The ecosystem for climate change continues to evolve. This diagram will improve as we get to understand the key players and how they interact. Currently, they are split across the following sectors:-
- Macro-economic models. Commonly called Integrated Assessment Models, they take a scenario such as 2.6 (or two degrees) and define external constrains on countries and each sector/industry. The key policy lever is a carbon tax that is expected to be used in the future to flush out the laggards (think the tax on tobacco). Most IAMs come from academia such as Grantham, or as spin-offs such as Vivid and CarbonDelta. Macroeconomic models used in finance are several years behind
- Physical Vendors. For carbon footprint, Trucost is the market leader, providing Scope 1/2/3 concentration at a corporate level. For physical risk, long-established players such as Carbon Delta and XDI operate at a company asset level. Most measure potential for disruption to revenues and damage costs from different hazards
- Data analytics. Expanding its client footprint by buying specialist players. Bloomberg and Refinitiv provide detailed balance sheet information for transition risk – only Quant Foundry used this level of granularity
- Collaborators. Banks that have announced joint ventures with academic institutes. This is expected to be a trend in 2020
- Instrument valuation. Basic valuation using Vivid (discount cashflow) and CarbonDelta (Dividend) for equities and bonds. Quant Foundry core capability is its Merton-based model that provides accurate revaluation.
- Equity Research. Under review, some are more focused on civic projects to improve the environment. Quant Foundry provides equity research on all companies in scope.
- Climate Research. Mostly funded to get the message out on policy, news and initiatives such as UK off-shore wind. Carbon Brief provides a daily summary of climate-related topics in the news
- Industry bodies. Set up in finance to promote the greening of the industry with an initial push for ESG in asset management. Has a tendency to promote initiatives such as green bonds or sustainability-linked loans which have been criticised by some as being more CSR-driven than promoting sound risk practice