A Sovereign Wealth Fund’s Path to Sustainability: Key Benefits of Climate Credit Risk Assessment

The financial implications of climate change pose significant risks to investment portfolios. Physical risks such as rising sea levels, extreme weather events, and disruptions to ecosystems can directly impact assets and operations. Additionally, transition risks stemming from regulatory changes, shifts in market preferences, and technological advancements can disrupt business models and affect financial performance. Investment managers must carefully assess credit risks associated with climate change, as it can lead to credit rating downgrades, increased default rates, and substantial financial losses.

At the same time, climate change presents significant opportunities for growth and innovation in key areas like green technologies, renewable energy, and sustainable practices. By identifying and capitalizing on these opportunities, investment managers can enhance portfolio performance, drive positive environmental impact, and support the transition to a more sustainable economy. Assessing both risks and opportunities allows them to make informed decisions, protect their portfolios, and contribute to long-term financial resilience and global climate goals. The case study below illustrates how one investment fund has leveraged its knowledge of climate-related risks to enhance its performance.

Introduction

The Sustainable Investment Team of an Asian sovereign wealth fund was dedicated to evaluating the credit impact of various climate scenarios on their portfolio, with a focus on global financial institutions. By assessing how different climate scenarios could affect creditworthiness, the team aimed to identify potential risks and opportunities within their investments. This approach allowed them to better understand the financial implications of climate change, ensuring that their portfolio remains resilient and aligned with sustainable practices. 

Pain Points

To support the team’s credit risk assessment, the client identified several key needs:

• Expertise in quantifying climate risk: The firm needed a granular, quantitative framework to assess the projected impact of climate risks.
• Access to extensive and reliable financial and environmental data: The firm needed accurate analysis driven by high-quality data that encompassed financial and climate factors.
• Tailored credit assessments: The firm needed access to specific insights on the valuation and credit impacts of various climate scenarios for a variety of asset classes, enabling a nuanced understanding of how climate factors influence their portfolios.

Adopting Climate RiskGauge (CRG) empowered the company to enhance its assessment capabilities, facilitate informed decisions, and align with sustainable investing. By leveraging targeted analytics and comprehensive data, the team was better equipped to navigate climate-related investment risks and opportunities.

The Solution

CRG offers a probabilistic view of how climate risk can influence the distinct financial and credit profile for Corporates, Sovereigns and Financial Institutions, providing both portfolio- and counterparty-level analysis. This tool enables businesses to stay current with the fast-paced evolution of climate risk across a variety of asset classes.

Key Features

• Flexible scenario analysis: Climate RiskGauge is equipped with scenarios from the Network for Greening the Financial System (NGFS) and select regulators. Additionally, users have access to scenarios developed by Trucost, S&P Global Sustainable1.
• Best-in-class data: Climate RiskGauge leverage S&P Global’s extensive and proprietary datasets including company-level financial and emissions data, industry-specific data, and quantitative credit scoring methodologies.
• Asset-class specific methodology: CRG tailors the approach of how climate risk impacts other asset classes through distinct approaches for corporates, financial institutions and sovereigns.
• Coverage of private and public companies: S&P Global Market Intelligence has company fundamental information and a waterfall approach to data enabling full portfolio analysis, even in cases where granular data is not readily available.
• Easy Implementation: This includes a compact set of Excel templates connected to S&P Global’s databases for real-time on-the-fly analysis, 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.

Key Benefits

Implementing a comprehensive climate credit risk assessment solution offers several key benefits for the Sustainable Investment team:

• Enhanced Credit Impact Assessment: By leveraging advanced analytical tools and comprehensive data, the team can accurately quantify the financial and credit impacts of various climate scenarios. This equips them with a deeper understanding of how environmental factors influence the financial stability of their portfolios.
• Informed Investment Strategies: Access to reliable data empowers the team to make informed decisions regarding potential climate-related risks. This capability allows for tailored insights into how climate conditions may affect investment performance, enhancing portfolio resilience.
• Strategic Positioning in Sustainable Investing: Integrating climate risk assessments into their investment framework differentiates the firm in a competitive market, attracting a diverse base of clients who are concerned with sustainable finance.

In conclusion, adopting CRG represents a strategic advancement for the Sustainable Investment team. CRG enables the client to effectively navigate the complexities of climate-related risks. This approach not only aligns with global demand for responsible investment solutions but also strengthens the client’s commitment to advancing sustainable practices. CRG equips the team with tools and insights necessary to drive value in their portfolios, ensuring a robust response to the challenges posed by climate change. 

Click the link to know more about Climate RiskGauge.