Total assets invested using ESG principles rose globally by 34% from 2016 to 2018, amounting to approximately $30.7 trillion at the start of 2018, with climate change being the leading ESG issue for most investors.

It is anticipated that ESG performance, including climate risk, will increasingly be incorporated into company valuations and risk assessments, and could have a material impact on the attractiveness of potential transactions.

There will also be opportunities for significant long-term growth as a result of the low-carbon transition. The IPPC estimates that annual investments in resource and energy efficiency will need to triple from current levels to approximately $1.5 trillion per annum between now and 2050 in order to meet the objectives of the 2016 Paris Agreement. This scale of economic transformation could significantly alter the valuation of companies and the allocation of capital across the global economy.

However, while reporting on ESG issues like climate change by corporates is on the rise, disclosure rates on their climate-related risks and opportunities are still somewhat limited. This is the key premise of the Task Force on Climate-related Financial Disclosures (TCFD), whose aim is to drive better reporting on climate-related issues in order to improve decision-making.

The challenge for investment managers will be how to integrate climate risk successfully into M&A activity, often in the absence of sufficient climate-related disclosure. This is where asset level data and climate-risk models can help.

Asset-level climate risk data and stress testing can help fine-tune M&A valuations, by integrating unpriced carbon and water risk.