Aims to provide transparency to the financial risks & opportunities for investors in a low-carbon economy

March 31st 2016

In the wake of the Paris Agreement on Climate Change at COP21 and the launch of a task force on Climate-related financial risk by the Financial Stability Board, a consortium of think-tanks, researchers and financial sector companies gather their forces to help investors assess these risks.

The Energy Transition Risk (ET Risk) project has been launched by a consortium of organisations in Paris following a nearly €2.2m grant from the European Commission’s Horizon 2020 programme.

The European consortium aims to mobilize capital for sustainable energy investment by developing an energy transition assessment framework which would bring transparency to the materiality of the energy transition risks and opportunities and help investors with data, research and analytics to assess the impact on bond and equity portfolios.

The consortium includes 2° Investing Initiative (project coordinator), Carbon Tracker Initiative, The CO-Firm, I4CE (Institute for Climate Economics), Kepler Cheuvreux, McGraw Hill Financial (MHFI), University of Oxford Stranded Assets Programme.

Focusing on how an assessment of energy transition risk can improve the “financeability” and attractiveness of sustainable energy and energy efficient investment, the ET Risk project will specifically develop:

  • Standardized macroeconomic scenarios associated with changes in policies, technology deployment, and climate litigation for a range of industries and how their trajectory could impact risk variables that inform financial analysis
  • A physical assets database for several industries, including a mapping of ‘locked-in Green-House-Gas emissions’ associated with each asset and the extent to which sustainable energy investments can ‘unlock’ these GHG emissions
  • A ‘stress test’ framework to assess the impact on company valuations and credit risk
  • Financial performance benchmarks through the creation of indices

On the same day that the ET Risk research consortium was launched in Paris, the European Systemic Risk Board (ESRB) published a report  calling for “carbon stress tests” to assess the potential materiality of energy transition risks. The ESRB makes several recommendations, including the development of “relevant macroeconomic scenarios against which to stress test firms” and “dedicated carbon stress tests” in the medium term. They also call for further disclosure from companies to inform risk analysis.

“Capital markets need to correctly price climate risk and the ‘true’ costs of investing in fossil fuels. Carbon Tracker welcomes the ET Risk project as a further step towards the internationalisation of financial stress-test models able to hold companies to account for how they propose to manage the energy transition to a low carbon future. Meeting the Paris agreement goals has strong implications for energy demand, price and emissions scenarios. We need to set a new benchmark for the industry capital expenditure plans. There are clear signs that major fossil fuel companies are overestimating the needed capex on projects in a 2˚C scenario and therefore run the risk of wasting shareholder funds and potentially stranding assets.  The ET Risk Project will help investors to understand these challenges and to price these risks more effectively.” says Mark Campanale, Founder and Executive Director of Carbon Tracker.

“The progress made in a few years is very impressive: when we started the Initiative four years ago having ‘2° Stress tests’ for financial institutions looked like science-fiction. Today, they are mandatory in France and the ESRB advisory scientific committee now suggests generalizing them.” Stan Dupré, founder and Executive Director of 2° Investing Initiative.

“The Paris Climate Agreement emphasizes that governmental action will facilitate the pathway to a 2°C world. This creates fundamental changes in the real economy and thus poses risks to investors. We already see up to high double digit margin risks arising for, for example, cement companies – even accounting for any technology or market action they can perform to avoid regulatory pressure. We are pleased to partake in the ET Risk project to integrate the awareness on financial risk in the transition phase across sectors and companies in the market.” Dr. Nicole Röttmer, Founder & CEO, The CO-Firm.

   “The idea behind the project is to better define how climate-related risks can affect the financial sector. Until now, the same narrative about these risks was applied evenly across the financial sector. The ET Risk project should help us better understand how different types of institutions will be impacted by those risks.” says Ian Cochran, ‘Finance & Investment’ Program Director at I4CE – Institute for Climate Economics.

   “Kepler Cheuvreux research aims to help investors navigate the emergence of new tools and integrate them into investment analysis. We are very happy to be part of the ET project to help further advance the topic and related methodologies, and leverage our analytical knowledge in the process”, Julie Raynaud, Senior Analyst Sustainability Research, Kepler Cheuvreux.

This project will help provide valuable insight for the capital markets into the risks and opportunities associated with financing the transition towards a low carbon energy future” said Michael Wilkins, Managing Director, Head of Environmental and Climate Risk Research, Standard & Poor’s Ratings Services, a division of MHFI. “We are pleased to be working on the ET Risk project with capabilities from across Standard & Poor’s Ratings Services, S&P Global Market Intelligence and S&P Dow Jones Indices. The current landscape of data and models does not permit financial institutions to fully integrate energy transition risks & opportunities in their processes” added Michael Bolle, Vice President, S&P Global Market Intelligence, a division of MHFI.