The Paris Agreement, the United Nations, the European Commission, civil society and many more other stakeholders: much has been said about the role of the financial industry when it comes to financing the transition to a low carbon economy. Investors have an important role to play and have a moral responsibility to contribute to the huge investments required for the energy transition. The latter is not only about supporting a healthier environment but also about job creation.
As environmental risks are economic risks on the short, medium and long run, it is much more than a moral duty, but also a fiduciary one to map all these risks during the investment decision making process.
It is therefore crucial to firstly understand the different notions related to climate risks and opportunities such as the difference between physical versus transition risks. Furthermore, it is key to have a view on how to assess the climate risk exposure of a global portfolio.
Several approaches can be applied to have a first estimate of the climate-related risk exposure of an investment.
The starting point for an assessment is mainly reported company data. Although the data quality concerning emissions can still be improved, the methodology is clear and quantitative and enables therefore to get a first indication of the level of exposure to climate change risks.
Based on additional assumptions, analytical choices and extrapolations, the use of scenarios can facilitate the integration of more forward-looking data and can help to assess how resilient a company’s strategy and business model is to climate change risks and opportunities, independent of the current level of emissions (carbon footprint).
Since both options present their own ups- and downsides, it is important to understand their underlying drivers, namely who the major contributors are to the final results. An in-depth, qualitative analysis of the companies’ climate change profiles can help to assess how well a company is prepared to tackle climate-related risks and seize opportunities.
Firstly, pro-activity regarding climate change mitigation and protection is a competitive advantage for the first movers who benefit from higher resources efficiency, reduced regulatory risk, but also from the shift in consumption behavior.
Secondly, the transition requires huge investments in infrastructure, in transport, in energy, etc. Several companies are already offering dedicated solutions for a more energy efficient, low-carbon economy. By applying a fundamental qualitative analysis of the negative and positive contributions to climate change, investors can profit from attractive investment opportunities, starting today.
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