Sycomore Asset Management relies on existing publicly-available climate-related scenarios to assess the likelihood of transition and physical risks. Two major sources serve as a basis for our assessments: IEA scenarios (Stated Policies Scenario, Sustainable Development Scenario and Current Policies Scenario) for transition risk and IPCC scenarios for physical risks (RCP 8.5, RCP 6.0, RCP 4.5 and RCP 2.6).
2°C and below climate scenarios flag technologies or activities with high-GHG intensities that are not compatible with a transition toward a low-carbon economy nor an environmentally resilient world.
We use climate scenarios for the following initial assessment:
1. Bottom-up assessment of transition risk:
- a. Each potential investment review includes a Net Environmental Contribution (NEC) assessment.
Climate-related scenarios are integrated into a more comprehensive methodology: the NEC. Based on the outcomes of a four-year research program led by Sycomore AM, the Net Environmental Contribution (NEC) metric has been developed and applied to more than 1,300 companies in our investment universe.
The NEC measures the degree of contribution to the energy and environmental transition of any product, service, company, portfolio or index. It is an approach based on scientific physical data from life-cycle analysis by function, sourced from academic tools, third-party studies and branch initiatives. The approach is multi-criteria and goes “beyond carbon” by integrating 5 key environmental challenges: climate change, biodiversity, air quality, water and resources/waste. The outcome is a single figure per company, based on its different underlying activities, ranging from -100% for the most environmentally damaging activities to +100% for environmental solutions clearly aligned with a low-carbon and environmentally resilient world. The 0% point is given for the average environmental impact of the function that the given activity is trying to fulfill.
The NEC is a solid proxy for transition risk and an insightful measurement of companies' contribution to the environmental transition. It is used as part of the transition risk assessment, for investment decisions and as a reporting metric for Sycomore AM.
Scenario analysis helps us build our Net Environmental Contribution (NEC) frameworks and assessing positively and negatively contributing activites, such as: building materials (e.g. cement activities have a NEC of -50%), mobility (e.g. air freight has a NEC of -100% and air travel of -60%), energy (electricity generation from coal has a NEC of -100%).
- b. Each potential investment review includes an assessment of the "Trajectory & alignment" criteria
This criteria covers the scenario analysis and analyses the alignment to a 2°C or lower future. It is based on various scenarios and publicly available tools (such as SBTi, TPI, PACTA, CDP, FAIRR) and private initiative (SB2A methodology based on SDA) as well as on company disclosure. The "Tranectory & Alignment" assessment also encompasses other environmental objectives.
- 2. Bottom-up assessment of physical risk: Each potential investment review includes an Environment pillar review in our SPICE model, which includes mid- and long-term risks related to climate change and other environmental challenges. It includes LT transition risks flagged by scenarios as well as physical risks that could materialize over the long-term.