In addition to the two traditional goals of climate change adaptation and mitigation, the Paris Agreement contains a third objective, which aims to “make financial flows consistent with a pathway towards low GHG and climate-resilient development”. This alignment of capital allocation with a 1,5-2-degree trajectory brings new risks and opportunities to both companies and institutional investors. In response, and in light of previous costly setbacks of economic failures caused by new risks, financial actors launched various initiatives to enhance the understanding of climate-related issues. The energy industry is both carbon and investment intensive. The challenge is therefore doubled due to higher exposure to climate risks and dependency on external financing. Investors are experiencing market and regulatory changes including those related to the decarbonization and physical and transitional climate risks management. Prudential asset allocation and value creation require solutions that combine complex, uncertain data at different levels: assets, firms, sectors, portfolios. To capitalize on the changes underway, investors will likely refer to the use of instant and forward-looking metrics: historical and current climate performance as well as medium- and long-term targets for carbon emissions reduction of investees. Energy sector companies can anticipate investors’ concerns, responses and consequently adapt better to the market transition. This communication discusses benchmarks from which companies and investors can design a roadmap for asset alignment on decarbonization targets.
Objective and method
The communication aims to present the potential impact of the Paris Agreement and the regulatory frameworks on financial market participants such as investors and issuers, including their asset allocation practices with a focus on energy sector investments. The analysis is structured around implications of the climate agenda for the capital market, energy sector companies, and portfolio management.