Investors launch new guidance to model climate change risk


Twenty large institutional investors have convened under the UN Environmental Finance Initiative to launch a ‘comprehensive investor guidance’ to better model and assess the risk posed by climate change to investor portfolios around the world.

These assessments enable investors to be more transparent about their climate-related risks and opportunities in line with the recommendations from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

They will also help investors contribute to and benefit from the transition to low-carbon and climate-resilient economies.

The guide provides a state-of-the-art overview of approaches, tools, and providers available to investors today. It also details the methodologies piloted by the 20 investors and summarises their experiences.

Some key findings are below:

  • Investors face as much as 13.16% of risk from the required transition to a low-carbon economy: The 1.5°C scenario, in line with the latest special report by the Intergovernmental Panel on Climate Change (IPCC), exposes companies to a significant level of transition risk, affecting as much as 13.16% of overall portfolio value. Considering that total assets under management AUM) for the largest 500 investment managers in the world total USD 81.2 trillion, this would represent a value loss of USD 10.7 trillion.

  • It is at the sector level that climate-related risks, including risks from the transition to a low-carbon economy, become acutely apparent. Utilities, transportation, agriculture as well as mining & petroleum refining sectors stand out as having high policy risk. Under a 1.5°C scenario, the utility sector is most strongly exposed to policy risk (-50.6% at risk), however, the sector contributes less than 10% overall to the portfolio’s climate-related risks. On the other hand, Manufacturing has a much lower risk of -16.5%, but gets the highest portfolio contribution of 46.7%. This showcases the significant variation in climate risk levels between sectors, while also highlighting how diversification can help to reduce these risks.

  • ‘Green profits’ in a 2°C world are significant – approximately USD 2.1 trillion. Addressing climate change and limiting global warming requires economic policies that support a low carbon energy transition. However, green revenues generated from the sale of low carbon technologies, which support the transition, will help companies offset costs from complying with greenhouse gas (GHG) reduction policies. Stronger climate policy therefore also translates into an increased potential for companies to generate green profits. Under the 2°C scenario, the sum of all green profits generated by this 30,000-company universe equals approximately USD 2.1 trillion.

  • Low carbon technology opportunities offset risk: Aggregated technology opportunities across a portfolio will offset losses generated under the 3°C, 2°C and 1.5°C policy scenarios. The portfolio’s value increases by 3.21%, 6.94%, and 10.74% under these scenarios, respectively.

  • Investors face increased risk if governments act late: Finally, if governments delay action to enact climate policies that reduce GHG emissions, investors face a further loss of 1.2 trillion USD off of AUM as compared to a scenario where climate policy is enacted smoothly and steadily with immediate effect. Furthermore, delayed action not only increases policy risk, but also results in much greater physical climate risk due the increased accumulation of GHG concentrations in our atmosphere.

The full report can be found here

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