The French Association of Private Enterprises (AFEP) asked the think tank The Shift Project to conduct an analysis of stakeholders in climate risk assessment, their choice of methodologies and key market trends. The aim was to help companies to more clearly understand the environment in which they were developing in terms of climate risk analysis.
This document explains the main lessons learned from the study, which includes:
1. Traditionally considered within the broader framework of environmental, social and governance (ESG) analysis, the climate component is increasingly being singled out in the work of risk analysis and ratings officers. It is expected to continue being singularised in this way owing to its fundamentally systemic, irreversible, global and very-long term dimension;
2. Despite marked progress, the scope of the “climate rating” remains limited. The climate risk is only slowly and partially being integrated into the mainstream analyses and studies of major financial ratings agencies. The utilisation of analyses conducted by non-financial ratings agencies focuses on assets for which there is specific demand from a small minority of end-investors (green bonds, SRI funds, “low carbon” indices).
3. The climate rating sector, like the ESG sector as a whole, lacks resources, resulting in (i) slower integration of the systemic risks related to climate change; (ii) less R&D in that field; (iii) the promotion of oversimplified or automated analysis; (iv) potential governance problems that damage confidence among stakeholders.
4. Analysing the risks and opportunities related to “low carbon” strategies depends on the development of expertise and the mobilisation of human resources and investment, which are currently inadequate. In addition to evaluating direct or indirect greenhouse gas emissions, analysis methodologies must increasingly take into account how dynamic and forward-looking deployed strategies are.
5. There is a temptation to implement oversimplified methodologies for the assessment of investment portfolios in the financial sector. The use of such static, reductive and methodologically fragile analyses should constitute only a single step in the actual integration of the climate risk by markets.
6. While the climate issue is destined to become ever more central, in France remarkable consensus is emerging in political and economic spheres on the gravity of the matter, which could give rise to a long-term national ambition. In addition to largely decarbonised power generation and proactive legislation, France has a number of assets to help it overcome the climate challenge and become a leader of the low-carbon economy of the future in Europe and internationally.