tools for the front office, and analytics for the front office, as you know better than anyone, we've always traditionally been a middle to back office data vendor. The old IDC business that we acquired in 2015, certainly played in that area.

Lynn Martins:

But as a result of the acquisition of those businesses, we had already had a very laser focused directive to create tools and services for the front office, and that has only been enhanced through those acquisitions. Certainly another pivot that we've made since we last spoke, Josh, is really the focus on ESG. It's undeniable that ESG is at the forefront of investor's minds. In March, for example, you actually saw money coming into ESG weighted funds. That's very different than some of the outflows you saw on your traditional equity funds.

Lynn Martins:

So, even in a time of crisis, ESG was at the forefront of customers' minds, and we are excited that we've launched some new services like we're going to talk about today around that.

Josh King:

Yeah. One of the partners, of course, is part of this initiative is risQ. Chris, I'm wondering first, when someone looks in their calendar and they say, "I've got Chris coming in from risQ and they see it spelled R-I-S-Q, they must wonder aloud like, "How should I pronounce this company? And why is that Q there instead of a K?

Chris Hartshorn:

We get that a lot, it's tended a bit of an icebreaker for us, quite frankly, where there's almost a little bit of an ask and see as to, "Well, where did that come from? Or what's it about? And how do I say it? No worries. So, it actually tends into, I guess, a more of a lighthearted moment. We don't get too wrapped around that actual, but the Q, we're all about quantifying. So, one of the big challenges or climate risks and what we're going to talk about for the next half hour or so, it's all about quantifying, and if you can't measure it, you can't do anything about it, you can't act upon it. So we are all about quantifying risk as opposed to making it squishy and unactionable.

Josh King:

So the idea for risQ started with a graduate student's dissertation in 2014. Walk us through the original idea for the company and how creating a database quantifying that, divided the country into 100 square yards segments, and measured and assess the climate risk for each of those segments. How, from that initial effort, evolved into the business we see today.

Chris Hartshorn:

As with any startups the moment [inaudible 00:10:25] So, the original work that came out of Northeastern University, the graduate student that was even coach who's now risQ CEO, that was a really high quality piece of work that looked at all the different climate change models that were out there, and basically build a best in class model of models for climate change. So took the shortcomings of each one, strip them out to the strengths of each of those, put them in, and that was really the underlying intellectual property that came out of the university.

Chris Hartshorn:

So, then the journey you go on, that's great, and the science is awesome, but who cares? And not just who cares, but who'll pay? Which is always the key thing for a startup company. So from there that the company was actually founded in 2016 after a couple of years hiatus, and I'd say the subsequent four years between then and a now, has really been a journey of the science of what's possible, and then the art of what's needed, and slowly converging those two circles to when Venn diagram drops you into a point where the answer that we built is this high resolution catastrophe model for the United States and the need that is there, all the folks that are left holding the financial bag for the longest, and in a lot of ways they represent securities with five, 10, even longer maturity times on those bonds. So that's where we are today.

Chris Hartshorn:

There were pit stops in the insurance space, didn't really get a lot of traction there, they care about climate change, but they can change their premiums every 12 months. Whereas a municipal bond, it is what it is. For the lifetime of their bonds, and there's really no escaping it for the participants in that, unless they have quantified information that says, "This one's not looking so good anymore, let's move on." That's where we ended up today was, I would not say it was a direct linear path, it was fast from a random walk experiment that provided those quality customer discovery that goes on. You can always bring high quality technology to high quality solutions that people actually want and that people will buy it.

Josh King:

So Chris, I own a drone. I send it up 500 feet in the air, I see a hundred meter increments stretching, maybe a half mile in either direction, but call me a little skeptical around doing this for the entire United States, how exactly does it work?

Chris Hartshorn:

Well, this comes back to the idea of having a great team or great data scientists. So, we use proprietary machine learning technology, and what that allows us to do is to take any dataset that we find across the entire of the United States with that comes in at county of resolutions, city resolution, census tract, satellite imagery. It doesn't matter what granularity that information comes in it.

Chris Hartshorn:

Through a machine learning technique called [Decimetry 00:13:24] Modeling, We can take all of those datasets, we can overlay them with each other, we can build correlations and inferences between every single observation and every single piece of data, and then as a result of building and identifying those correlations we can spit all of that same information back out at 100 meter resolution label.

Chris Hartshorn:

So if you want to know the number of over 65 year old effluent people with private health insurance who are obese living in a given area, I've don't know why you would want to do that, but sure we can do it. And same thing with property types. We've got satellite imagery of all the property maps. We can overlay that with global human settlement layers, we can put that together where the American community survey information, we can tie that to origin, destination and employment statistics, so we know where a given person lives and where a given person works in space.

Chris Hartshorn:

So by building in and connecting all of these really different pieces of data, and by connecting them up and mapping them on top of each other, there's a tremendous amount of insight and understanding that you can pull out that something no one else has. And I haven't even talked about the climate piece yet. Oh, that's just understanding the US economy, the US social economics and the US demographics at high resolution. From there, we build out a wildfire model, with US fire service, and then land flooding model with another partner, we role all those same models at that same hundred meter resolution.

Chris Hartshorn:

So, it essentially becomes their maps, super high resolution understanding of how the United States works, super high resolution map or understanding how climate parallels will impact those same areas, and I present you the ability to do basically anything we want, provided that unit area is 100 meters of size and grid.

Josh King:

The science of what's possible to the art of what's needed, Lynn, the art of what's needed. What's the real world application for the extensive climate risk database? And how did risQ and ICE Data Services come together to collaborate on it?

Lynn Martins:

That's a great question, because you hear Chris talk, it's obviously a very compelling dataset that they have created. But in our mind, when we were thinking about the ESG demand in the market, the one thing we kept thinking was, how do we make something that's actionable? How do we make something that adds transparency to markets that someone can actually use to make informed risk management decisions? If you look at municipalities in general, if you look at the State of California, when you think of California, what do you think of? You think of, prior to the pandemic, you thought of wildfires because they had an awful lot of wildfire risks.

Lynn Martins:

And what's really interesting about the dataset that risQ has developed, because they have essentially a 100 meter grid, you're able to marry that dataset from a wildfire risk perspective, alongside the broad database that we've created valuing over a million municipal securities in the United States, and also offering terms and conditions data. So, coupons, maturities, things of that nature.

Lynn Martins:

And when you start to line up those two datasets, you see that two different municipalities, ane is wildfire risk, one doesn't, but yet they are priced the same in the market, why is that? Well, it's probably because no one was able to bring those two datasets really together in a way that just adds transparency. I mean, Josh, you mentioned in your opening remarks about hurricanes. We are on the verge of hurricane season, some of the catastrophe metrics that risQ identifies are hurricane wind speed, tidal flooding, coastal flooding, inland flooding, those types of risks, for lack of a better description, and you look at a state like Florida, who's continuously issuing debt, who has hospitals that are along the coast.

Lynn Martins:

It's really interesting to see, when you look at from a risQ perspective, these different factors alongside, "Well, what are these two municipal bond pricing in the market? And what are their terms and conditions? And where do I have longer-term risk and shorter term risk?" So that's really what drove us to have the conversation. I think ultimately we were introduced by some mutual acquaintances in the industry who were really starting to think through, "Well, how do you quantify this stuff?"

Lynn Martins:

They quantified the actual risks. How do you turn that into an actionable dataset that someone can use to make an informed risk management decision?

Josh King:

Chris, I'm interested in what drove you into this line of work. You've got a PhD in chemistry and a background of working for companies involved in science and technology. Can you tell us how you came to risQ and what your role is there now?

Chris Hartshorn:

Yeah. Chemistry feels like a long time ago, I actually call myself a reformed chemist. It's maybe 15 years since my last experiment. The [inaudible 00:18:50] that I've been personally on since then for 15 years and the information service and space understanding what subscription-based businesses look and feel like in that case delivering them to large multinationals who are interested in data, interesting information, and interested in actioning that information, which is to speak to their innovation platforms.

Chris Hartshorn:

So that's where I got started in this whole information services game, while I was there, helping grow that company as an executive there, Evan Kodra, the CEO of risQ was part of an acquisition that we made. So Evan and I began working at their point, working on some interesting stuff that was more innovation focused and which get really well, we went our separate ways for a while, but did have separate things, I went back to New Zealand, I spent some time there running as the chief technology officer of the New Zealand government's innovation agency.

Chris Hartshorn:

But I had about what, 30, 40 data scientists who were reporting to me at that time, building out data science solutions for the companies that are independent on Zealand's economy. So again, it was a reinforcement of the idea, that data, and analytics is critical for action, is critical for decisions. I came back to Boston again, and even reached out to Evan, "Hello Chris, we work great together, looking for some direction for a company. Can you help me out a little bit?"

Chris Hartshorn:

So I basically did some advising, loved the idea of working with Evan because, for two things. Are the people great, and as the mission, what you can jump out of bed for, and if you can tick those boxes, a lot of the other things that might get in the way melt away a little bit. And for me, that became a question of advising the company and covering this opportunity in the municipal bond space, which came as a result of, I'd say, the work that I was doing to help you Evan out to give it some direction.

Chris Hartshorn:

And then at that point, there was a decision as to, well, do you just advise and get other people to do the hard work? Or do the actually put your money where your mouth is? And Lord knows, I've got at least a mouth, it was time to get my mouth in analysis, sort of thing, I can really get them behind. And that's where [inaudible 00:20:57] the Chief commercial Officer role there, where essentially, the job is everything, it's not technical. I know when I'm out of my depth, we've got some people that do zeros and ones in every way, shape and form, some of the best that I ever come across in all of my journeys.

Chris Hartshorn:

And those journeys are getting pretty substantial now, not to age myself, and if I can handle the business development, the product market strategy, the partnerships, the licenses, all of that good stuff that really makes a business stand and help these guys just build great products, oh, that's easy to do. Just sign me out for that seven days a week and twice on Sunday and we're all good.

Josh King:

Thinking about that journey you've been on, what comes out of your mouth, we certainly hear the kiwi accent there. I'm sure Chris, you are our first New Zealander on the podcast, honored because of that. I read in National Geographic a few days ago that New Zealand has effectively eliminated coronavirus. And just today, your prime minister, Jacinda Ardern joined Australia's coronavirus cabinet meeting to discuss reopening trans-Tasman travel effectively forming a travel bubble down there. Has new Zealand's approach to managing its climate influenced your views around climate science and the need for applying it to real life application?

Chris Hartshorn:

I'm not sure as much as it's influenced it, if it's just the nature of where you grow up and how you grow up. I mean, I'm not sure where the influence would come from, I guess it's the whole nature of this is niche thing, right? I would say that New Zealand, as a nation, has a pretty good collective view. There's generally a view as to not privatizing profits and socializing costs, I think there's a much more balanced view there. And you can see that in the way that New Zealand responds to crises.

Chris Hartshorn:

Whether it be at a current pandemic, whether it be other unfortunate events that have struck New Zealand; earthquakes, there's been, unfortunately, a mass shooting there that the country's response to crises tied to the social fabric called the individual and the collective. So, if that has come across and some of the ways that I see the world personally, I would not be surprised, not by any means. Again, makes it easy to get out of bed. And so, to wake up for four and a half million New Zealanders who think exactly the same way and product of your up bringing.

Josh King:

Product of your upbringing. Lynn, you've been in cities for a long time. So let's talk a little bit about municipal bonds. The $3.8 trillion market for funding state; local governments, airports, schools, hospitals. It faces a test this month as New York City's transit agency offers bonds to the market for the first time, since the coronavirus emptied it's subway trains and buses. So, ICE Data Services has one of the most extensive business offerings for data analytics and trading for the muni bond market. Can you tell us more about ICE's offering in this space?

Chris Hartshorn:

Back to a bit of what I was saying earlier, we had a very strong base when we started the ICE Data Services journey, of end of day pricing, in the muni markets. Which I think we've only made stronger over the last couple of years through some various acquisitions and investments we've put on the platform, but we've also made the pivot from not just being an end of day provider, also doing intraday, but more recently real time prices, as well as continuing to build out the terms and conditions.

Chris Hartshorn:

Having that kind of base data offering, you can do a lot of really interesting and neat things alongside it to add value. Great example of that is some of the analytics we've more recently rolled out. And in the last two months, in the height of the volatility in the muni market, as we rolled out things like our municipal real-time curves offering available on a screen that a trader can just watch to see what is going on in the muni market, the full AAA curve.

Chris Hartshorn:

And you'd be unsurprised to know that it's been quite a wild ride over the last six to eight weeks while we've been in this pandemic situation. When you have that type of information, you can also build a really strong index business. We've got a variety of muni indices, that many folks benchmark products against. So now in our mind, this is just another extension of how to better service the muni market from a more fulsome perspective. How do we continue to add datasets and analytics that allow the muni market to number one, have additional transparency around it.

Chris Hartshorn:

Quite an opaque market, I think only 10 to 15% of that market even trades electronically, but there's the opportunity. There's the opportunity for a data vendor, in particular, the more transparency you add to a market, the more items that allow customers to manage risks, the more liquid a market becomes, at the end of the day. So the way we think about our muni offering is just a holistic data services offering encompassing every part of the risk management spectrum.

Josh King:

And then just to get a little more granular, how exactly did the vision for ICE Climate Risk come about?

Lynn Martins:

It was really the marrying of what we were hearing as demand for market participants for ESG driven metrics, I've had the words ESG a couple of times for the listeners who don't, a hundred percent know what that means. E environmental, S social, G for governance. The environmental side, prior to the pandemic, and probably continuing after that pandemic, was the one that a minute you said, ESG folks immediately went to what's my greenhouse gas emission score. What are the environmental factors on a company?

Lynn Martins:

And a lot of times you think about that from an equity's perspective, what's the carbon footprint of a company? Do they buy offsetting carbon emissions? It's even more interesting than when you look at the fixed income markets, given the proliferation of securities, we talked about the muni markets having over a million securities, just think about that. The US equity markets, I think only had about 5,000 to 6,000 publicly listed companies.

Lynn Martins:

So it's an order of magnitude and an order of complexity that when you're looking at developing an offering around ESG, the one thing you need to be very laser focused on is creating things that are actionable. Creating datasets for the sake of creating datasets, well, maybe interesting, you won't get the broad market adoption, you won't be serving a need in the market. So when we started looking at the ESG demands in the market, start inventorying our own datasets, and then as I mentioned earlier, a mutual colleague introduced us to Chris and Evan at risQ, it was just a conversation that made an awful lot of sense.

Chris Hartshorn:

Just bolting on top of there really quick. I mean, we'd already been engaged with a lot of the bond community for probably about 12 months, even before the conversation with Lynn and the team had started. And one of the things we were hearing was, "Here guys, this is great. And we know we can use some information." One of the things that I think was going to really bring it to life and make it really actionable would be if you can take all this information and tie it to the securities.

Chris Hartshorn:

So we were getting direct feedback from the users that were very much engaged with us to say, "Yeah. You know what? This is really good. The piece that you really need is this last piece, this last connection." And so it was exactly what we were hearing from the market as well. And that's where the introduction that we got to Lynn and team was perfectly timed. They were the perfect round peg for the perfectly round hole that we were getting from the customers that we were talking to.

Josh King:

Round pegs in round holes. After the break, Chris, Lynn and I are going to continue our conversation on the importance of climate risk to the municipal bond market. That's right after this.

Speaker 1:

Advancements are coming, equity and fixed income ETFs are poised for continued growth, and ICE ETF Hub is ready to advance the ETF industry. Simple, efficient, transparent. Get involved.

Josh King:

Before the break, Chris, Lynn and I were talking about the original idea for risQ and ICE Data Services partnering to create ICE credit risk. Let's bring the conversation back to today, both of you, and the current environment we're living in. COVID-19 has been a big focus for everyone for the last couple of months, and has impacted the daily lives of people around the world at a time like this, when we're grappling with a global pandemic, why should we care about the climate risk of municipal bond issuers right now?

Chris Hartshorn:

Well, I think if anything, the current situation we're living in showing what can happen when very quickly, in financial markets, what can happen when jurisdictions are not prepared for potential outcomes. When there is not foresight into every eventuality and how they can play through to social systems, to financial systems, to systems of resiliency.

Chris Hartshorn:

I think there's a lot of parallels between what we're experiencing now and the level of preparedness and the complexity of response to what one can potentially say, if you stop playing it forward and to climate events as well. I think there are some very logical parallels that one could make between the two on that basis.

Josh King:

So Lynn, currently, muni bonds come from, I guess, over 50,000 issuers and constitute well over a million separate securities. What are some of the themes, patterns, rules of thumb that you use as starting points to look at this market? Give me some of the basics to help us start to think about the muni bond market.

Lynn Martins:

It's a very opaque market. And one of the things as the chair of the muni transparency subcommittee of the [SCCS 00:31:29] femme SAC committee that has become incredibly apparent to me is just knowing what is available to trade. When you think about a million securities, you can't underestimate just having a catalog of what is even available and what the differences are and starts to get quite confusing, especially since you mentioned yourself, Josh, some of the big issuers in the market, like the MTA in New York City, State of California is another big issuer, transportation authority down in DC as well.

Lynn Martins:

You start to look at those and it could be a little bit like bond soup in some respect, because there's just issues all over the place. Different durations, different coupons, different amount, outstanding serve for different purposes, different issue dates, things of that nature. So just getting that staple of data in a digestible form is no mean feet. It's no small undertaking for a firm.

Lynn Martins:

And then when you actually think about trying to ascribe value to those, as well as the relative liquidity of view of the relative liquidity of each of those bonds, that's another large area that we spend a lot of time thinking about. So when you marry those three elements in particular, you can form a view of, well, I may want this exposure, I may want this sector, but I may not want this liquidity profile. I may want something more liquid or less liquid. So it depends on what your investment thesis is and your outlook for the future.

Lynn Martins:

So you need to approach this market just from a series of building blocks, more than anything, given its complexity, and widespread nature, before you really start to understand it. And that's why I'm so excited about this project. To me, this is a building block. When you start to think about, particularly in some of the states that I mentioned, you think about a state like Florida, you think about California, think about North Carolina. You think about coastal exposures, you mentioned Texas, and the effects that they had from hurricanes, Louisiana, New Orleans, who could forget Katrina.

Lynn Martins:

You start to see some of those natural disasters, Puerto Rico, in particular, you start to think about some of the natural disasters in history, and you can definitely see different patterns forming about why bonds were priced certain way, at issue, and things of that nature. So to me, this is just another building block of a unique market that just needs to be better understood by market participants.

Chris Hartshorn:

Some criticality that you lay on top of that as well, in the prison environment. So we know that the balance sheets have a lot of issuers across the country are incredibly stretched right now, whether it be at states, counties, cities, hospitals, you name it. You can go through every single cohort of the issuing community and find financial distress as a result of the current economic environment. We're going into the spring and land flooding season in the middle of the country, up and down the Mississippi Valley and the Missouri Valley, how are they going to handle financially and logistically if a major flood comes through some of those jurisdictions.

Chris Hartshorn:

We're predicting a 30 to 40%, most of the hurricane season this year. What will the state of local finances be up and down the Eastern Seaboard and the Gulf Coast area? If a hurricane comes through given how stretched finances of the country, of the states, and of those individual issuance, there's just a tremendous amount of vulnerability that's been led into the system that climate events can now double whammy on top off.

Chris Hartshorn:

And so, there's even more reason now, given all those fundamentals land talks through to be aware of what the climate risk is because there has been no time ever when climate risk could have a greater impact on them in a school bond[inaudible 00:35:33] given its current state of vulnerability.

Lynn Martins:

Yeah. And Chris actually raises a good point. Just to go back to a question you asked earlier about why we should be concerned about climate factors in this sector; hospitals. You turn the TV on every day, and what is the first story? How are your hospitals stretched? I mean, think about New York City, we had hospitals in Central Park pop-up, the Javits Center was used as a hospital. If you get a hurricane on top of that, do you know what that's going to do to an already taxed system?

Lynn Martins:

So, when you start to look at the hospital sector of the municipal environment, you may want to look at, well, does this also have hurricane risk in addition to the trends that I've been seeing on TV? Because that may be a foreshadowing of additional cataclysmic stress being put on certain regions.

Josh King:

I mean, both of you, especially, as you were talking, Chris, giving me a case of post-traumatic stress. In a prior career, I used to work in the insurance industry first at the Hartford, that's NYSE took a symbol HIG and later Willis Group, which was formerly a WSG, now been subsumed by Towers Watson and then Aon, you were talking about earlier days at risQ talking to the insurance industry. You look at a graph in a white paper that risQ published on climate risk as a tool for municipal bond stakeholders.

Josh King:

And you'll see this startling and widening gap over time between insured losses, those things that all of the policy holders have that are covered; fire, wind, and uninsured losses, water, flood, it really drives home how current and future climate risk is an existential threat to the municipal debt ecosystem. The majority of economic climate losses are now absorbed in some form by the public sector. A flood comes through a city like Superstorm Sandy, inundating the New York subway system, and it really is a new definition of Schitt's Creek.

Josh King:

So how does risks mission help all stakeholders in the market understand both current and future climate risk in a way that's operationally and strategically relevant?

Chris Hartshorn:

Clearly, the fact that the insurance industry is managing to mitigate some of the risks means that they are obviously passing that risk on to the financial markets. There was very, and you catch that incredibly eloquently. But what that means is that the public purse that's represented at the federal level, the state level, the city level, or it's down to the individual taxpayer, and all of those things underpin the credit quality for the given issuers that are actually there.

Chris Hartshorn:

How does an investor in this space, how does a participant in the financial sector that's looking at muni bonds then figure out, well, exactly how impaired will any of these issuers will be when a climate event rolls through. Essentially, we've got to do exactly what the insurance industry did, which was build a catastrophe model, which allowed them to mitigate for all of that climate risks that they were exposed to before what Hurricane Andrew in 1992, and provide exactly the same tools, the same type of catastrophe modeling sensibilities, except applied to the issuers of municipal bonds.

Chris Hartshorn:

So that now participants in that space can be just as informed and take justice as higher quality and informed action as the insurance industry is taken, which has allowed them to generate that insurance gap, that you mentioned Josh, we're in a sense, trying to even the playing field. Allow the municipal bond sector to be informed and had the same tools at their hands as the insurance industry has been building for the last 25 years and allow them to make those decisions and move forward on that basis.

Josh King:

Do you expect that this new data you're providing, which could highlight areas where higher levels of climate risk exists could actually negatively impact the borrowing capabilities of some of these communities?

Chris Hartshorn:

There is the potential for that to happen. So certainly the first step in addressing a problem is recognizing and admitting that there is a problem. And again, if you can't measure it, then you can't improve it, you can't control it. So our job is to first measure, to get the dialogue and the disclosure of potential climate risk for the bond issuers to be liberalized and everyone looking at the same information and having honest and open discussion about it, and then figuring out, "Well, okay. What are the next steps that we should take in order to mitigate this risk?"

Chris Hartshorn:

A lot of the wealth management entities and the buy side that we've been talking to, they say, "Look. We except there's going to be some climate risk in some places, we'll even invest in that if we believe that the issuer of that data is aware, if they're taking action, if they're talking about it, then we're willing to put a bid on them." Because again, they've gotten past that first step of, "Do we have a problem or not? Are we aware of the problem?"

Chris Hartshorn:

Then at that point, there's a bunch of solutions. They can be bonds that they'll invest in that will build the infrastructure that provide that resiliency, sustainable finance operations, and some large financial services sector companies with all investing off their own balance sheets into some of these projects. So, they're willing to be informed, and then they're willing to provide the investment for the issuers of debt who are willing to act and are willing to engage in the discussion.

Chris Hartshorn:

If someone on the other hand or financial insurer on the other hand is all surging up, head in the sand, not aware, not willing to act, they're putting the own residents and the people inside their own jurisdiction at risk, and that they should be in some way, shape or form, a dialogue around it. And the issue, probably be some action taken on that. And if that comes down to money and becoming more expensive for them, that's an unfortunate artifacts, but it's the one way you can drive adaptation, it's the one where you can drive resiliency, if there's a price to pay for not engaging at.

Lynn Martins:

I think there'll still be continued capacity for these municipalities to go and issue debt, and I don't think that's going to be the issue. I think potentially price may diverged, but again, that's not for us to say we're not taking risks on the market. We're not issuing debt in the market. That's up to the market to decide as to whether or not, now that you know piece of information, should I price in that risk or should I not price in that risk?

Josh King:

I mean, thinking about maybe the last 10 weeks or so, climate and viral threats are so very different, but is there any data that you've been able to produce from the COVID response, which provides new insight into how climate is affecting infrastructure?

Chris Hartshorn:

Only two would agree with the connectivity between impact on the population. So in terms of employment, in terms of GDP, in terms of the inability for transit authorities to generate revenue for all of these types of things. You start seeing the flow through direct to the top, and then to the bottom line of a lot of the entities that are responsible for this data that's on the market. The lessons that can be learned from it as well, how quickly can this systemic issue plays through into these markets?

Chris Hartshorn:

I've seen some analogies that's COVID-19, it's like a hurricane hits the entirety of the United States, and this is the recovery from that. Obviously, that's not going to happen from an actual climate perspective, but isolate that down to a place that is vulnerable to hurricanes, vulnerable to floods, vulnerable to wildfires, and you've got a much more, I would say, surgical and destructive force.

Chris Hartshorn:

Because, not only then is the people and the economy that's impacted, it's actually the infrastructure that was impacted on top of that. So you've got to make sure the excess of damage that they needs to be repeated and recovered from. So I think there are plenty of analogies there, but the main one is, "Look. If you've got enough of a systemic problem that hits you on a consistent enough way, eventually something's going to break and we need to be prepared for that, and to be prepared again, you've got to be informed."

Josh King:

Flip side of the lockdown. There's been a lot of discussion in the media about the rapid drop in emissions, due to the reduction of economic activity. The international energy agency last week issued a report that said, "Global greenhouse gas emissions are on track to plunge nearly 8% this year, the largest drop ever recorded as worldwide lockdowns to fight the coronavirus have triggered an unprecedented decline in the use of fossil fuels." Is it possible to know if these few months will have a significant or noticeable impact on how climate risk is modeled?

Chris Hartshorn:

Only if it continues on a sustained basis. So one of the biggest challenges of recognizing the climate change problem, it is a slow moving long leg impact. So the decisions we made 10 years ago on carbon, we are harvesting those decisions right now, and so on and so forth. The only way it really impacts climate models and the likely climate outcomes, and years from now, is if this is a sea change in terms of ongoing behavior.

Chris Hartshorn:

I'm skeptical that that's the case, and I'm also a little bit hesitant to tie a victory on climate to a pandemic, because the last thing I think we need is to have the association between an 8% reduction in carbon emissions with unprecedented spikes and unemployment, That actually doesn't present a great story that, "Well, if you want to reduce carbon emissions by 8%, first you must swallow your 20% unemployment. It's a bad message.

Chris Hartshorn:

And it's a false message, because there are plenty of ways to go through climate transition, there are plenty of ways to undertake climate adaptation that don't require an unemployment penalty. Don't require a GDP penalty. Require no financial penalty whatsoever, in fact, quite the opposite. So, I'm actually a little bit hesitant to hedge the wagon to that horse two [inaudible 00:46:29].

Josh King:

So Lynn, as we wrap up, we saw an announcement that Breckinridge Capital partners signed on as the first client recently for this offering, what attracted them to it? And what's been the reception from other firms that you've been speaking to in the market?

Lynn Martins:

Breckinridge was one of our first customers that did sign up for the service. They were actually using, as I understand, another provider, initially, and then they saw the specificity of risQ's offering. Found that to be much more of a precise dataset that they could use for risk management purposes. Reason they signed up with us, though, was because how we brought it all together. How he brought together on a security by security basis, marrying with the risQ data.

Lynn Martins:

When you think about it, you take those two datasets together, and while it probably makes a lot of sense, and it probably makes sense for the folks listening on today's podcast, that's a lot of work to do for a firm who's got a lot of other priorities. So, the fact that we can bundle that type of information together on a security by security basis, it takes a lot of the work that the customers need to do out of the equation, becomes very plug and play for them.

Lynn Martins:

Additionally, something else that we've heard from customers, it's not just the themes I mentioned earlier, but also the fact that we're doing this through our native distribution mechanism. We've got relationships with more than 5,000 customers, individual firms globally, they're already ingesting information from us. So they can just ingest this information in a format that is already plugged into their infrastructure, that is already plumbed into the key risk systems on their side.

Lynn Martins:

It's a very digestible form of information that just gives them an additional layer of transparency. But make no mistake, it is very much because of the fact that it's very specific dataset that risQ has developed that allows us to marry our security by security information, alongside theirs to make it actionable.

Josh King:

So, we've taken a little tour around the world, and specifically around the United States over the last half hour or so, we've touched on hurricanes, flood, tornado wildfire, I'm not sure if we hit any other risks, but when you're looking at the risQ database, some things that a casual observer might not know about. What other areas of negative climate risk factors might make you worried or might surprise any of us that they exist? That they would factor into a muni bond?

Chris Hartshorn:

The headline of answer is always the hurricanes and the wildfires, and for obvious reasons, I'm not trying to be blazey about it. I think the most underappreciated and underestimate a part of the climate risk that's out there, is actually the inland flooding side. And we see this in a lot of the people that we talk to and provide our information to where they're constantly looking California for wildfire, and they talk about Florida for hurricanes and they do all this good stuff.

Chris Hartshorn:

But a lot of the biggest climate risk that's out there is up and down the middle of the country, and there are substantial changes because of these climate events. So population decreases over 10 years that we can correlate to the quantity of inland flooding, loss of the property value that we can correlate the quantity of inland flooding. If you think about population and property value, these are two of the key indicators of a future financial health, of a given issuer, of a given jurisdiction.

Chris Hartshorn:

And inland flooding has been a massive component of that, and again, there aren't many movies about slow moving inland floods, plenty out there about wildfires and all the risk, so that's probably the one thing that I think surprises everyone is just how impactful some of those events are when they're not on the front pages of your global newspapers.

Josh King:

So, both of you give us a little peak into the crystal ball, what is next for climate change data and for risQ?

Chris Hartshorn:

So far for us, we've got this super high resolution of high credibility map of the United States, there's plenty of economic value that we can go ahead and characterize on top of municipal bonds. So mortgage backed securities, real estate investment trusts, essentially anything that exists in terrestrial space in the United States has climate risk associated with it, it has climate risks that can be characterized, and generally speaking, that climate risk and that asset is traded in some way, shape or form, on some financial market, mission, and now, vision as space to a match and inform on dry climate adaptation across the entirety of the financial services sector that speak to the United States.

Lynn Martins:

Yeah. I think there's definitely applications for the broader fixed income markets. Mortgages is certainly, I'd say, the next low hanging fruit. When you look at property value and things of that nature, think about, Josh, in your past life, working for an insurance company, how incredibly valuable this type of information could be when you're looking at underwriting someone's property insurance.

Lynn Martins:

So, not to mention the mortgage backed securities market, as Chris mentioned. So, I think there's much broader applications for this data, we wanted to get the muni markets out to the market first, but we have a dialogue about other applications as well.

Josh King:

Well, with that, I think I'm going to head outside, send the drone up about 300, 400 feet into the sky, see if I can map out a few hundred meter increments around my place in the Catskills. And I will let you guys get back to your work. Thanks so much, Chris and Lynn for joining us inside the ICE House.

Lynn Martins:

Thank you, Josh.

Chris Hartshorn:

Thanks Josh.

Josh King:

That is our conversation for this week. Our guest was Chris Hartshorn, Chief Commercial Officer of risQ, and Lynn Martin, President of ICE Data Services. If you liked what you heard, please rate us on iTunes, so other folks know where to find us. And if you've got a comment or a question, you'd like one of our experts to tackle on a future show, email us at icehouseattheice.com or tweet it at us at ICE House Podcast. Our show is produced by [Damon 00:52:52] Level and Pete Asch with production assistance from [Steven 00:52:55] Roman Shake and [Ian 00:52:56] Wolf.

Josh King:

I'm Josh King signing off from the library of the New York Stock Exchange, the remote branch here in the Catskills. Thanks for listening. Talk to you next week.

Speaker 1:

The information contained in this podcast was obtained in part from publicly available sources and not independently verified, neither ICE nor his affiliates make any representations or warranties, express or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content here. All of which is presented solely for informational and educational purposes.

Speaker 1:

Nothing here in constitutes an offer to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of LinkedIn clarity.