Climate risks can potentially severely disrupt economic activity and create opportunities for companies that deliver or enable solutions to the climate emergency. Climate risks are likely to unfold in a “non-linear” way, i.e. there will be sudden economic shocks like extreme weather events rather than a steady transition. If high emitting sectors like Oil & Gas, Steel or Cement will be challenged, the move to a low carbon economy will impact every sector with winners and losers. Our role, facilitated by our expert research center Inflection Point by La Française, is to analyze and assess companies and sectors in order to invest in those winners of the transition to a low carbon economy.
Our methodology is designed to project companies’ carbon emissions into 2030. The Low Carbon Trajectory (LCT), is a key component of our inhouse Carbon Impact Analysis.
The Carbon Impact Analysis is focused on the transition risks and opportunities that companies face due to climate change. It allows us to construct portfolios that are aligned with a low-carbon economy as envisaged by the Paris Agreement. It provides us with investment insights into the specific climate risks and opportunities of companies and how they are managed. This Carbon Impact Analysis has three distinct components:
- The Carbon Impact Assessment is a deep dive into the climate change exposure of a company and its management of the respective risks and opportunities.
- The LCT Methodology is a modelling approach allowing us to determine whether a company in a high emitting sector is in line with a given climate scenario. This methodology requires the selection of appropriate climate scenarios. We are using those provided by the International Energy Agency (IEA), which provides us with the sectoral and regional activity and carbon emissions data for the period from 2014 to 2060 for three reference scenarios (2°, beyond 2° and above 2°). This is a dynamic process. It allows to capture past performance, current behavior and – most importantly – our evidence-based trend analysis. This forward-looking approach is a major improvement of our capability as an asset manager to assess climate change-related risks and opportunities for a given portfolio (equity and fixed income).
We have built our proprietary de-carbonisation pathway to control the model design and the necessary assumptions. This is crucial as we are using the results in our investment process. We model sector-specific pathways for each scenarios used up to 2030. We then model Low-carbon Trajectories for companies and determine a confidence corridor which describes an area of potential outcomes. Finally, we contrast the sector pathway with the company-specific trajectory. This allows us to determine which warming scenario a company is currently aligned with. To determine this scenario, we compare for the period 2019 to 2030 the company’s annual carbon intensity level with each scenario level. We then sum the differences to see whether the company beats each scenario.
- Then, we are engaging with many of our portfolio companies to hold them accountable.
For a more detailed explanation of our LCT Methodology illustrated by an example, please read our Carbon Impact Quarterly report here.