The UNEP FI Investor Pilot explored, enhanced and applied the Carbon Delta methodology, throughout the Pilot to road-test a ‘Climate Value at Risk’ (CVaR) for listed equities, corporate debt and real estate under several future scenarios. This measure brings together assessment of the physical and transition risks of climate change.
On the physical side, the methodology examines the impacts of chronic changes in the climate and acute weather events on companies’ operations using business interruption as a proxy.
On the transition side, it explores policy risk—the cost for companies from meeting countries’ emissions reductions targets; and green opportunities—the profits for low-carbon technology companies earn from providing the means by which to reduce emissions.
These physical and transition impacts are then translated into financial values through financial modelling.
The methodology further assesses portfolios against international climate targets to give a temperature alignment: the implied degree of warming of a portfolio.