This is one part of the Global Investment Outlook series. The other sections are focussed on Prosperity and Inclusive growth.
In order to minimise the potentially devasting physical impacts of climate change, long-term structural changes are required that will influence the value of physical and financial assets, revenues, royalties, tax flows and jobs. The risk of value reductions brought about by the transformation to a low carbon economy is often referred to as “climate transition risk”.
Reducing the financial risk resulting from climate change requires managing climate transition risk and opportunity, using finance as a catalyst, and encouraging market reform.
Account for four characteristics when measuring the impact of climate transition risks and opportunities on financial investments, assessing the economic impact at the sovereign country level, or applying strategic risk evaluation tools to help corporates.
Read : Risks from disorganised climate transitions keyboard_arrow_right
Scenarios should identify the effects of the transition on demand, costs or margins, pricing, investment needs, and the valuation of assets. Then assess how changes in asset value will be affected by policy, contracts, ownership, financing, and tax regimes, which allocate this change in asset value between equity owners, creditors, governments, and consumers. This is called Climate Transition Value at Risk (CVaR).
Management of climate transition (and physical) impacts – whether through strategy, investment, diversification, or divestment – will de-risk both investments and companies and improve valuations.
The WTW CVaR platform provides an investment approach that can measure climate transition risk for financial portfolios and businesses. It serves as the basis for new tools and investment solutions that will help investors and businesses price transition risk, reduce the concentration of risk, and limit the potential for economic disruption.
| Risk Management Actions | Risk management & measurement | Stewardship | Portfolio analysis & construction |
Investment Solutions/ hedges |
Insurance products |
|---|---|---|---|---|---|
| Avoid new high climate risk investments | ✔ | ||||
| Improve climate risk of existing investments | ✔ | ✔ | ✔ | ||
| Divest high risk investments | ✔ | ✔ | ✔ | ||
| Diversify to manage portfolio/ company level risk |
✔ | ✔ | ✔ | ✔ | |
| Hedge risks that cannot be improved/ divested |
✔ | ✔ | ✔ | ✔ | |
| Insure risks that cannot be otherwise managed | ✔ | ✔ | ✔ | ✔ | ✔ |
-2%
The estimated Enterprise Value at Risk for businesses in the food value chain, if the world transitions to a low carbon economy consistent with a global temperature increase of 1.8°C.
-0.4%
The estimated Enterprise Value at Risk for businesses in the automobiles sector, if the world transitions to a low carbon economy consistent with a global temperature increase of 1.8°C.
-3%
The estimated Enterprise Value at Risk for businesses in the industrials and materials value chains, if the world transitions to a low carbon economy consistent with a global temperature increase of 1.8°C.
-17%
The estimated Enterprise Value at Risk for businesses in the energy and utilities sectors, if the world transitions to a low carbon economy consistent with a global temperature increase of 1.8°C.
6 gigatons
The annual carbon emissions that could be reduced if net-zero deforestation was achieved by 2030.1
1 The world is projected to emit 36.4 gigatons of carbon dioxide in 2021.
5 gigatons
The volume of carbon dioxide emissions per year that would need to be removed by engineering by 2050 to help achieve a net zero (1.5°C) outcome. 1
1 The world is projected to emit 36.4 gigatons of carbon dioxide in 2021.
36%
The proportion of world GDP now covered by net zero emission policies in law.
$80 per kWh
The production cost of batteries used in electric vehicles by 2035 to help achieve a net-zero world (currently $140 per kWh).
$2.7 trillion
The additional public-and private-sector subsidies and financing needed now to target a transition to a net zero global economy.
The other two sections of this report are available here: Overview, Prosperity and Inclusion.
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