香港地球之友綠色金融顧問 Michele Leung / Green Finance Advisor of Friends of the Earth (HK)
The Paris Agreement aims to strengthen the global response to the threat of climate change by keeping a global temperature rise below 2 degrees Celsius above pre-industrial levels. In order to reach the goal of Paris agreement, many countries have launched initiatives that targets to lower carbon emission and transform into low carbon economy.
Though heavy industries account for a substantial portion of global greenhouse gas emissions. Financial institutions also play a very important role in this transition as they are responsible for the financed emissions, either through their lending or investments, which is also considered as scope 3 emission.
It is encouraging to see more financial institutions start to evaluate their carbon footprints. By measuring the carbon exposures and intensities of their investments or loan books, they are able to establish a baseline. After knowing where their portfolios stand, they would set up reduction targets or formulate their two degree policies.
While carbon footprinting is a fundamental step, the climate analysis won’t be complete without incorporating forward looking data and scenario analysis, as guided by Task Force on Climate-Related Financial Disclosures (TCFD).
For example, one of the key transition risks is carbon pricing risk and it is strongly tied to the earnings of investments made. According to general consensus, the carbon price is expected to increase 7-10 folds to USD $120/ton by 2030, which represents a very significant increment from now. The increase in carbon price would impact companies’ current earnings and be priced in as the adjusted EBITA and reduction in EBITA margin. Financial institutions would then stress test the potential impacts by looking into different climate scenarios and tenors.
On the other hand, physical risk is also an imminent threat to financial institutions. Their investments or collaterals for loans or even mortgage books would be located in physical risk prone areas that would suffer in great loss from the climate change. Different hazard indicators (i.e. flooding, drought, wildfire etc.) can now be mapped to the asset locations to a very granular spatial resolution, such the physical risk can be quantified on either asset level or company level.
As climate risks translate into material financial risks, financial institutions should not ignore the climate change, they should start to measure and asses the climate risks of their portfolios.