The European insurance industry identified climate change as an emerging risk over two decades ago and has since campaigned for more action to be taken to mitigate its impact.1 As Europe’s largest institutional investors, many look to insurance firms to assist with the transition to a low-carbon economy. The portfolio management team at this insurance company is responsible for the investment strategy associated with the firm’s assets. The team wanted to determine the current carbon footprint of its portfolios and set appropriate reduction targets. This would enable the team to meet regulatory requirements and show key stakeholders it was taking appropriate steps to align investments with a green economy.
Pain Points
The portfolio management team was quite small and lacked the data, tools, and analyst time to undertake the needed work. As such, the team wanted to identify a firm that had the capabilities to review its equity and fixed income investments and create information that could be shared with regulators and important stakeholders. In particular the team wanted a firm that could:
- Assess the carbon footprint for portfolio companies that disclose their emissions.
- Estimate the carbon footprint for companies that do not report this information.
- Evaluate potential earnings at risk from any governmental policies that might change carbon pricing.
- Determine the physical risks associated with heatwaves, droughts, floods, and other natural disasters where assets are located.
- Track the portfolios against the goals of the Paris Agreement in an effort to limit global warming to 1.5°C and 2°C climate change scenarios.
The team began discussions with S&P Global Trucost (“Trucost”) to learn more about the firm’s offering.
The portfolio management team wanted to evaluate the climate intensity of its portfolios and establish appropriate reduction targets. This would enable it to meet regulatory requirements and let stakeholders know that important climate–related work was underway.
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The Solution
Trucost described the expertise of its staff and subject matter experts and how they would leverage a wide range of proprietary capabilities to undertake audits of the company’s portfolios. This would involve receiving details on each portfolio — including those for sovereigns, infrastructure, and renewables — and then having Trucost assess a range of climate issues. The portfolio management team would receive a detailed report highlighting the findings, with results being shown for each company and the portfolio overall. In addition, there would be an opportunity to walk through everything with Trucost and ask detailed questions. The audits would draw on a wide range of capabilities to:
Evaluate the carbon intensity of the portfolios
Carbon Emissions Data contains information on over 16,000 companies,2 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 contains 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 data when not available
The 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, given the availability of company revenue details by industry sector.
Assess the ability of companies to absorb future carbon prices
The 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 from carbon pricing at a portfolio level. 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.
Delve into asset-level details to assess physical risks
Change Physical Risk Analytics offers an asset-level approach to the assessment of physical risk at the company and portfolio level. This include data that provides 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.
Track a company’s progress on meeting goals of the Paris Agreement
The 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.
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Key Benefits
Members of the portfolio management team were confident that they would get the information they needed with the Trucost audits. In particular, they saw value in having access to:
- Seasoned subject matter experts to undertake the analysis, given limited internal resources.
- One source of comprehensive and standardized environmental information, plus a well-tested methodology that would be used to estimate the carbon intensity of non-reporting firms.
- An analysis of potential earnings at risk as government policies come into play to incentivize firms to move to a greener economy.
- A detailed look at the geographic location and sensitivity of a company’s assets and the potential physical risks they face from adverse weather conditions.
- An evaluation of how portfolio companies are aligned with the Paris Agreement to track progress being made with each of the portfolios.
- A comprehensive report that summarizes the findings to use in regulatory filings and with other stakeholders.
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1Climate Change,” Insurance Europe, https://www.insuranceeurope.eu/priorities/17/climate-change.
2All data as of February 2021.