Climate risks & Net Zero - FIRM March 2021
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Climate risks & Net Zero FIRM March 2021
PwC has been actively shaping the ESG agenda and
contributing with thought leadership and market-leading tools
We are actively involved in standard setting (orange letters indicate PwC involvement) We help orchestrating the regulatory agenda and support clients globally
Umbrella reporting frameworks Detailed standards Umbrella enablers
UK: FCA is consulting on corporate Germany: BaFin published guidance
Global reporting initiative (GRI)
Environment (E): • Accounting for Sustainability disclosure of climate risks and in December 2019 on how FS firms
CDSB, CDP, TCFD, Natural • Corporate Reporting Dialogue is focusing on ‘greenwashing’; should manage sustainability risks
Capital Protocol, Greenhouse
gas protocol, Science Based
• EFRAG BoE plans to introduce climate
Integrated Reporting Council (IRC) stress tests
Targets • European Commission Hong Kong: Securities & Futures
Social (S): • Focus capital for the long term Commission announced Strategic
IASB – MD&A project • Impact Measurement Project Framework for Green Finance in 2018
International organisation for EU: EBA Sustainable Finance
standardisation (ISO26000), • NGFS (contributions) Action Plan; EU taxonomies,
Sustainability Accounting Standards Board UN guiding principles framework • The Capitals Coalition ECB Guide on management of Singapore: MAS exploratory work to
UN Global Compact Communication Governance (G): • UN Sust. Development Goals climate risks; various reporting incorporate climate-related stress
COSO Framework • UNEP FI and disclosure requirements scenarios
• Value Balancing Alliance
WEF International Business Compact • World Business Council for
Sustainable Development
We have developed market-leading tools
PwC's “Climate Excellence” tool for climate scenario
analysis supports investors and companies in getting
We shape global ESG discussions through Thought Leadership their portfolios ready for the risks and opportunities of
climate change.
Our recent publications/projects include In this way, the potential for value enhancement, adequate
risk management and communication with regulators and
• Advice and review: UNEP FI PSI work on climate risks in insurance
stakeholders can be fully exploited.
• The growth opportunity of a century - onset of a paradigm shift in investment Market Recognition:
• Network for Greening the Financial System (NGFS)
• Sustainable Finance for Asset Managers – a revision to the non-financial • UNEP FI TCFD Pilot at insurers
reporting and regulatory requirements based on the EU Green Deal • TCFD Knowledge Hub
• UN PRI
• “Privatkundenstudie Sustainable Finance” – detailed survey of private customer
• Standard and Poor’s
expectations on ESG offerings and preferences, and growth opportunities
• Kepler Chevreux
• Pathways to Paris (in collaboration with WWF): develop transformation tools for • Green and Sustainable Finance Cluster Germany
sectoral decarbonization in Germany and connect real economy with financial
sector in Germany
Climate Risks & Net Zero March 2021
PwC 2
Agenda
1. Why climate?
2. Climate risks and Net Zero – what does it mean?
3. Spotlight on climate risk
4. Spotlight on Net Zero
5. What does it mean for the risk function?
March 2021
PwC 3
Why climate?
March 2021
PwC 4
Even if we are limiting global warming, we will see tangible
changes in our world
Legend
Source: IPCC (2019) SR15 Summary for Policymakers, https://www.ipcc.ch/site/assets/uploads/sites/2/2019/05/SR15_SPM_version_report_LR.pdf
Climate Risks & Net Zero March 2021
PwC 5
Awareness is increasing that we will be facing
climate risks, no matter what we do
More Physical Risks
01 If we do not contain climate change,
physical risks will materialize.
Floods and Extreme weather
Drought higher sea level Heat events Wind
More Transition Risks
If we embark on a transition path, transition
02 risks will materialize. An orderly transition
is preferred over an abrupt and disorderly
transition.
Technological Climate law and regulation Market
Source: Global Carbon Project innovation
Climate Risks & Net Zero March 2021
PwC 6
Net Zero is a pressing issue for society
GOAL to make 1.5C possible:
-> Net zero carbon emissions before
Transition Pathways:
2050, 50% reduction by 2030.
PwC’s Low Carbon Economy Index 2019
The Net Zero tidal wave (since 2019):
- >120 countries commit to net zero
by 2050,
- >450 net zero cities
- Ca. 300 net zero global
businesses (“Race to Zero”)
- WEF and WBCSD membership
requirement 1-2yrs
- Investors controlling $45Tr AUM
commit to net zero by 2050
> quarter of global CO2 emissions and
more than half of the global economy
covered by net-zero commitments
Climate Risks & Net Zero March 2021
PwC 7
The finance sector is impacted by three significant climate-
related changes
ESG assets perform better The market commits to disclosing The market commits to net zero
climate risks and opportunities decarbonization
ESG leaders’ equity performed better during the Corona Climate risks and opportunities have become part of the Market participants are increasingly committing to
crisis compared to ESG laggards: market and regulatory conversation. decarbonize their portfolios to net zero emissions.
>1500 signatories
>$12 trillion market 30 signatories
capitalization >$9 trillion AuM
Source: TCFD Signatories website (December 2020)
Source: Net Zero Asset Manaegers Initiative Website (December 2020)
33 signatories
>$5 trillion AuM
>3000 signatories
>$103 trillion AuM Source: UNEP FI Website (December 2020)
Source: PRI Signatories website (December 2020)
>60 Financials taking action
Source: AXA (2020) Coronavirus: How ESG scores signaled
resilience in the Q1 market downturn, retrieved here. Source: SBTi Website (December 2020)
If we don’t act …
… we will lose market share, … … we will not fulfill investee expectations, … … we will not fulfill our commitments.
Climate Risks & Net Zero March 2021
PwC 8
Case example: Climate risk heat maps focus attention
MSCI world analysis
Example: Portfolio
Unweighted 1.8°C Scenario
The MSCI World could risk losing 5% in profitability if Benefits
companies weren’t acting
MAINSTREAM: 2019 - 2030 • Understanding financial
materiality of climate risks
Percentage annual change of EBITDA
: in portfolios and focusing
the attention going forward
as heatmaps highlight
Total MSCI World material sectors and
Mining geographies
-1.41%
cumulated growth (2019-2030):
+ 3.4% in Mainstream • Identification of potential for
Utilities reweighting
+3.86% - 4.9% in Inaction
• Key input into reporting
EBITDA CHANGE as compound annual growth
rate (CAGR) compared to previous period
- 1% +1%
Climate Risks & Net Zero Negative financial Positive financial March 2021
impact of scenario impact of scenario
PwC 9
Stakeholders are taking a harder look at climate
US Asia Europe
Climate Risks & Net Zero March 2021
PwC 10Climate risks and Net Zero –
what does it mean?
March 2021
PwC 11TCFD as SBT can conceptually interlock seamlessly with a
shared scenario basis: IEA below 2°C 1
Task Force on Climate-Related Financial Disclosures Science-Based Targets Initiative (SBTi)
EUR CO2/t
Taxonomy
4°C
Paper Sector Curve
2°C (based on 2° IEA 1)Extract Absolute Impact: Net zero does not equal no risk
Can a CO2 footprint be a good indicator for risks and opportunities?
Comments
• Portfolio choice:
• Two test portfolios were built based on Europe’s top 20
utilities companies
• Test portfolio A chose those 3 out of those 20 companies
that showed the highest climate resilience in both
scenarios and with and without strategic adaptation
assumption (highest EBITDA change)
• Test portfolio B chose those 3 out of the 20 companies
that had the lowest CO2 footprint
• Result: A is a lot more resilient, while growth could be similar
in the best case for both, B could experience -0,9% EBITDA
change p.a. – average change in A lies at +0,8% p.a. and at
+0,2% for B
• Rationale: companies in A show a diversified technology
Best, average and worst annual earnings performance (EBITDA)
portfolio and are globally diversified. Companies in B are
of the two test portfolios A and B over the period 2020 to 2050 rather focusing on Europe and mostly have RE, nuclear in their
based on a 1.8°C and a 2.7°C climate scenario respectively with mix.
and without strategic adaptation of the companies.
Source: AbsolutIimpact, Climate Excellence: Bewertung von Klimarisiken und –chancen, Ausgabe 04/2020
Climate Risks & Net Zero March 2021
PwC 13Spotlight on climate risk
Minimal input from your side and maximum output provided
via the Climate Excellence tool
Input of Your Company Output: Financial
• NACE codes impact per scenario
• ISIN (if listed)
• Company
• Country of operation/geography (ideally not only headquarters)
• Exposure EBITDA
1.8°C
• If possible: revenue breakdown of companies by NACE codes
Climate
2.0°C Sales
Excellence
Input Climate Excellence Model 2.7°C
• Scenario data
• Asset level data
• Validation emission-data
Climate Risks & Net Zero March 2021
PwC 15Climate risks are not a separate risk category but have an
impact on credit, market and operational risks
Credit Risk Market Risk Operational Risk
Physical • Revaluation of credit objects and • Rating downgrades and Exchange rate • Physical losses burden balance sheet;
Risks collateral losses after catastrophes and by impairment the availability of banking
• Rating downgrades creeping sinking productivity services
Transition • Stranded assets • Sudden extreme fluctuations in asset • Image damage due to failure to switch
Risks • Risk shifts prices; stranded assets to sustainable business practices
• Effects on Probability of default (PD) • Long-term price increases due to
and losses in the event of default (LGD) environmental and social changes
Financial • Affectedness of entire industries and • Market-threatening effects of climate • Reputation damage for entire industries/
Stability markets and environmental damage in an entire entire markets
Risks • Economy is no longer insurable at region • Large parts of the financial infrastructure
reasonable cost of a Country/Region
Source: BaFin Perspektiven Ausgabe 2|2019, pg. 23
Climate Risks & Net Zero March 2021
PwC 16The tools guides you through the relevant aspects and delivers
answers for your specific portfolio Transition risk
PF Overview Regional Heatmap Single Asset Benchmark
Identify exposures, portfolio Compare sector performances Illustrate differences in Allows separation of winners and Compare risk drivers for a single
resilience and potentials for of companies performance across countries losers company and analyze company
reshifting in the same segment. within the same sector differentiators.
Company Benchmark Regional Performance Single Asset Risk driver
Climate Risks & Net Zero March 2021
PwC 17Spotlight on Net Zero
March 2021
PwC 18Reaching Net Zero: Different frameworks for target setting
exist
Three target options* for
mandatory Asset Classes: Further approaches:
1) Sector Decarbonization Approach
Potential Net Zero pathway: Four target options
Target for the reduction of the emission
(3 mandatory):
in Billion tonnes CO2 per year (GtCO2/yr)
intensity of individual sectors present
in the portfolio
40
• Absolute emissions target for
(sub)portfolio
2) Portfolio Coverage
20 • Sector intensity targets
Target for the share of portfolio • Engagement targets
companies that set themselves a • Financing Transition targets
0
SBT
-20 3) Portfolio Temperature Rating
2020
2020 2060
2060 2100 2100
Fossil fuel and industry AFOLU Target for the overall temperature
rating (contribution to global warming)
of the entire portfolio
Climate Risks & Net Zero Sources: IPCC SR1.5; SBTi – Financial sector science-based targets guidance, October 2020; *Real Estate and Project Finance has to be calculated using the SDA March 2021
PwC The Unconvened Net-Zero Asset Owners Alliance 2025 Target Setting Protocol; January 2021 19How to use the SBTi to set science-based targets
What does this mean for the different parts of your business?
SBTi method
The table shows the SBTi
Estimated SBTi Sector Decarbonisation SBT Portfolio Temperature
approach mapped to your €bn
emissions Coverage Approach Coverage Rating
business.
Residential Mortgages Optional ✔ ⨯ ⨯
Where an activity is out of scope Property & Construction / Commercial Real Estate > 67% actual ✔ ⨯ ⨯
for SBTi, such as car finance, Electricity generation 100% actual ✔ ⨯ ⨯
Project
targets can still be developed and Finance Other n/a ⨯ ⨯ ⨯
set using an appropriate method,
Electricity generation 100% actual ✔ ⨯ ⨯
and would provide you with an
Fossil fuel** > 95% $ ⨯ ✔ ⨯
opportunity to show leadership by
working with the SBTi to pioneer Corporate ✔
Mining and quarrying > 67% $ ✔ ✔
a new methodology. & SME* (iron and steel only)
lending
Transport, aluminium, cement, pulp and paper,
> 67% $ ✔ ✔ ✔
The SBTi are looking to broaden buildings
the framework over the coming Other commercial*** > 67% $ ⨯ ✔ ✔
years, with infrastructure and
asset finance being considered Common and preferred stock, corporate bonds,
Listed exchange traded funds, REITs****, listed real 100% $ ✔ ✔ ✔
for the next twelve months. equity and estate companies, real estate mutual funds
bonds
For your own operations, Funds of funds Optional ✔ ✔ ✔
financial institutions are Private equity and debt, including venture capital Optional ✔ ✔ ✔
encouraged to set targets for * SME lending is optional
scope 1 & 2 emissions. ** Includes Oil & Gas and Coal. SDA approach for oil and gas currently in development
*** Other sectors include all service sectors, tech and education, wholesale, agriculture, manufacturing, and retail and hospitality
**** REITs: If the FI in question is a REIT, 67% of mortgages need to be covered. If the FI in question is investing in REITs, this investment is considered a listed equity, and 100% of
Climate Risks & Net Zero
mortgages need to be covered. March 2021
PwC 20Case example: Achieving net zero requires target setting and
active steering
Example: Portfolio
Energy Relevant questions that need addressing:
Benefits
0,60 1. Where are companies I am investing in situated
0,55 relative to the trajectory? • Credible communication
0,50
2. Comparing titles I hold and sell over time, what are of integrated steering
0,45
0,40 relevant assumptions I need to consider? mechanisms
tCO2 / MWh
0,35 3. In planning decarbonization of my portfolios what • Initial assessment of
0,30
KPIs do I need to consider in the future? financing universe
0,25
0,20
4. How much decarbonization can I expect to • Setting up a future-proof
0,15 achieve in my portfolios through my holdings’ own steering mechanism by
0,10 decarbonization? understanding
0,05
0,00
5. What are implications on my product portfolio? decarbonization needs in
2020 2025 2030 2035 2040 6. Is the investment universe large enough to explore different sectors
Reduction curve from the IEA B2DS Scenario
such a decarbonization journey? • Set decarbonization
Possible portfolio
Illustrative portfolio reduction curve starting points targets and collaborate
with clients to achieve them
Sector decarbonization curves can be built: Existing Asset Holdings Asset Additions
• For different ambition levels (different scenarios)
• For different scenario sources Steering options: Steering options:
• For a number of different sectors • Engagement with issuers • Choose issuers, who are already aligned
• With regional granularity where scenarios provide it • Re-weighting • Choose companies and sectors, who are easy to align
• Based on physical or economic intensities
• Last resort: sell or have credible commitments
• Policies and thresholds
Climate Risks & Net Zero March 2021
PwC 21A steering logic must take into account the development of the
existing portfolio and requirements for new business
Illustrative: Real Estate
Reduction in primary energy demand from the climate scenario for Germany (for comparison).
Calculated reduction of primary energy demand (kWh/m²) according to IEA ETP 2017 B2DS
1 RISK Focus on heat pumps and
Primary energy (kWh/m²) (1 = 100%)
natural gas
Lock-in for new buildings to be considered
Vulnerability
Wie stehe ich of today’s portfolio
da?
Focus on solar heat and heat pumps
→ Necessary to reduce energy
~- consumption through renovation
80%
Paris-Agreement
(Well-below 2°C)
3 SUPPORT
TRANSITION The majority of buildings are
renovated and use efficient,
renewable heat
How can I support the transition?
Long-term minimum standard?
Nearly Zero Energy Buildings (NZEB)
2 STEERING
Combining extreme building efficiency
with renewable heating.
Portfolio starting point „to be aligned“
Source: IEA ETP and Energy Efficiency Strategy Buildings BMWi
Climate Risks & Net Zero March 2021
PwC 22What does it mean for the risk function?
The ambition level defines the way forward for risk integration
Do I want to decarbonize my portfolios as well? Need to integrate on both sides and
ensure consistency of approaches.
What is my decarbonization ambition?
How many scenarios do I want to analyze?
Qualitative/quantitative integration
Start with most material sectors
Climate Risks & Net Zero March 2021
PwC 24Different key pathways for risk integration exist
Metrics for Net Zero need to be
integrated as well and depend on
method decision
Model integration Factor model Qualitative integration
• Quantitative results integration into • Determination of risk drivers across • Qualitative integration into current
current assumptions and existing scenarios assumptions and considerations
models • Define a sector and company
characteristic-specific weighting
• Approximation in the risk model
Selection criteria:
• Ambition level
• Simplicity in implementation
• Transaction and data costs under construction
• Integration capability into the overall control system
Climate Risks & Net Zero March 2021
PwC 25Today’s production portfolio and strategy separates winners from losers
in a 2°C climate scenario
EBITDA developments from steel production up to 2050 in relation to 2016 status
Comment
150% 150% 150%
144%
• ArcelorMittal is transitioning to a
140% 140% 140%
133% regionally and technologically diverse
130% 130% 130% (BOF, EAF & DRI) asset base that makes it
119% resilient to climate change scenarios
120% 120% 120%
113%
110% 110% 110% • thyssenkrupp’s earnings from its steel
100% 100% 99% 100%
100% 100% 100% division could fall until 2030E, due to a
EBITDA [100% in 2016]
EBITDA [100% in 2016]
EBITDA [100% in 2016]
93%
89% lack of regional and technological diversity.
90% 90% 90%
Economic use of CCS technology (w/o
80% 80% 80% hydrogen) only in a time window from 2030
70% 70% 70% 68% to 2040
64%
60% 60% 60% • voestalpine’s earnings could rise by 33%
50% 50% 50% to 2050 as a result of a long-term BOF
40% 40% 40%
divestment strategy, towards DRI-based
steel production (ACT) and can turn highly
30% 30% 30% profitable for voestalpine
20% 20% 20%
10% 10% 10%
0% 0% 0%
2016 2020 2030 2050 2016 2020 2030 2050 2016 2020 2030 2050
S. AMERICA + S. AFRICA N. AMERICA EUROPE GERMANY UNITED STATES AUSTRIA
Source: Kepler Cheuvreux, The CO-Firm. The CO-Firm’s team and tool are now part of PwC
EAF DRI BOF
Climate Risks & Net Zero March 2021
PwC 26Your contact person
Dr. Nicole Röttmer
Climate Leader PwC
Deutschland
Partner, Hamburg
+49 151 40803712
nicole.roettmer@pwc.com
Climate Risks & Net Zero March 2021
PwC 27Develop a future-proof climate strategy with us! Thank you.
Coverage in the licensed tool version will include…
ALL sectors (NACE up to 4th digit)
Open for all scenarios
A - Agriculture, Forestry K – Financial and All business-related scenarios can be analyzed.
E - Construction
And Fishing Insurance activities Focus right now lies on (Integrated) Energy
Sectors
System Models
B - Mining and Quarrying C - Manufacturing L – Real Estate Activties • 1.8°C based on IEA ETP B2DS
• 2.0°C based on IEA ETP 2DS
D - Electricity H – Transport and Storage All remaining NACE* • 2.7°C based on IEA ETP RTS
Financial
Assets Listed corporate bonds, listed equity
Coverage
Companies More than ~70,000 companies; beyond that covering unlisted companies
based on sectoral split
Physical
Assets > 230,000 physical assets
e.g. power plants (wind, solar farms), oil
fields, automotive production lines
Adaptation
measures >135 unique technical adaptation measure packages across sectors per industry
Countries Global Coverage with more than 50 countries in depth
*Our primary analysis is performed based on NAICS classification, as it provides
more granularity for the analysis. We provide a mapping for NAICS to NACE.
Climate Risks & Net Zero March 2021
PwC 29You can also read
