Climate-driven extreme weather events and the transition to a low-carbon economy are expected to have material impacts on companies, with increasing significance for credit analysis. However, both physical and transition risks have a wide range of potential outcomes. In its new report, Climate scenarios vital to assess credit impact of carbon transition, physical risks, Moody’s Investors Service describes a conceptual approach to scenario analysis, leveraging Four Twenty Seven’s methodology for physical risks.
The transition risk approach is to explore sector-specific credit implications for two IEA emissions scenarios. For physical risk scenarios Moody’s will use data from Four Twenty Seven to provide a uniform starting point from which to explore the range of credit implications of different climate hazards across sectors. Since the climate takes years to fully respond to greenhouse gases in the atmosphere, in the near-term the uncertainty in physical outcomes is not driven by policy changes, but rather by scientific uncertainty within the climate models. By grouping the outcomes of climate models within a single RCP into low, medium and high tiers one can explore the range of potential severity in climate hazards such as extreme temperature and precipitation.
This article explores the Climate Linked Credit Analytics tool and how it can help users perform stress testing and scenario analysis. In particular, this article explores how the tool was used with ConocoPhillips to understand how the low-carbon transition might affect the business.
Industry Group: Agriculture, Food, and Forest Products
Research / Insights - 2020
The Coller FAIRR Climate Risk Tool has been developed by the FAIRR Initiative, which was established by the Jeremy Coller Foundation. FAIRR has worked with climate modelling experts and consulted over 30 investor analysts and industry experts to create a tool that helps investors understand how climate-related physical and transition risks and opportunities will impact investments in primary producers of animal proteins in a 2°C scenario. It is based on scenario analysis, as recommended by the TCFD.
The TCFD recommendations are relevant to the insurance industry’s insurance and investment activities. This webinar by UNEP’s Principles for Sustainable Insurance Initiative (PSI) will focus on investment portfolios and the key findings of two pioneering TCFD pilot projects by UNEP’s Finance Initiative (UNEP FI), spanning listed equity, corporate debt and real estate. Understanding climate-related physical and transition risks and opportunities in investments is critical, particularly since the global insurance industry, as institutional investors, collectively represents over USD 30 trillion in assets under management. Separately, the PSI is currently carrying out a ground-breaking project to pilot the TCFD recommendations in the context of insurance portfolios.
Author: International Association of Insurance Supervisors,
Industry Group: Insurance Companies
Research / Insights - 2020
The International Association of Insurance Supervisors (IAIS) discusses the implications of climate change on the insurance industry and calls for action on strengthening climate related financial disclosures.
The financial services industry has a crucial role to play in the transition to a lower carbon economy. Much has been done in the industry to increase the pace and scope of the response but there is much more to do. This report from Oliver Wyman argues that financial firms must respond to three imperatives on climate change:
1. Act on the risks.
2. Seize the opportunity.
3. Steer top down.
This guidance has been developed to provide practical assistance for ASX-listed entities and others to report against Recommendation 7.4 (material exposure to environmental or social risks) of the ASX Corporate Governance Council’s Principles and Recommendations (Principles and Recommendations). The guidance focuses on climate-change risk, a critical environmental risk.
This project is framed within the EU Non-Financial Reporting Directive, which came into effect in 2018 and requires large companies and financial corporations to disclose information necessary for understanding their impacts on society and environment, as well as sustainability-related financial risks. The Directive requires companies to provide information on their business model, policies and due diligence processes, principal risks, and key performance indicators relating, at a minimum, to environmental matters, employee and social matters, respect for human rights, and anti-corruption and bribery matters. This project applied leading reporting frameworks and standards to this structure, and designed a research methodology allowing to assess quality of corporate disclosures against the principle requirements of the Directive.
This analysis also examined the extent to which companies from the most exposed sectors report information corresponding to specific TCFD criteria. These sectors are Energy & Resource Extraction, Financials, Infrastructure, Resource Transformation and Transportation.
Author: European Financial Reporting Advisory Group
Industry Group: All Industry Groups
Research / Insights - 2020
This report presents the findings of the EFRAG Project Task Force on Climate-related Reporting which has considered the current state of climate-related reporting by European companies, as well as the current and potential use of climate-related reporting information by investors and other users, and other relevant stakeholders. The primary focus of this project was to identify good reporting practices and assessing the level of maturity in the implementation of the TCFD recommendations, while also taking into consideration the climate-related reporting elements of the EU Non-Financial Reporting Directive and the related non-binding Guidelines.