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In addition to the “Warming Potential” approach, which embodies the impact that investments may have on the climate, climate risk analysis can also be undertaken from a business/investment risk perspective to assess how climate change may impact investment returns.
Here as well, Carbon Delta proposes an analysis based on the following three pillars: ❯ Transition (or “regulation”) risk costs: the low carbon transition, both via market and regulated evolutions, may significantly impact business models. This will likely create economic losses in the form of “regulation costs” for th...
❯ Physical costs: for each company, we identify how much potential future extreme weather events (5 “chronic” hazards – extreme heat, extreme cold, heavy precipitation, heavy snowfall, wind gust – and 2 “acute” hazards – coastal flooding and tropical cyclones) by 2030 will cost them (via asset damages and business inte...
❯ Green revenue: for each company, we identify how much revenues future green technologies developments by 2030 will generate for the company, using company-level patent databases (see Box) to estimate future revenue flows from green and low carbon technologies. This is expressed as a proportion of revenues positively ...
Context Box.
Achieving a 1.5°C or 2°C world is necessarily a shared responsibility amongst energy suppliers, industrials, consumers, investors and regulators 4.8%
AXA's “Company cost of climate” 0.2%
AXA's “Portfolio cost of climate”
19 AXA GROUP 2019 Climate Report June 2019 2. Strategy.
Green patents: a proxy to identify the “winners” of the energy transition?
The model used links green revenues with the occurrence of specific green patents. While certainly not the only factor to be taken into account to estimate future green revenues, a statistically relevant correlation has been established by Carbon Delta. The high share of green patent filings in the energy and transport...
(1) Carbon Delta analysis.
These combined costs and opportunities are then translated into a “climate cost” indicator. As detailed in the table below, our exploratory analysis also shows that, on aggregate, the companies we invest in may lose 4.6% of their total revenues in transition costs, and 4.6% of revenues to physical costs, but this is pa...
Transition costs and physical costs are partly offset by green revenues.
Overview of company-level climate-related “cost” metrics.
Asset class Transition cost (% of total revenues) Physical Risks Cost (% of total revenues) Green Revenues (% of total revenues) “Company” cost of climate (% of total revenues)
Fixed Income -5.2 -4.7 4.1 -5.8.
Relevant benchmark: Bank of America Merril Lynch (BofAML) -4.7 -4.9 3.8 -5.8.
Equity -2.2 -4.0 6.6 0.4.
Relevant benchmark: MSCI World ACWI -3.9 -4.5 5.3 -3.1.
AXA Total Corporate Assets -4.6 -4.6 4.4 -4.8.
Is future regulation likely to impose emissions reductions with the help of carbon pricing?
Despite significant political and commercial obstacles, there is a growing consensus among economists, governments and businesses on the fundamental role of carbon pricing in the transition to a decarbonized economy. For governments, carbon pricing is one of the instruments of the climate policy package needed to reduc...
Methodology Box.
Context Box
20 AXA GROUP 2019 Climate Report June 2019 2. Strategy.
Climate-Related Analysis: Sovereign Debt.
An Innovative Methodology AXA’s investments rely significantly on sovereign debt. AXA’s climate analysis of this asset class is conducted via a methodology developed by Beyond Ratings, a specialist credit rating agency pioneering ESG risks integration in its sovereign debt ratings analysis.
GHG Emissions.
Population.
GHG Emissions.
Energy.
GDP.
Population GDP.
Energy.
Taking proxies of each of the 3 determinants in a list of 15 KPIs and simulating many different combinations of the above correlations, Beyond Ratings defines the “most efficient” allocation of “2°C compliant” GHG emissions by 2030.
As highlighted earlier, the current NDCs result in an average temperature rise by 2100 of 3.2°C. Implementing policies that would produce 2°C would require setting more stringent national emissions targets. The Beyond Ratings methodology allocates a carbon budget by country supporting various warming scenarios, dependi...
Beyond Ratings determines national greenhouse gas “GHG” budgets compliant with any average temperature target and time horizon. This allocation process is based on an equation (called the “Kaya equation”) which decomposes GhG emissions per capita between 3 components: i) GDP per capita ii) Energy efficiency of growth i...
Yearly GhG emissions in a 2°C scenario by 2030.
Emissions Reduction Needed, higher than average efort Emissions Reduction Needed, lower than average efort Increasing Emissions Allowance No historical data.
Source: WoldwideClimatePolicy.eu
21 AXA GROUP 2019 Climate Report June 2019 2. Strategy.
Based on this model, the Warming Potential of AXA’s sovereign debt would stand at 2.9°C, which is lower than the widely used market reference (4°C) thanks to our strong exposure to the EU (over 60%), where economies tend to display a relatively low carbon intensity in their energy mix. The use of low carbon energy sour...
This is described in the following table which shows that nearly a third of AXA’s sovereign securities are below 2°C thanks to strong reliance on nuclear and renewables in France and Switzerland.
Sovereign allocation breakdown and Warming Potential.
Country.
Weight in AXA’s Sovereign Investments (June 2018) 2015 CO2 Intensity (in CO2/GDP*) Warming Potential.
France 25% 173,1 1.9°C.
Japan 13% 281,9 3.5°C.
USA 9% 321,6 5.5°C.
Italy 8% 216,5 2.5°C.
Belgium 8% 253,8 3.1°C.
Germany 6% 262,9 3.0⁰C.
Spain 6% 247,9 2.5⁰C.
Switzerland 4% 69,4 1.8⁰C.
Austria 3% 193,8 2.6⁰C.
Netherlands 2% 266,2 3.3⁰C.
Note: 2015 is the most recent data for these indicators. * Tons of Greenhouse Gas emissions based on domestic GHG emissions (territorial and exported GHG, in consistency with emissions used to assess carbon budgets in comparison with NDCs), per million $ of Gross Domestic Product/GDP.
How to Interpret Results? What situation does this aggregate figure reveal? As of 2018, 29% of AXA’s sovereign securities are below 2°C, significantly contributing to lowering our aggregated Warming Potential.
This is the case for France whose sovereign securities Warming Potential is 1.9°C. This is driven down by a high proportion of low carbon sources of energy, thanks to a strong reliance on nuclear and hydro power, which ensure lower carbon intensity in downstream activities. Switzerland is similarly positioned with a lo...
This Warming Potential analysis can serve as proxy indicators for transition risk & opportunities. Indeed, countries with a “cooler” WP are on the way to successfully decoupling carbon emissions from economic activities, reducing the emissions of downstream sectors, and thus minimizing general exposure to regulatory co...
Considering AXA’s sovereign geographic exposure to the EU, a reduction in AXA’s sovereign WP will need to rely heavily on the phase out of coal in Europe and a corresponding rise in renewables and nuclear (e.g. France, UK). This is particularly relevant to AXA’s lending to Germany and Italy given their share of AXA’s a...
(1) Poised to decrease following the IPO of AXA US in 2018 and subsequent sell-downs of AXA Group’s ownership interest.
4°C 2.9°C 1.9°C.
Sovereign debt assets market reference.
AXA's sovereign debt assets “Warming Potential”
France's “Warming Potential”, thanks largely to a low-carbon energy mix
22 AXA GROUP 2019 Climate Report June 2019 2. Strategy.
The Importance of Choosing the Right Climate Scenarios.
Various climate scenarios are needed to account for various assumptions, as described in the IPCC report “Navigating climate scenario analysis”, co-signed by AXA IM (see https://www.iigcc.org/resource/ navigating-climate-scenario-analysis-a-guide-forinstitutional-investors). The TCFD recommendations specifically state ...
One of the way climate scenarios can be used by investors, as is the case in this report, is by being translated under the form of portfolio alignment models (here the Warming Potential metric). The commonly-referenced climate scenarios, such as those published by the IPCC (Intergovernmental Panel on Climate Change) an...
Energy transition scenarios can vary widely depending on their underlying assumptions. Understanding and analyzing the range of assumptions is important to inform investors’ views on how the energy transition could unfold and what market signals to watch.
However, with the exception of the 5 “Shared Socioeconomic Pathways” (SSPs) scenarios analyzed by the IPCC, which consider not only transition risks but also physical climate impacts, the narratives of the Energy/Climate scenarios are poorly developed. These scenarios suggest a world in which the main parameters are no...
The 5 IPCC SSPs are the sole scenarios considering the socioeconomic effect of energy transition, as compared in particular to the IEA Energy Technology Perspectives projections. This is why in the Warming Potential section of this report, AXA will generally refer to the IPCC scenarios to allocate remaining carbon budg...
“Portfolio Alignment”: Conclusion.
Methodology Box.
As explained previously, AXA’s corporate investments (Corporate Bonds and Equities) have a Warming Potential which is closely in line with widely used market indices – despite efforts such as climaterelated divestments whose impact is only proportional to the AUMs involved. The Warming Potential of AXA’s sovereign debt...
A weighted average of these two figures – which involves some double-counting at the level of carbon emissions – produces a combined Warming Potential for AXA's corporate and sovereign holdings significantly lower than the broad market reference of 3.7°C, as well as projections derived from the current NDC pledges (3.2...
However, the main objective of the Warming Potential metric, which still requires getting certainty that tested methodologies are robust enough, is to provide a “science-based” reference point showing the extent to which today’s markets reflect a course that is not on track to reach the goals set under the Paris Agreem...
(1) UNEP Gap Report 2018: “Implementing the unconditional NDCs would lead to a mean global temperature of around 3.2°C”.
Climate scenarios can be translated by investors into “portfolio alignment” models.
The concept of “investment portfolio alignment” with a 2°C target requires a far broader multistakeholder effort that investors alone cannot achieve
23 AXA GROUP 2019 Climate Report June 2019 2. Strategy.
Methodology for Real Estate.
Where is the exposure?
What are the sums insured?
What are the risks made of?
HASARD MODULE.
GENERATE STOCHASTIC EVENTS.
PERIL ASSESSMENT.