With the increase of the technology and policy implementations towards the transition to a low-carbon economy increase, the competitiveness of companies with high carbon emission intensity decreases gradually. The process of transition to a low-carbon economy creates new risks and opportunities for institutional investors and financial institutions.
Twenty institutional investors from eleven countries convened at the United Nations Environment Programme Finance Initiative (UNEP FI) and announced the publication of a guide for investors to help them understand the impact of climate change and climate actions on investor portfolios. Thanks to the assessments in the guidelines, the investors will have the opportunity to disclose the risks and opportunities associated with climate change in line with the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD) established by the Financial Stability Board. The guidelines will help investors to contribute to the creation of climate-resistant, low-carbon economies.
Speaking at the opening, UN Assistant Secretary General and Secretary of the UN Environment Group Satya Tripathi said that we should complete the transition to a carbon-free economy by 2050 and stated that it is still possible to protect the world's ecosystems.
The guide, which contains the most advanced approaches and tools, was made available to the investors. The guide also details the experiences of twenty investors who have tried the tools and methodologies as case studies. It also examines the sector-based risks and costs of the policies governing the physical risks that arise in the 1.5°C, 2°C and 3°C scenarios, the risks that arise in the transition to an economy with low-carbon technologies, and the risks associated with policies that tackle climate change over a selected 30000 sample of companies. Key findings can be summarized as follows:
- Under the 1.5°C scenario, the transition to a low-carbon economy predicts a 13.6% drop in the selected portfolio. Considering that the assets under the world's top 500 fund managers amount to 81.2 trillion USD, the total loss stands at 10.7 trillion USD.
- The risks associated with the transition to a low-carbon economy and climate change point to different costs across different sectors. Diversity in portfolios will be important in managing these costs.
- In the 2°C scenario, the revenues to be obtained from the sale of low-carbon technologies stand out and are estimated to amount to approximately 2.1 trillion US Dollars.
- The opportunities offered by low-carbon technology compensate for losses and risks. Portfolio value increases by 3.21%, 6.94% and 10.74% in 3°C, 2°C and 1.5°C scenarios.
- In case governments fall behind with the implementation of the policies and actions associated with these policies, investors will face a greater risk.
When the current method is applied to a portfolio compromising of the largest 1,200 companies in the MSCI World index, the results are as follows:
- Although the climate-based net effects of this portfolio can be said to be balanced, the most favorable situation occurs in case of the scenario where we limit global warming to 1.5 °C (+0.05% value at risk), and the most unfavorable situation occurs in case of the 3.0 °C scenario (-0.46% value at risk).
- In the scenario where we limit global warming to 1.5°C, green revenues are calculated to be 6 times the scenario we limit it to 3°C.
Investors play an important role in ensuring the continuance of financial stability and facilitating the transition of our world to a carbon-free economy. The recommendations of the Taskforce on Climate-Related Financial Disclosures is considered to be innovative as the recommendations encourage investors to disclose their climate risks transparently and to plan the future and investments through the lens of climate scenarios.