The 2015 Paris Agreement sent a clear signal to the market that decarbonising the global economy is essential to avoiding dangerous climate change. As a result, business models and investments tied to fossil fuels present significant climate risk and could be devalued, because of the physical, reputation and regulatory implications.
The Financial Stability Board Task Force on Climate-related Financial Disclosures, set up by the G20 in 2015, has investigated effective climate-related disclosures – to aid understanding of carbon-related assets, exposure to climate risk, and support informed investment, credit, and insurance underwriting decisions. The task force recommends that companies disclose direct and indirect greenhouse gas emissions, and describe the risks and opportunities caused by climate change under a range of potential scenarios.
That means reporting not just company targets and underpinning metrics, but also strategy, risk management and governance approaches. This raises many questions: how do we shift relative comparisons of company performance to a 2°C benchmark? How do we factor in “Scope Three” emissions (those emissions produced throughout the production process) to understand the full extent of emissions occurring throughout the value chain? How do we factor in physical risk to understand how to adapt to climate impacts?
Innovative metrics for financing climate action
Climate-KIC recognised this early on, and has supported a raft of innovative projects exploring some of these crucial questions to understand how enhancing reporting and disclosure can create an ability to respond and act — a “response – ability” — to climate change.
This side event in the Bonn Zone at the COP23, organised by Climate-KIC, brought together Rainer Zah, managing director, Quantis; Owen Hewlett, chief technical officer, Gold Standard; Nico Fettes, project lead and fund ratings, CDP to present these innovative projects, chaired by David Lunsford, head of development at Carbon Delta.
Here, we take a look at them:
Climetrics (presented by Nico Fettes, project lead and fund ratings, CDP)
The main aim of Climetrics is to make the mutual fund industry transparent, by offering the first climate rating for investment funds. Bringing together individual investors’ savings and retirement, this industry represents around 9 trillion Euro of assets managed in publicly available funds. At present, little is known about how these funds allocate capital.
The five-tiered leaf rating evaluates how carbon efficient a fund is, how it manage risks and opportunities, or how much it is invested in areas like fossil fuel exploration. It can also indicate that an asset manager is demonstrating action on climate change.
The scoring incorporates information on a company’s qualitative management of climate change risks and opportunities with measured and reported figures. CDP holds the largest collection globally of primary climate change, water and forest risk commodities.
Climate Risks for Asset Managers (presented by Thomas Nocke, Potsdam Institute for Climate Impact Research)
Another major challenge is the need for better disclosure of physical risk. Water availability, poor harvests and extreme weather can damage premises, operations, supply chain, distribution or affect employee safety – all crucial to a company’s financial performance.
Physical risk is rarely included in reporting, and when it is, it tends to be in varying ways and quality. It can be incorporated into scenarios, based on probabilities and magnitude. But the challenge is how to break down the risks and evaluate the likelihood of these occurring in a way that is both robust and accessible.
Climate Risks for Asset Managers (CRAMS) is a global assessment on the economic impacts of climate change on corporate activities, tailored specifically towards the needs of investors in managing climate change risks within investment portfolios.
A collaboration between Climate-KIC partners, the Potsdam Institute on Climate Impact Research (PIK) and Carbon Delta, this project is translating major climate policy and physical climate impact risks into company risk assessments by applying and improving existing climate data sets, damage, growth and cost functions, and CO2 pricing models into comprehensive financial risk assessments.
The physical risks such as exposure, hazard and vulnerability to disaster risk can be estimated for individual facilities, providing a risk assessment of firms. On this basis, investors can choose to be “active managers” and to move their money elsewhere.
Corporate scope 3 action (presented by Owen Hewlett, Gold Standard)
Setting and monitoring climate targets is not easy, particularly given the blurred boundaries between companies and sectors. Including “Scope Three” emissions, is critical to understanding the true picture.
According to the GHG Protocol Corporate Standard (PCS), they can represent a company’s biggest greenhouse gas impacts. When testing with Kraft Foods, for instance, the GHG PCS found that value chain emissions accounted for more than 90 per cent of the company’s total emissions Corporate Scope 3 action.
Based on the idea of ‘insetting’, where companies can invest in change projects within their supply chain and offset the benefits against their science-based emissions targets, Gold Standard is exploring how it can become attractive for companies to invest in suppliers, not just within their immediate boundaries, but also outside the major scope of their supply chain.
Full lifecycle greenhouse gas emissions (presented by Rainer Zah, Quantis)
Continuing on the idea of Scope 3 emissions, the aim of this project run by Quantis, together with Carbon Delta, is to have fully COP-compliant decision making in the finance sector by assessing the full life-cycle of greenhouse gas emissions.
Rather than looking at the aggregation of emissions from sectors, the project is exploring disaggregated results to help pinpoint exactly where emissions are coming from — scope 1, 2 or 3.
This analysis notes that it is really only vertically integrated companies that can readily evaluate full lifecycle emissions within scope 1, while differently structured supply chains will have the majority of their emissions coming from scope 3.
Using Swiss companies as a basis, Quantis showed how company reporting lacks consistency, with some companies reporting scope 1, some reporting scope 2 and a handful reporting scope 3. By providing an analysis for the full lifecycle, it can help harmonise reporting.
Combining data from Carbon Delta — analysis of types of company, structure and where they are producing, with data from Quantis — such as regional information on land use and water scarcity — it’s possible to map and analyse emissions hotspots; to help identify triggers, and subsequently take action. The first pilot application of this is on food companies.
Interested to know more about Climate-KIC at COP23? Find out what other side events Climate-KIC is organising in the Bonn Zone here.