A Global Asset Manager Enhances Investment Strategies with Comprehensive Risk Assessment Solutions

THE CLIENT:
A large asset management firm from Europe

USERS:
Investment Management Risk Department

Pain Points

To address the firm’s strategic climate-linked investment goals and to align with upcoming regulations on disclosure practices in Europe, the client had issued a request for proposal (RFP) for support in addressing these challenges:

• Lack of expertise in quantifying climate risk: The firm needed a granular quantitative framework to assess the projected impact of climate risks on the financial profile of their portfolios.
• Limited access to extensive and reliable financial and environmental Data: The firm required accurate analysis driven by high-quality data that encompassed both financial and environmental factors.
• Inability to Link Internal and External Data: The firm lacked the capability to integrate various data sources, which hindered a holistic view of climate risks.
• Inefficient analysis across the different portfolios: The firm needed to efficiently analyze a varied portfolio, including corporates and financial institutions, each with unique risk profiles.

The department’s pain points underscored the necessity of adopting a robust climate risk assessment framework tailored for asset management, specifically for their Financial Institutions and Private Equity book. S&P Global Market Intelligence emerged as the winning solution, effectively addressing the client’s challenges and surpassing competitors in the process.

The Solution

Given the range of asset classes within the investment portfolio of the asset manager, the proposed solution included:

• Climate Credit Analytics (CCA), an award-winning climate scenario analysis model suite, launched in 2021 to assess the impact of climate risks on Corporates in the private equity book ^[3]. Climate Credit Analytics makes the critical link between climate change and credit risk by translating climate scenarios into drivers of financial performance (e.g., production volumes, fuel costs and capex spending) tailored to specific industries. These drivers are then used to condition and forecast complete financial statements of corporates under various climate scenarios, including those published by the NGFS, a group of over 160 central banks, financial authorities, and observers. ^[2]
• Climate RiskGauge (CRG), which offers a probabilistic view of how climate risk can influence the financial and credit profile for Financial Institutions in the asset management book, providing a portfolio-level as well as counterparty-level. This tool enables businesses to stay current with the fast-paced evolution of climate risk across a variety of asset classes.

Both products leverage S&P Global Market Intelligence’s proprietary datasets and capabilities, including financial and industry-specific data, sophisticated quantitative credit scoring methodologies and company-level environmental and physical risk datasets that powers many of S&P Global’s sustainability solutions.

Key Features

• Asset-class specific methodology: For Corporates, CCA is tailored to the real economy across sectors and various business models, balancing risks and opportunities. Similarly, CRG tailors the approach of how climate risk impacts other asset classes through distinct approaches for Financial Institutions.
• Compatibility with multiple climate scenarios: These include scenarios from 1) the NGFS, 2) Regulators including European Central Bank, Federal Reserve Board and Monetary Authority of Singapore 3) short term stress scenarios (which may be user-defined) for added flexibility.
• Best-in-class data: These tools leverage S&P Global’s extensive and proprietary datasets including company-level financial and emissions data, industry-specific data, and quantitative credit scoring methodologies.
• Easy implementation for smooth integration into existing processes and workflows: This includes a compact set of Excel templates connected to S&P Global’s databases for real-time on-the-fly analysis, as well as web services (for CCA) enabling users to undertake the analysis within their own IT environment.
• Transparency into the modeling framework with a clear connection between key transition variables, drivers and resultant financial impact: This enables clients to understand the model inputs, drivers and output, supporting confident reporting on climate-related financial risks to regulators and investors.
• Sensitivity Analysis: This feature empowers businesses to meticulously examine the potential impacts of change in specific variables or assumptions on their climate risk exposure., This capability facilitates the development of robust risk management strategies, empowering businesses to navigate climate-related challenges effectively.

Key Benefits

Implementing a comprehensive climate risk quantification solution offers several key benefits for the Investment Management Risk Department:

• Enhanced Risk Assessment: By utilizing advanced analytical tools and reliable data, the department accurately assessed and quantified climate-related risks for their clients. They are now equipped with a more nuanced understanding of how environmental factors impact an entity’s financial profile.
• Informed Decision-making: To project climate-conditioned financials empowered the department with tailored insights into the potential climate impacts on their investment portfolios.
• Competitive Advantage: By seamlessly integrating climate risk assessments into their advisory framework, the firm positioned itself as a leader in transition financing. This proactive approach not only catered to the growing demand for environmentally responsible investment strategies but also set the firm apart in a competitive market attracting a broader base of environmentally conscious clients.
  

Adopting a comprehensive climate risk quantification solution empowered the Climate Risk team to enhance risk assessment capabilities, facilitate informed decision-making, and secure a competitive advantage. By leveraging advanced analytics and reliable data, the team adapted a more resilient investment strategy that aligned with the firm’s commitment to advancing responsible investing standards.

Click the links to know more about Climate Credit Analytics and Climate RiskGauge.

^{[1] Sustainable Finance Disclosures Regulation (SFDR), European Commission, as of October 8, 2024, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32019R2088
[2] NGFS, as of August 20, 2024, https://www.ngfs.net/en/about-us/membership
[3] S&P Global Market Intelligence, as of October 8, 2024, https://www.spglobal.com/market-intelligence/en/solutions/products/climate-credit-analytics#awards}