Quant Foundry has developed a Climate Change Credit model (QF4CM) based on its exclusive relationship with Imperial College London’s Integrated Assessment models (IAM). By integrating the IAM with QF credit capabilities, the full solution’s unique feature is that the model simulates from the bottom-up each company’s balance sheet based on a top-down restricted economy.
Transition risk can only be incorporated into a risk framework at the level of the counterpart. Transition risk is directly imposed onto the balance sheet as it impacts debt ratios, dividend policy, accumulated revenues, quality of the new revenue stream as well as increasing cost of production from the introduction of carbon tax. Each company is different in their capacity to absorb these additional costs and how they can respond to turning climate-related risks into opportunities.
QF4CM measures the effect on companies from changing demands for their products and services. QF4CM delivers neutral and scientific analysis for risk professionals to make certain and sustainable investments that address the challenges of transitioning their operations as well as products and services to a low-carbon future
The user of the model can define how a counterpart would manage its transition path based on specific investment choices. Critically, the model allows the user to impose debt-led investment constraints implied by their long-term covenants. Each annual step of the simulation observes the progression of the balance sheet, income and cash flow statements of the counterpart while assessing the non-financial condition such as capacity per technology and age of plant or machinery.
The combination of financial and non-financial simulated results provides a transparent and detailed description of how each transition scenario impacts the ability of a counterpart to generate income and service their debt.
QF has in Q4 2019 deployed the corporate and instrument results and pricing engines of QF4CM as the results and instrument pricing engine for a global insurer to complete their TCFD reporting and to provide the methodology framework for their asset management division. Dr Chris Cormack, co-founder of QF has recently been made a fellow of Imperial’s Centre for Climate Finance and Investment as part of the Imperial Business School. Imperial and QF have signed an exclusive MoU to enable commercialization of QF4CM as an integrated solution for climate change.
In 2020 Imperial commence research [1]with QF to provide a detailed risk taxonomy to classify the relevant risks across physical factors, transition, litigation and market factors. Dr Chris Cormack has played an active role in developing the risk scoring methodology and is actively involved with the EU INSPIRE program
As part of the research work, QF is at Imperial the model is undergoing continuous research and development to further integrate other macro-economic micro-economic effects.
[1] https://1drv.ms/p/s!AqFONlVWmt-8hqY2t9ii5N0LOuBs8Q?e=J03W5g