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Measuring Climate-Related Risks in Investment Portfolios

May 23, 2017

The latest SSF Focus Publication “Measuring Climate Related Risks in Investment Portfolios” created by Inrate discusses risks and opportunities within the context of investment portfolios. It provides an overview of the existing practices to assess such risks and illustrates how to properly conduct climate-related risks screening.

Risks and opportunities
There are both risks and opportunities related to climate change. Physical risks, such as climate change induced sea-level rise, and transition-related risks, such as the imposition of climate change mitigation policies, lead to repercussions on a financial level. However, mitigation policies can also foster the development of new, low-emission products and services, such as increased access to renewable energies. This means that climate change also brings opportunities which range from improved production processes, to the access to new markets, assets and public sector incentives, which in turn could lead to a reduction in operating costs and an increase in revenues.

Different goals need different methods
Investors pursue diverse goals when it comes to climate-related risks and opportunities, from the reduction of their financial and reputational risks to their contribution to a low-carbon economy. Different measuring methods can be employed depending on the investors’ aims and the use of one or a combination of them might be appropriate. Approaches that could support financial actors in the integration of the aforementioned risks and opportunities into investment decisions are impact metrics (i.e. carbon footprint and carbon intensity), the weighted average carbon intensity, green and brown share approaches, climate scenario compatibility analysis and climate-related value at risk (VaR). Finally, ESG data, such as information on firms’ climate change policies and GHG reduction measures, are good indicators for a company’s readiness to deal with climate-related risks.

Conducting a portfolio screening
The choice of metrics depends on the individual goals of investors. Specialized data and research providers, such as Inrate, can support the screening process by delivering raw data, bespoke analysis or specialized climate risk products. Ideally, climate related risks and opportunities are monitored over time. Finally, subsequent actions resulting from the monitoring should be defined and reported to the stakeholders.

Measuring Climate-Related Risks in Investment Portfolios

Financial market infrastructure provider SIX announced today the launch of a new climate data offering, aimed at supporting investors in reporting and monitoring of climate factors, and in climate-related investment and risk decision making.

The climate data sets, from various data providers in a range of industries, will provide clients with modelled and reported emissions data, covering over 33,000 companies globally, and bringing together multiple data sets on regulatory, historical and forward-looking climate impacts from providers including MSCI and Inrate. SIX also announced that it has recently entered into an agreement with environmental disclosure platform CDP to offer access to its global Greenhouse Gas (GHG) Emissions Dataset across various industries.

According to SIX, the new data sets come as investors increasingly require ESG and climate data to monitor investment decisions and to meet growing regulatory disclosure requirements, including the EU’s SFDR and the U.S.’ upcoming SEC Climate Disclosure Rules.

Martina Macpherson, Head ESG Product Strategy and Management, Financial Information, SIX, said:

“Understanding, measuring and managing climate risk and opportunities, as well as the impact that these can have on investment decisions, is a critical area of focus for market participants and policy makers alike. As more climate risk monitoring and reporting is required globally, the cost of compliance is increasing – both in operations and in terms of specialist ESG resources. SIX works with established providers of basic and specific ESG and climate data in the market.”