The Investment Leaders Group has published a new report detailing the results of a new model which quantifies the impact of potential climate and energy regulation on company profitability.
The Investment Leaders Group (ILG) is an international network of investors managing over $4 trillion, convened by the Cambridge Institute for Sustainability Leadership (CISL). Its new report, Feeling the heat: An investors’ guide to measuring business risk from carbon and energy regulation, shares the results of a new model which details the impact of carbon- and energy-regulation scenarios on firm-level profitability. Specifically, the report analyzes the impact of such regulations on companies at a national level.
According to CISL, the new report and model are intended to provide “context” to investors. “Without giving analysts and portfolio managers effective tools to assess climate risk and its financial impacts we cannot expect portfolios to be positioned for a low-carbon future,” said Urban Angehrn, Chief Investment Officer of Zurich Insurance Group. “This model form part of the groundwork that will allow investors to start making the necessary adjustments.”
The new model integrates two regulatory scenarios for each of the countries it covers; the United Kingdom, Spain, Germany, Canada (Alberta), and the US (California): a Transition Scenario which reflects “plausible changes” to national carbon- and energy-regulations that might come into effect by 2020; and the €45 Carbon Price Scenario, which adds a carbon price of €45/tonne of CO2 “as a proxy for more aggressive policy action to curb emissions.”
Among the findings is the unsurprising news that “energy and carbon regulations can have a significant impact — both positive and negative” on company profitability at a national level. The results also highlight significant differences between individual companies within the same sectors and geographies — especially once a company’s response potential is included. According to the authors of the report, “This underscores the importance of granular, bottom-up analytics for those trying to understand firm-level risks.”
Impact at a sector level across five countries
“This research underlines the financial risk of not addressing climate change in investment analysis,” said Bozena Jankowska, Global Co-Head of ESG at Allianz Global Investors. “Investors can begin anticipating this financial impact and make investment decisions that are consistent with the expected future direction of climate policy.”
“The work of the ILG could not be more timely given the attention G20 governments are giving to how environmental risks are handled in the financial system this year,” said Andrew Voysey, Director of Finance Sector Platforms at CISL.
“G20 Ministries of Finance and Central Banks are increasingly aware of the challenges posed by environmental risks and risks from the transition to a zero carbon economy. They want to understand the tools and techniques financial institutions are developing and what challenges they are facing implementing them. The ILG’s experience is extremely relevant.”
More information on the report, Feeling the heat: An investors’ guide to measuring business risk from carbon and energy regulation, can be found here.
Members of the Investment Leaders Group include: Allianz Global Investors; First State Investments; Loomis, Sayles & Company; Natixis Asset Management; Nordea Life & Pensions; Old Mutual Group; PensionDanmark; Standard Life Investments; TIAA Asset Management; and Zurich Insurance Group.