The Client: An Asian-based banking and financial services holding company

Users: Risk management team

The latest science shows that global emissions must reach net zero by mid-century to prevent the worst effects of climate change. Action requires major investments, plus a shift of financial flows away from climate-harmful activities.1

The Partnership for Carbon Accounting Financials (PCAF) is a global network of financial institutions that are working together to assess and disclose greenhouse gas (GHG) emissions associated with loans and investments. The approach provides a starting point for setting science-based climate targets and aligning portfolios with the Paris Agreement goal of limiting the global temperature increase in this century to 2ºC above pre-industrial levels.

This Asia-based financial services company is a supporter of PCAF and the Science Based Targets Initiative (SBTi). The risk management team was charged with calculating financed emissions in line with PCAF guidelines and setting internal science-based targets. This would be used in a report following recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), which would be included in the company’s Corporate Sustainability Report.

Pain Points

The risk management team was an existing client of S&P Global Market Intelligence (“Market Intelligence”) for credit ratings and company financial data. Team members knew that the firm had an extensive environmental offering and had completed similar work with other financial institutions in the region. They reached out to see if Market Intelligence could provide:

  • A one-stop shop for holistic environmental analysis, including deep data, robust analytical tools and extensive reporting capabilities.
  • The ability to identify possible physical risks from heatwaves, droughts and other natural disasters where assets were located.
  • A model to evaluate potential earnings at risk from transition costs associated with an increase in the price of carbon.
  • An approach that aligned with the PCAF and could cover a diversified set of asset classes.
  • Scenario analysis to support TCFD reporting.
  • Capabilities to help set targets and track the portfolios against the goals of the Paris Agreement.

This financial services company knew that many peers in the region had already taken steps to disclose their climate-related strategies, making it imperative that the company follow suite to stay competitive.

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The Solution

Market Intelligence discussed an approach that would enable the risk management team to calculate the carbon footprint of the company’s operations and those of the companies and assets that it finances, following the PCAF guidance on calculation methodologies. This would involve allocating to the bank the carbon emissions of an asset being financed based on the bank’s share of the asset’s value. Following this, the team could assess potential climate-related risks and opportunities, and see how the portfolios were aligned with the Paris Agreement. The assignment would draw on many datasets from Trucost, the data and analytical engine the drives many of S&P Global’s sustainability capabilities, to enable the team to:

Access deep environmental data

Trucost Environmental Dataset contains information on the direct and supply chain environmental impacts for a universe of over 15,000 2 companies, representing 98% of global market capitalization. Information about each company’s environmental impact is updated annually using a mix of disclosed and, where gaps are present, modeled data. The data covers hundreds of environmental issues encompassing carbon and other pollutants, water dependency, natural resource efficiency and waste disposal.

Delve into asset-level details

Trucost Physical Risk Dataset offers an asset-level approach to the assessment of physical risk at the company and portfolio level. This includes data that provides detailed information to help understand the exposure of company-owned facilities and capital assets to seven climate-related physical impacts (i.e., flood, water stress, heatwave, cold wave, hurricanes, sea level rise and wildfire) under different climate change scenarios. Scores at an asset level can then be aggregated to a company level.

Assess the ability to absorb future carbon prices

Trucost Carbon Earnings at Risk Dataset can be used to stress test a company’s current ability to absorb future carbon prices and understand potential earnings at risk from carbon pricing. Integral to this analysis is the calculation of the Unpriced Carbon Cost, which is defined as the difference between what a company pays for carbon today and what it may pay at a given future date based on its sector, operations and a given policy price scenario.

Track progress on meeting the Paris Agreement goals

Trucost Paris Alignment Dataset assesses company-level alignment with the Paris Agreement goal to limit global warming to well below 2°C from pre-industrial levels. This dataset can help track performance against scenarios that limit global warming to 1.5°C and 2°C.

Establish targets and metrics

Targets and metrics can be established to measure and manage GHG emissions and become more efficient and resilient over time.

Create a TCFD report

End-to-end TCFD reporting support helps quantify climate-related financial risks and opportunities for disclosure to company stakeholders, helping to turn metrics into action.

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Key Benefits

The risk management team was impressed with the wide range of products and services available on one easy-to-use platform and subscribed to all the components Market Intelligence had described. Importantly, they knew that this solution set would provide the credibility needed to address enquiries from the regulator on methodological and validation techniques. Team members also saw benefit in having:

  • A relationship with a firm that has a strong track record in the region for environmental analysis.
  • An approach that meshes with the PCAF guidelines − from identifying carbon footprints to assessing alignment with the Paris Agreement to establishing a path forward.
  • Access to deep environmental data, plus a time-tested modeling approach to fill in any gaps where needed.
  • The ability to assess both physical and transition risks under different scenarios associated with the move to a greener economy.
  • Reputable TCFD reporting to demonstrate to stakeholders the company’s commitment to reducing its GHG emissions.
  • On-going support from both technical and climate specialists.
  • The ability to create and monitor emission-reduction targets to evaluate the progress being made over time.

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1“How banks can accelerate net-zero emissions commitments,” GreenBiz, October 7, 2021, www.greenbiz.com/article/how-banks-can-accelerate-net-zero-emissions-commitments.

2Data as of January 2022.

Location

Europe