Award for Innovation (Research) – Trucost's Carbon Earnings at Risk

Channels: Green Bonds

Companies: CEaR, Trucost, S&P, TCFD, OECD, International Energy Agency, Allianz France

The Carbon Earnings at Risk (CEaR) analytics product was piloted by S&P subsidiary Trucost in 2018 and launched early this year. It is used to stress-test a company's current ability to absorb future carbon prices and to help understand the potential earnings at risk from carbon pricing at a portfolio level.

The process has obvious relevance for dedicated impact investments but can also be integrated into traditional investment products to reduce portfolio risk and identify investment ideas with sustainable, long-term business models in a decarbonising economy.

By integrating CEaR data into portfolio analysis, investors can examine the financial impact of carbon prices at a company and portfolio level under a range of different scenarios and time horizons – as recommended by the Task Force on Climate-related Financial Disclosures (TCFD).

Integral to the methodology 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, operating location and various policy scenarios.

Trucost has developed three carbon price scenarios based on research by the OECD and the International Energy Agency and current carbon prices (in emissions trading schemes, and taxes on carbon and fossil fuels). For example, the company's high carbon price scenario assumes full implementation of policies in line with the Paris Agreement.

Several financial institutions already use the CEaR product to report to stakeholders on forward-looking estimates of financial risks in line with TCFD recommendations. Trucost reports particularly strong interest in France, where Article 173 mandates investors to report on how they account for ESG criteria (with specific mention of climate) in their investment policies. Allianz France, for example, worked with Trucost on its Article 173 report to incorporate analysis of portfolio-level carbon earnings at risk for the first time.