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    Monitoring corporate climate risks

    Monitoring corporate climate risks

    24 February 2021 Responsible investment
    Over the past few years we have observed a large increase in interest from our clients for climate risk specific strategies and demand for more granular data on climate change.

    There has been a growing awareness of the science behind climate change and the risks it poses to companies. Expectations have also been raised by companies being required to report climate related data and the stated intention of governments to focus pandemic financial aid on a green recovery.

    We developed our first climate risk model in 2017 as a comprehensive ranking of fixed income corporate bond issuers that enabled better engagement activity with companies. 

    Now, to improve understanding of the key risks that climate change poses and further develop our offering in sustainable strategies, we have expanded the scope of the model; it now collects metrics on 1,700 issuers for 14 climate-related issues. The new Prime climate risk ratings will help our portfolio managers and analysts to:

    • consider material climate risks to support their investment decisions and identify potential for constructive engagement with debt issuers
    • build dedicated strategies for clients seeking portfolios that reflect specific climate criteria.

    In expanding our research, we have now added S&P Trucost, SBTI (Science Based Targets Initiative) and TPI (Transition Path Initiative) to our existing data providers CDP and MSCI. Our portfolio managers and analysts overlay their expertise on to this data to ensure a focus on the material risks for default by issuers.

    The Prime climate risk ratings creates two scores for each company; one for its transitional risks and one for its physical risks.

    • Transitional risk analyses a company’s policies for transitioning its operations to reduce carbon emissions. These are the key performance indicators a company has set itself, e.g a plan to reduce emissions in line with the Paris Agreement goal of limiting global warming to below 2°C above pre-industrial levels. Seven measures make up the transitional risk score (integration, targets, leadership, emissions, reporting, products and services, value chain).
    • Physical risk measures the likelihood of a company's assets being damaged or incapacitated due to fire, river and coastal flooding, hurricanes, heatwaves, coldwaves and water stress. We differentiate between chronic and acute risks.

    Both risks are scored between 1 to 5 for each company; 5 being the worst score and 1 the best. The overall score is the higher of the two scores, e.g. if a company scored 4 for physical risks and 2 for transitional risks, its overall score is 4 – the rationale being that we want to reflect the most significant risk. The ratings themselves are aligned with the framework created by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

    Today, the Prime climate risk ratings sit alongside Insight’s Prime corporate ESG ratings which assess material ESG risks for corporate debt issuers based on extensive global data and qualitative research.

    Find out more about Prime climate risk ratings

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