As climate change continues to gain attention throughout the world, it has become increasingly important that banks develop a deeper understanding of climate-related issues that could affect their businesses and those they finance. By effectively identifying and managing these issues, banks can help mitigate the risks, while also seizing the opportunities presented by a transition to a lower-carbon economy.
The enterprise risk management team at this U.S.-based commercial bank is responsible for identifying any risk that could negatively affect the business. While this had traditionally included credit and operational risks, environmental, social and governance (ESG) risks also started to become a concern. The team had been working with third- party consultants to better understand how to think about climate risk in particular, and now wanted to look at hard data to assess the bank’s carbon footprint and potential exposure in its loan portfolio.
Pain Points
The bank saw the importance of taking a lead position on climate action and having a publicly available climate strategy for stakeholders. Since almost all of the bank’s climate impact and risk is related to the activities of customers, the enterprise risk management team wanted to measure and disclose the greenhouse gas (GHG) emissions of entities in its loan portfolio. This would be done according to standards established by the Partnership for Carbon Accounting Financials (PCAF) to work towards aligning the portfolio with the goals of the Paris Agreement. To support this effort, the team wanted the ability to assess:
- Carbon emissions of customers, including small- and medium-sized enterprises (SMEs) that typically don’t disclose this information.
- Physical risks that could impact customer assets (e.g., more frequent and extreme weather events).
- Transition risks associated with the move to a low-carbon economy (e.g., market, technological, and reputational risks).
- Progress towards aligning with the goals of the Paris Agreement.
- The relative climate stance of firms (i.e., good climate performers versus others).
Team members also wanted to easily access the data via a desktop solution, plus an efficient cloud-based option. They began discussions with S&P Global Market Intelligence (“Market Intelligence”) to learn more about the firm’s offering.
The bank recognized the risks and opportunities presented by climate change, and wanted to understand its current carbon footprint and steps needed to align with the goals of the Paris Agreement.
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The Solution
Market Intelligence first discussed Sustainable1, a group at S&P Global that represents the firm’s integrated sustainability offerings. This includes Trucost, the data and analytics engine that powers many of S&P Global’s ESG solutions. A wide range of capabilities were mentioned that would give the enterprise risk management team and other groups at the bank the ability to:
Evaluate the carbon footprint of the portfolio
The Trucost Carbon Emissions Dataset contains information on over 16,000 companies,1 covering Scope 1, 2 and 3 with metrics on quantities and intensities of carbon-equivalent emissions (tCO2e, tCO2e/US$ revenues) and their estimated damage cost equivalents (US$), along with impact ratios. It includes sector revenue data that gives revenues and percentages of company revenues derived from each of 464 business sectors. Data goes back to 2005, where available.
Estimate carbon emissions when not reported
The Trucost Environmentally-Extended Input-Output (EEIO) Model brings together a vast database of industry-specific environmental impact data with quantitative macroeconomic data on the flow of goods and services between different sectors of the economy. The EEIO model lets users estimate environmental impacts for a company’s own operations and across their entire global supply chain using company revenue details by industry sector.
Delve into asset-level risks
The Trucost Physical Risk Dataset offers an asset-level approach to the assessment of physical risk at the company and portfolio level. This includes detailed information to help understand the exposure of company-owned facilities and capital assets to seven climate-related physical impacts (i.e., flood, water stress, heatwave, cold wave, hurricanes, sea level rise and wildfire) under different climate change scenarios. Scores at an asset basis can then be aggregated to a company level.
Assess the ability of companies to absorb future carbon prices
The Trucost Carbon Earnings at Risk Dataset can be used to stress test a company’s current ability to absorb future carbon prices and understand potential earnings at risk at a portfolio level form increased carbon prices. Integral to this analysis is the calculation of the Unpriced Carbon Cost, which is defined as the difference between what a company pays for carbon today and what it may pay at a given future date based on its sector, operations, and a given policy price scenario.
Understand sovereign bond carbon exposure
The Trucost Sovereign Carbon Exposure Dataset provides an understanding of carbon exposure linked to investments in sovereign bonds, and enables users to compare performance against a benchmark and report in line with voluntary and mandatory reporting requirements. The dataset covers the territorial and import-export GHG emissions of 170 countries across all GHG Protocol gases, plus country-level socio- economic and energy data.
Take a deep look at fossil fuels
The Trucost Fossil Fuels Dataset identifies all the companies within a global 5,000 universe that have any revenues derived from fossil fuel activities. This includes the percentage of revenues companies derive from their business activities in fossil fuel extraction, power generation, and clean energy sectors.
Better understand energy assets
The Energy Offering delivers a range of capabilities from company financials and commodity pricing to detailed statistics, summaries and project tracking. Data covers industry subsectors, such as power, natural gas, renewables and coal. Key types of data include: market details, corporate finance data, supply and demand analytics, power plant data, third-party commodity prices, power forecasts and more.
Track a company’s alignment with the Paris Agreement
The Trucost Paris Alignment Dataset assesses company-level alignment with the Paris Agreement goal to limit global warming to well below 2°C from pre- industrial levels. This dataset enables investors to track their portfolios and benchmarks against the goal of limiting global warming to 1.5°C and 2°C climate change scenarios.
Assess sustainability practices using scores
S&P Global ESG Scores is an environmental, social and governance dataset that provides company-level, dimension-level and criteria-level scores based on the S&P Global Corporate Sustainability Assessment (CSA) process, which is an annual evaluation of companies' sustainability practices.
Easily manage integration with internal data
Business Entity Cross Reference Services quickly links standardized and proprietary IDs for entities to the S&P Capital IQ Company ID.
Access data as needed
S&P Capital IQ Pro is a powerful desktop solution for quick data access that works alongside Snowflake, a third-party cloud-based option to retrieve and query Market Intelligence data.
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Key Benefits
Members of the enterprise risk team, plus colleagues in the corporate sustainability and data science areas, saw great value in the offering and chose to subscribe to all the components. This would provide:
- Support from a team of environmental specialists who understand how to utilize all the data to create a sound climate strategy.
- Estimates of financed emissions at an entity level across the loan portfolio, including for SMEs that typically don’t disclose this information.
- A clear understanding of the physical risks customers face for their individual corporate assets located around the world.
- The transition risks associated with higher carbon prices that may be used to incentivize firms to reduce emissions.
- An understanding of the steps needed to align the loan portfolio with the Paris Agreement goals.
- The ability to report the bank’s current carbon footprint to PCAF, plus track progress being made over time to reduce emissions.
- Information to support discussions about potential opportunities to provide products in high-risk areas, given a knowledge of the climate risks.
- Improved workflows by easily integrating data with internal applications using cross- referencing capabilities and access through the cloud.
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1 All data as of January 2021.