Schroders has added a new climate change investment model to its sustainable investment toolkit, with the warning that company profits worldwide could be hit by the new taxes they’ll be required to pay under the Paris climate agreement.
Schroders’ new Carbon Value at Risk (Carbon VAR) model has been designed to help investors more accurately assess the risks higher carbon prices pose for companies, industries and investment portfolios, the company said, in unveiling its new system.
Schroders’ Carbon VAR model shows that some 20% of the profits generated by global companies could be at risk if carbon prices rise to the levels required to meet the temperature change commitments international leaders made at the 2015 Paris Agreement.
In the most exposed sectors, such as the construction, steel and commodity chemicals industries, profits could even drop by as much as 80%.
Schroders’ Sustainability Team estimates that if the world is to limit itself to the 2°C temperature rise target agreed in Paris, carbon prices will have to increase from the current rate of less than US$5 a tonne to well over US$100 a tonne, in order to incentivise decarbonisation on the scale needed.
Carbon pricing is a vital lever for climate policymakers to reduce emissions, and higher costs will increase the pressure on carbon-exposed businesses’ profitability. There are signs of renewed appetite in the European Union and China in particular to increase carbon pricing and expand its scope, Schroders said.
Traditional analysis, such as carbon footprints and fossil fuel exposure, assess companies in isolation and fail to reflect how higher carbon prices would affect their profitability in the future.
Investment products and funds that rely on more simplistic approaches may leave investors more exposed to climate risks than they had originally anticipated, warned Schroders’ head of sustainability research, Andy Howard.
“The tools investors have to measure or manage climate risk have barely changed for a decade,” said Howard.
“Carbon footprints continue to dominate but at best provide an incomplete and, at worst, a misleading picture of the risks carbon pricing presents to investors.
“Carbon VAR is a new approach. It reflects the way companies make money and how their profits would change if carbon prices rose significantly. The results don’t bear much resemblance to carbon footprints, underlining the dangers of assuming funds or portfolios with low footprints will be insulated if policies toughen.”
The Carbon VAR model is now being used by Schroders’ portfolio management teams, as part of their broader investment toolkit.
In July, as reported, Schroders’ Sustainability Team launched what it called its Climate Progress Dashboard, which assesses the long-term temperature rise trajectory the world is on course for.