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A fresh look at creating carbon smart portfolios
A fresh look at creating carbon smart portfolios
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A fresh look at creating carbon smart portfolios

23/08/2016

Andreas Schaffer

Andreas Schaffer

Founder

Avalarion Capital

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BNP Paribas has teamed up with Avalerion Capital to develop a new climate change stress-testing approach that moves beyond assessing absolute carbon emissions as the principal risk factor

Context

With the backdrop of 2015 marking the planet’s hottest year since temperatures were first recorded in 1880*, the ‘Paris Agreement’ from the Conference of Parties (COP) 21 produced a global climate change treaty under international law. The agreement states that global greenhouse gas emissions should peak ‘as soon as possible’ to keep global temperature increase to 1.5 – 2°C above pre-industrial levels. The temperature recorded for 2015 already saw a 0.9°C increase.


BNP Paribas is working with Avalerion Capital to develop a new climate change stress-testing approach that moves beyond assessing absolute carbon emissions as the principal risk factor.

Questions

Three fundamental questions lie at the heart of our stress-testing work:

  • Does climate change policy pose material risks to the expected future performance (defined as impact on profit before tax = PBT) of equity portfolios?
  • If so, which policy factors are most significant?
  • At what tracking error and performance ‘costs’ can equity portfolios be re-balanced, without any material loss of performance, to mitigate these risks?
  •  

*National Oceanic and Atmospheric Administration (NOAA) – State of Climate Reports Year 2015

 

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