TCFD Scenario Analysis: Integrating future carbon price risk

Private markets will play a key role in this transition by redirecting capital to lower-carbon solutions, but further stimulus is required to make effective change quickly. To help investors navigate carbon price risk, Trucost has compiled a dataset of possible future carbon prices that can be used to stress test a company’s current ability to absorb future costs. Integral to this analysis is the quantification of a Total Risk Premium – the difference between what a company pays for emitting carbon today and what it may pay in the future under three different policy scenarios. By examining the potential impact of increased costs on profits, Trucost’s dataset offers market participants forward-looking estimates of financial risk for over 15,000 listed companies. In this paper, we will:

• Examine the drivers of carbon price risk for a universe of 500 large-cap listed companies.
• Calculate the Carbon Earnings at Risk for a hypothetical portfolio (based on the universe mentioned above) to show how the dataset can be used to report in line with TCFD best practice requirements.
• Demonstrate how the dataset can be extended to understand potential Value at Risk for equity and credit investors.

Register for our webinar on ‘Carbon Earnings at Risk and its Alignment with TCFD’