Publication / 01 Mar 2019

TCFD Scenario Analysis: Integrating future carbon price risk

Trucost examines how investors can integrate future carbon price risk into portfolio analysis.

With 195 nations committed to curbing global warming by substantially reducing annual greenhouse gas (GHG) emissions, a course has been set to change the shape of the current economy.

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’

Videos / 29 Mar 2019 Webinar: Carbon Earnings At Risk And Its Alignment With TCFD

Trucost examines key questions around carbon pricing and alignment to TCFD recommendations.

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It is becoming widely accepted that high-carbon activities present considerable threats to social, environmental, and financial stability. Carbon pricing mechanisms ­ such as emissions trading schemes, taxes on carbon or fuel, and the removal of fossil fuel subsidies ­ can help provide the incentives needed to change company behaviour.

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Trucost’s Global Head of Corporate Business discusses the investor-and business-led trend towards disclosure of forward-looking financial metrics on climate risk.

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