This site is directed at Institutional/Professional Investors only. It is provided for information purposes only and should not be construed as investment advice nor a recommendation to buy/sell any products nor as an offer or solicitation to engage in any investment activity.

Insights & News / Case Study / Whitepaper

Transition Risk Management in Action

May 23, 2024

Philipp Ruf
Philipp Ruf

Data & Analytics

How Asset Managers measure and manage financial carbon risks

Carbon Price Exposure is growing rapidly and is forecasted to be the main driver of financial risk in the energy transition for the next decade.

In this White Paper, we explore the underlying drivers of carbon price exposure, how carbon price risk can be measured and what investors do today to actively manage this risk.

Carbon pricing has emerged as the primary tool of climate regulation – being used now in jurisdictions responsible for 50% of global GDP and growing. Prices are expected to increase significantly over time, and subsidies in the form of free pollution permits are phased out in nearly all systems. This trinity amplifies the impact of carbon pricing on corporates and the macro environment via inflation.

To measure carbon price exposure, a granular bottom-up model is required that incorporates the individual aspects of each market and corporate, including its operations, the regulatory framework, decarbonisation and trading strategies as well as the ability to pass through carbon costs.

Using such a model reveals significant exposure of equity valuations to carbon pricing. Cushon, an innovative UK pension provider, models that its “green” equity portfolio could suffer by up to 3.5% by 2030, while the Stoxx600 could see a decline of up to 10.9% by the end of this decade.

Cushon hedges this exposure with a natural capital allocation in carbon removal projects, anticipating a convergence with compliance carbon markets. They find that a Natural Capital Allocation of 6-8% could financially hedge their exposure to compliance carbon pricing.

    Thanks for submitting the form. Please check your email inbox to access the download link, or you can click the link below.

    Download

    DISCLAIMERS

    This communication has been provided to you for informational purposes only.

    This communication is not intended to constitute, and should not be construed as, investment advice, financial promotion, investment recommendations or investment research.

    This communication is not intended as and is not to be taken as an offer or solicitation with respect to the purchase or sale of any security or interest, nor does it constitute an offer or solicitation in any jurisdiction, including those in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such a solicitation or offer. Distribution of information contained in this communication may be restricted by law. Persons receiving this communication should inform themselves about and observe any such restrictions. Any dissemination or other unauthorised use of this information or documents by any person or entity is strictly prohibited.

    SparkChange believes the information in this communication to be correct at the date of issue. However, no representation or warranty is given as to the accuracy of any of the information provided. Some information in this communication is based on information given/obtained from independent research providers that SparkChange considers to be reliable. Analysis provided in this communication may be based on subjective assessments and assumptions and can use one among several alternative methodologies that produce diverse results. Hence, analysis and projections should not be seen as factual and should not be relied upon as accurate predictions of future performance.