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Starting from 2012, the European sectors covered by the carbon quota system of the EU ETS (Utilities, Building Materials, Oil & Gas, Basic Materials, Airlines, Maritime Transport) will be financially impacted by the entry into phase III. Moreover, other sectors are potentially and indirectly affected by an increased carbon cost, such as the Automotive, Capital Goods, Chemicals, or even the Food & Beverages sectors, a significant share of the "bottom line" of which is exposed to carbon risk.
Although the market is still struggling to incorporate the carbon risk that weighs indirectly on the economic fabric, with regard to the UK market, the "Low-Carbon" strategies constructed from direct GHG emissions have paid off over the past five years on average for most of the sectors most exposed to carbon risk. In addition, the volatility of these strategies is slightly lower.
The integration of carbon and climate risk ex-ante (definition of an eligible universe) or ex-post (monitoring of environmental KPIs) is made possible by the availability of standard measurements, such as the direct and indirect emissions provided by the Trucost agency or the MSCI - RiskMetrics environmental scores. Some of these indicators are also already available to AXA IM's managers through AXA IM's ESG proprietary platform, the RI Search.
During the last two decades the OECD members have put into place carbon markets as regulatory mechanisms in order to control greenhouse gas emissions (GHGs). The companies with the highest emissions must increasingly also take into account the cost associated with the emission of carbon, and integrate the risks and opportunities related to climate change into their strategies.
According to a Ceres survey, more than 60% of the surveyed investors state that they integrate regulatory carbon risk into their investment considerations. But only 20% claim to take carbon risk directly into account in their valution models.
Why did AXA commission the research?
The purpose of the research was to analyse the impact of carbon risk for investors on the European market in general and the UK market in particular. A clasification of solutions for investors wanting to incorporate carbon risk, and thus climate risk, into their management strategy is also presented.