Update: The 2°Investing Initiative updated the LCT and ACT scenarios in other to apply the framework designed in the Transition Risk-o-meter to newly available data, to improve the methodology for some indicators, and to expand the scope to countries in emerging markets. This update includes the addition of a “too late, too sudden” scenario. This scenario assumes that no climate action is taken to mitigate global warming before 2025 and that ambitious climate action is taken afterward to stay below the 2°C limit by the end of the century. Such a scenario can be particularly useful in the case of climate stress-testing (considering that the purpose of a stress-testing exercise is to assess the impact of a “worst-case” scenario on the financial system, a “too late, too sudden” scenario is more suited than a “smooth transition” one).
Financial analysts and institutional investors can now access and integrate in their models and related reporting the ET risk project reference decarbonisation scenarios download the full report here. These scenarios, developed by The CO-Firm and 2° Investing Initiative, constitute the first attempt to develop transition scenarios tailored for financial risk and scenario analysis. The scenarios feature:
An Ambitious Climate Transition (ACT) scenario. The ACT scenario builds on the IEA WEO 450 and ETP 2D scenarios, and third party literature developing integrated assessment or general equilibrium models seeking to approximate an outcome associated with a 2°C transition. It thus uses the most optimistic assumptions around technology economics and commodity prices identified in industry and academic literature.
A Limited Climate Transition (LCT) scenario. The LCT scenario builds on the IEA WEO NPS and ETP 4D scenarios, and third party literature developing ad hoc models associated with a 3°-4°C decarbonisation range. It assumes that policy intervention will continue with “carrots and sticks” and command and control measures are only used when targets are not reached. These “conservative” assumptions are also considered in the technologies learning curve perspectives.
Risk-related parameters. The scenarios include sector-specific indicators for the most relevant key value drivers embedded in three macro categories of parameters: production and technology changes, market pricing variations and policy signals. The integration of these parameters renders existing scenarios ready for risk assessment.
Indicators for 8 sectors. The scenarios cover the oil & gas, coal, electric power, automobile, aviation, shipping, cement and steel sectors, representing the sectors to which an average financial institution could potentially have the largest transition risk exposure in their credit and equity portfolios. Access the sector specific chapters here.
Indicators for 7 regions. The scenarios cover the World, the US, Mexico, Brazil, Germany, France and Italy in terms of regions, thus providing a suitable geographic granularity for company risk-assessment by covering the most significant geographic exposures (at production and sales level) in the sectors covered according to the MSCI world.
Medium to long-term time horizon. The scenarios cover trends until 2040, thus considering current practices in financial risk analysis and the need to capture risks materializing in the medium to long-term moving forward.
Interested in knowing more about risk-related reference scenarios and how they are currently being used?
Read our report “The Transition Risk-O-Meter: Reference Scenarios for Financial and Scenario Analysis” and find out more about the need for scenarios adapted to the financial sector’s practices and practical examples on how the market is currently using the scenarios for financial risk assessment and scenario analysis.