Investment Leaders Group launch climate change model helping to ‘future proof’ companies

The Investment Leaders Group (ILG) have launched a report detailing the results of economic modelling on the impact of climate and energy regulation on company profitability. The Investment Leaders Group is a network of ten pension funds, insurers and asset owners, organised by the University of Cambridge Institute for Sustainability Leadership. Their report focuses on some of the most high-risk industries and areas including oil, gas and utilities in the UK, Spain, Germany, California (USA) and Alberta (Canada).

The COP21 climate agreement indicates a growing global action on climate change. In response, the report written by the ILG assesses the impact of future carbon and energy-related regulation on high-risk industries in high-risk areas.

The report has shown that if these companies do not change, they will be facing a substantial financial risk in the future.

The ILG highlights three key findings on the significant effects of climate and energy regulation on company profitability at a national level, and how there are substantial differences between individual companies in the same sectors and areas.

It shows how carbon and energy regulation can impact companies’ margins, using the example that “impacts for oil and gas companies are negligible under the Transition Scenario, but risks will become a reality if the price of carbon is assumed to be €45.”

The report supports companies’ risk mitigation activities, stating that they do make a difference.“Electric utilities were shown to be able to increase margins by more than 50 per cent in the UK and Spain by using risk mitigation activities” highlighting the importance of investors engaging with companies directly.

The report also suggests that energy and carbon risk assessments can facilitate stock-picking. It states that “the analysis for oil shows that margin impact can differ between refiners in the same country by up to 30 per cent due to refinery configuration.”

The ILG detail in their report a unique model which can be adapted to any individual company. It captures both energy and carbon-related regulation and defines two regulatory scenarios for 2020. The model helps companies provide a risk assessment arising from the chosen regulatory scenario before and after any corporate action.

The tool will provide “outputs that can be integrated into existing valuation techniques, providing transparency on the measures required for companies to reduce the impacts on profitability associated with climate-related regulations.”

It will also help companies looking to understand their ability to respond to energy and carbon regulation, improve stock picking and empower them to engage with companies on actions they can take to make themselves ‘future proof’.

Further development of the model detailed in the report is needed but, once finished, it could be used to “complement bottom-up financial analysis”. In the future, the model can also be expanded to other high-risk sectors such as chemicals and transportation.