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Navigating the Transition: Modelling the materiality of transition risk for infrastructure investment portfolios

The ClimateWise Insurance Advisory Council is launching an open-source framework to support investors and regulators assess how the transition to a low carbon economy will impact the financial performance of infrastructure investments. The framework and accompanying step-by-step guide align with the G20 Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) and inform practical actions – for asset managers, owners and regulators – on capturing emerging opportunities from the low carbon transition.


"With better information and risk management as the foundations, a virtuous circle is being built with better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers and a smooth transition to a low carbon economy."

Mark Carney, Chairman of the G20, Financial Stability Board

 

Register here to download the project summary and receive the final open-source ‘transition risk’ models and how-to guide once launched.

Why transition risk?

A sudden and disorderly transition to a low carbon economy will financially impact investment portfolios. Transition risks include policy changes, carbon taxes, reputational impacts, and shifts in markets and technology. These will vary across geographies, sectors, time horizons and according to commitments to limit global temperature rises.

Why infrastructure?

In today’s low interest rate environment, infrastructure offers stable income and portfolio diversification. However some infrastructure assets are exposed to transition risk that could impact their financial returns. With a better understanding of transition risks investors could better manage portfolio risk.

 

The ClimateWise Transition Risk Framework


In today’s low interest rate environment, infrastructure offers stable income and portfolio diversification. However some infrastructure assets may be exposed to transition risk that could impact their financial returns. A clearer understanding of transition risks and opportunities will help investors manage risk within their infrastructure portfolios.

Step 1

Asses the breadth of asset types exposed to transition risk and opportunity. This will inform asset owners and regulators on the future allocation of funds and diversification of investment portfolios.

Step 2

Define potential impact of transition risk at asset level. This will indicate investment options for asset owners and regulators to help improve the resilience of their investment portfolios.

Step 3

Incorporate the impacts of transition into in-house asset financial models. This will enable quantification of potential impact on asset returns, investment options or exit strategies.

 Summary for Decision-Makers

 

“We regard the TCFD as a game-changer for the financial services sector in helping us to communicate our responses to the physical, transition and liability risks of climate change.”

Dominic Christian, ClimateWise Chairman and Global Chairman of Aon Benfield

 

Summary

  • Transition risk could grow significantly by 2030, financially impacting infrastructure investment portfolios.
  • This framework supports quantification of potential financial impact as called for by the TCFD, enhancing investors’ ability to manage risk and capture opportunity.
  • The accompanying how-to guide provides methodology, tools and case studies to demonstrate how to quantify variations in transition risk across portfolios and within asset types.

How will transition risk impact you?

About the project

This project was co-funded by the ClimateWise Insurance Advisory Council and The Finance Dialogue.

It was produced in partnership between the University of Cambridge Institute for Sustainability Leadership (CISL) and global sustainability consultancy ERM, with input from The ClimateWise Insurance Advisory Council and the projects Advisory Panel.

Published: June 2018

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