2016 saw the official launch of the Energy Transition (ET) Risk project , a EUR2.2 million project involving S&P Market Intelligence, S&P Dow Jones Indices, Oxford University, Kepler-Cheuvreux, CO-Firm, I4CE, and the Carbon Tracker Initiative. The project developed a toolbox for energy transition risk assessment – reference scenarios for financial analysis including 2°C scenario analysis, ET risk data, as well as financial models. The project was funded by the European Commission H2020 programme.
1. Transition scenarios
The consortium developed and released two transition risk scenarios, the first representing a ‘soft’ transition extending current and planned policies and technological trends (e.g. an IEA NPS trajectory), and the second representing an ambitious scenario that expands on the data from the IEA 450S /2DS, the project’s asset level data work (see number 2), and relevant third-party literature. The project will also explore more accelerated decarbonization scenarios.
2. Company & Financial data
Oxford Smith School and 2° Investing Initiative will jointly consolidate and analyze asset level information across six energy-relevant sectors (power, automotive, steel, cement, aircraft, shipping), including an assessment of committed emissions and the ability to potentially ‘unlock’ such emissions (e.g. reducing load factors).
3. Valuation and Risk models
a) 2°C portfolio assessment – 2° Investing Initiative. 2° Investing Initiative will seek to integrate the project results into their 2°C alignment model and portfolio tool and analytics developed as part of the SEI metrics project.
b) ClimateXcellence Model – The CO-Firm. This company risk model comprises detailed modeling steps to assess how risk factors impact margins and capital expenditure viability at the company level.
c) Valuation models – Kepler Cheuvreux. The above impact on climate- and energy-related changes to company margins and cash flows can be used to feed discounted cash flow and other valuation models of financial analysts. Kepler Cheuvreux will pilot this application as part of their equity research.
d) Credit risk rating models – S&P Global. The results of the project will be used by S&P Global to determine if there is a material impact on a company’s creditworthiness. S&P Dow Jones Indices, a S&P Global Division, will explore the potential for developing indices integrating transition risk
All publications from the Energy Transition Risk project can be found here.