Help investors assess risks related to energy transition

Energy Transition Risk project launched in Paris

In the wake of the Paris Agreement on Climate Change at COP21 and the launch of a task force on climate-related financial disclosure by the G20’s Financial Stability Board, a consortium of think-tanks, researchers and financial sector companies have gathered their forces to help investors assess these risks.

The Energy Transition Risk (ET Risk) project has been launched by a consortium of organisations in Paris following a €2.2m (approx.) grant from the European Commission’s Horizon 2020 programme.

The European consortium aims to mobilize capital for sustainable energy investment by developing an energy transition assessment framework which would bring transparency to the materiality of the energy transition risks and opportunities and help investors with data, research and analytics to assess the impact on bond and equity portfolios.

The consortium includes 2° Investing Initiative (project coordinator), Carbon Tracker Initiative, The CO-Firm, I4CE (Institute for Climate Economics), Kepler Cheuvreux, McGraw Hill Financial (MHFI), and the University of Oxford’s Sustainable Finance Programme.

Focusing on how an assessment of energy transition risk can improve the “financeability” and attractiveness of sustainable energy and energy efficient investment, the ET Risk project will specifically develop:

•Standardized macroeconomic scenarios associated with changes in policies, technology deployment, and climate litigation for a range of industries and how their trajectory could impact risk variables that inform financial analysis
•A physical assets database for several industries, including a mapping of ‘committed greenhouse gas emissions’ associated with each asset and the extent to which sustainable energy investments can ‘unlock’ these future emissions
•A ‘stress test’ framework to assess the impact on company valuations and credit risk
•Financial performance benchmarks through the creation of indices

On the same day that the ET Risk research consortium was launched in Paris, the European Systemic Risk Board (ESRB) published a report calling for “carbon stress tests” to assess the potential materiality of energy transition risks. The ESRB makes several recommendations, including the development of “relevant macroeconomic scenarios against which to stress test firms” and “dedicated carbon stress tests” in the medium term. They also call for further disclosure from companies to inform risk analysis.