We have examined the extent to which company profits and investor returns could be at risk from tougher climate policies and higher carbon prices. Our Carbon Value at Risk model shows almost half of listed global companies would face a rise or fall of more than 20% in earnings if carbon prices rose to $100 a tonne (for further details see: http://www.schroders.com/en/about-us/corporate-responsibility/sustainability/climate-progress-dashboard/carbon-var/). We have also looked at how falling demand will impact the profitability and the fate of fossil fuel producers. Our analysis shows that up to 20% of listed companies' cashflows are at risk if policies strengthen in line with political commitments (for further details see: http://www.schroders.com/en/about-us/corporate-responsibility/sustainability/climate-progress-dashboard/fossil-fuel-producers/).
We have developed a proprietary model to help our analysts, fund managers and clients measure and manage the physical risks climate change poses. Effectively, we ask “what would it cost a company to insure against physical risks caused by climate change for the remaining life of their assets?”. The costs to most global companies are under 5% of their current market value, but are higher for the most exposed companies. While smaller than the risks posed by carbon pricing or changes in demand growth, the impact is clearly significant and more certain. For further information, please see: https://www.schroders.com/en/sysglobalassets/digital/insights/2018/thought-leadership/climate-change---the-forgotten-physical-risks_final.pdf/.
We have examined the impact on companies’ valuations from increases or decreases in growth stemming from a transition to a two degree pathway. That transition would require faster growth in low carbon industries (such as clean energy technologies) and lower investment in emissions intensive sectors (eg coal power generation). By combining the required change in growth from current levels to those needed to meet two degree targets, and combining that growth impact with profitability measures, we gauge the value impacts – positive or negative – for individual industries and companies. For information please see: https://www.schroders.com/en/us/institutional/insights/climate-progress-dashboard/fossil-fuel-producers/.
We have looked at the impacts on fossil fuel companies of sharp declines in demand for hydrocarbons, required to contain long run temperature rises to two degrees. By combining analysis of producers’ cost positions, reserves and fossil fuel mixes, we gauge the risks posed by those assets becoming “stranded”. For information please see: https://www.schroders.com/en/us/institutional/insights/climate-progress-dashboard/fossil-fuel-producers/.
We make all of those tools available to our analysts and fund managers and our sustainability team works with them to understand their application and implications. We focus on ensuring the risks climate change poses – positive or negative – are measured and considered in their investment decisions (and have focused on measures which quantify climate risk in dollars of value rather than tonnes of carbon as a result). That work has informed different teams’ investment decisions, typically by identifying potential beneficiaries or losers, which are then examined more detail by our sector and sustainability analysts, including for instance investments in a low carbon aluminium producer and nuclear utility.
Furthermore, in several funds we explicitly avoid fossil fuel producers or limit carbon intensity of portfolios.