ClimateXcellence: Tool for scenario-based risk and opportunity analysis

Financial service providers and companies can now access the Energy Transition (ET) Risk Tool for scenario-based financial impact analysis of climate risks and opportunities, which is based on the ClimateXcellence tool built by the CO-Firm. Using the scenarios that were developed by the 2° Investing Initiative and the CO-Firm as a starting point, through the tool the CO-Firm demonstrates the potential impact of transition risks on financial indicators such as earnings, capital expenditure and profit margins in selected sectors and companies.


How the results can be used

The modelling results have been incorporated into valuations at the company-level by Kepler Cheuvreux, building on the impact of scenarios on the cash flow generation capacity of companies. In addition, they have been integrated into credit risk rating models by S&P Global Market Intelligence to evaluate the impact on a company’s creditworthiness.

Together Kepler Cheuvreux and The CO-Firm have published a series of reports to outline their findings:

1. The Investor primer to transition risk analysis report outlines the methodologies behind the bottom-up modelling of climate risks and opportunities and illustrates how the results can be integrated into valuation methodologies.
2. The sector and company reports apply the approach outlined in the Investor Primer and show the results for three companies each in the utilities, automotive and steel and cement sectors.
3. Transition risks: How to move ahead is a management summary illustrating the key findings of the collaborative project.


How ClimateXcellence can support you

Areas of support

Improved investing: ClimateXcellence is a tool that can identify systematic, cross-scenario winners and losers in relation to the readiness and capacity of companies to transition and indicate growth areas to invest on.
Performing scenario analysis in line with the Task Force on Climate-related Financial Disclosures (TCFD): the tool shows financial impacts, business opportunities and threats, which can lead to an understanding of material business risks, opportunities and drivers. This is the basis for integrating them into traditional risk assessments, strategy and governance processes.
Integrating scenario analysis into all processes: ClimateXcellence enables mapping metrics, targets, risk drivers, assessment, investment, strategy and governance processes in line with the TCFD requirements.
Guiding company engagement: ClimateXcellence determines corporate risks/opportunities and helps to identify key 1-2 targeted questions for investors to ask in their company engagement.
Enabling analyses: ClimateXcellence builds on datasets for scenario interpretation, assessment of carbon/energy efficiency measures, meta-analyses of physical assets (facilities/ products), meta-analyses of geographic exposures and financial impacts.


Value added for selected user groups

The key features of The CO-Firm’s modelling approach are a combination of bottom-up asset level data with scenario data coupled with the general sector dynamics and assumptions about companies’ adaptive capacity.
Equity analysts and asset managers can validate their previous assumptions on key determinants of company growth and profitability in a transitioning market. Furthermore, the analysis enables them to pick the appropriate/relevant shares
CIOs can see different impacts of scenarios on sectors, as well as new risks and investment opportunities
CROs can embed new climate change-induced risk drivers in traditional risk assessments
Those responsible for CSR can better inform portfolio, risk and asset managers with an integrated numbers-driven approach, connecting Investment and corporate responsibility views, providing unique climate analysis that can feed directly into sector, company and country assessments


What are the central components of the tool?

I. Scenarios
The tool focuses on two macro climate change scenarios that are based on the International Energy Agency’s (IEA) 2017 Energy Technology Perspectives:
1. The first scenario, the Limited Climate Transition Scenario is based on the IEA’s Reference Technology Scenario (a temperature increase of 2.7° C by 2100) and considers commitments by countries, including Nationally Determined Contributions pledged under the Paris Agreement.
2. The second, more ambitious scenario, the Ambitious Climate Transition Scenario, corresponds to the IEA’s 2°C Scenario (a temperature increase of 2.7°C by 2100).

II. Company readiness and capacity to adapt
The two scenarios are overlaid with two company adaptation pathways, with adaptive capacity being considered a result of dynamic capabilities, which allow for putting existing resources such as assets, financial pockets and intellectual property) into good use:
1. MARKET: expects companies to grow in line with changes in the scenario
2. MARKET REVENUE/EBIT: acknowledges that financially strong companies (that feature, for example, higher sales revenues or EBIT) can capture a larger share of profitable growth.
These two adaptive capacity pathways are compared to a FROZEN path that expresses the cost of inaction in case companies do not adapt at all. It also supports an evaluation of whether existing geographic and technological exposure fit the scenario requirements.

III. Sectors
In total, four sectors have been analysed, all of which are mentioned in the TCFD recommendations: The first three sectors – utilities, automotive and steel – have full geographic coverage, whereas for cement an individual case study from six selected countries (US, Mexico, Brazil, Germany, France and Italy) has been selected/analysed.

IV. Companies
Of the 33,000 companies analysed, 12 (three per sector) have been selected to reflect the different financial impacts of the two climate scenarios. The scenario analysis is performed bottom up, building on high-quality asset level data.


What is the outcome of ClimateXcellence?

The outcome contains a change in three key financial indicators over time (2016 – 2050), EBITDA, EBIT and depreciation, on three levels:
Sector results: Average sector performance based on all companies operating in the market globally (case study on six countries for cement).
Company results: Financial performance across adaptation pathways and climate scenarios for a selected company.
Benchmarking: Financial performance across of companies within a selected adaptation pathways and climate scenario.


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