Case Study — 10 Sep, 2021

Managing Physical and Transition Climate Risks at a Central Bank

The Client: A central bank in a European country

Users: The research and portfolio management teams

Natural disasters as the result of climate change are increasing in both intensity and frequency, resulting in significant financial losses for companies. A record number of hurricanes, wildfires, and floods exacerbated by climate change cost the world $210 billion U.S. in damages in 2020.1 To address the growing concern, in 2017 a group of 83 central banks and financial supervisors joined the Network for Greening the Financial System (NGFS). NGFS aims to accelerate the scaling up of green finance and provide recommendations for the role central banks can play in this initiative. This includes having central banks lead by example by integrating climate-related risks and sustainability factors into their financial stability monitoring and portfolio management processes. The research and portfolio management teams at this central bank needed to enhance their analytical capabilities for environmental, social, and governance (ESG) issues to address the NGFS’s recommendations.

Pain Points

The research and portfolio management teams wanted to address both transition risks, associated with policies that encourage companies to move to a low-carbon economy, as well as physical risks, associated with severe weather conditions. This required expanding the ESG data they had available and incorporating climate scenarios into their economic models and forecasting methods. To support these efforts, the teams needed to identify a firm that could provide:

  • A comprehensive set of carbon data to evaluate the current footprint of the portfolio.
  • The ability to estimate carbon intensity for companies that do not report this information.
  • An understanding of a company’s potential earnings at risk from changes in carbon pricing.
  • Insights on potential physical risks from droughts, floods, cold waves, and other natural disasters.
  • The ability to track portfolios and benchmarks against the Paris Agreement goal of limiting global warming to 1.5°C and 2°C climate change scenarios.
  • Details on fossil fuel reserves and potential embedded carbon emissions, as well as on energy assets.
  • An efficient data feed option to deliver information to an internal repository to drive applications.
  • The ability to easily link internal with external data to create one comprehensive database.

The team began discussion with Trucost, part of S&P Global, to learn more about the firm’s offering.

The central bank needed to get a handle on both transition and physical risks associated with climate change.

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The Solution

Trucost discussed a wide range of capabilities that would enable the climate risk team to:

Evaluate carbon intensity of the portfolio

Carbon Emissions Data contains information on over 22,000 companies2, 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

S&P Global 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, given the availability of company revenue details by industry sector.

Assess the ability of a company to absorb future carbon prices

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 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

S&P Global Trucost Climate 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 the Paris Agreement goal

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.

Take a deep look at fossil fuels

Trucost Fossil Fuels Dataset identifies all the 331 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. News provides essential sector-specific regulatory and financial updates. Key types of data available include: Market details, corporate finance data, supply and demand analytics, power plant data, third-party commodity prices, power forecasts, and more.

Access data as needed

XpressfeedTM automates the download and management of Trucost data and enables delivery as needed in a ready-to-query relational database to link to internal applications.

Easily manage data integration

Cross Reference Services enables the linking of over 63 million instruments to a range of identifiers, such as ISINs and CUSIPs, 28 million entities to the S&P Capital IQ Company ID, and industry sectors to GICS and other industry classifications schemes.3

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Key Benefits

Both the research and portfolio management teams were impressed with the breadth of the Trucost offering and felt the solution set could take their analysis to a new level to establish best practices and be an example for other banks in the country. In particular, they saw value in having:

  • Ready access to one source of comprehensive and standardized environmental information, plus a well-tested methodology to estimate carbon intensity for non-reporting firms.
  • A better understanding of both transition and physical risks that could affect companies in the bank’s portfolio.
  • An opportunity to dig deeper on assets owned by energy companies.
  • Improved workflows with easy integration of data with internal applications using a powerful data feed solution and cross-referencing capabilities.

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1Disasters caused $210 billion in damage in 2020, showing growing cost of climate change,” CNBC Environment, January 7, 2021, www.cnbc.com/2021/01/07/climate-change-disasters-cause-210-billion-in-damage-in-2020.html
2All data as of February 2021.
3ISIN=International Securities Identification Number; GICS=Global Industry Classification Standard. Data as of September 2020.

Location

Europe