Goodbye Carbon Footprint? New Climate Risk Tools Take Shape

German insurer Allianz and other players have developed a model that seeks to better reflect companies’ adaptation to emissions rules.

The time may soon come for carbon footprinting to step aside. If it does, it’s likely to give way to more dynamic portfolio analytics tools that better meet the challenges presented by increasingly complex energy and carbon regulations. At least that’s the hope of Simone Ruiz-Vergote, head of climate policy and advisory at Allianz Climate Solutions (ACS), a subsidiary of German insurance giant Allianz.

“Carbon footprinting just tells you how a company performs at a given time,” says Frankfurt-based Ruiz-Vergote of the metric derived by calculating carbon emissions associated with a stock portfolio. “But that company might be very well placed to move into low-carbon areas, or reduce its carbon footprint, or change its energy consumption.”

The carbon footprint measure of a portfolio would miss the subtleties between two companies poised to respond very differently if carbon regulation were put in place or if energy demands were to change significantly — or even between businesses whose jurisdictions subject them to much different energy requirements or carbon restraints.

Still, carbon footprinting has become the go-to method for investors trying to quantify their portfolios’ carbon risk. For example, when the Principles for Responsible Investment launched the Montreal Carbon Pledge in September 2014, the United Nations–led investor network urged asset owners to commit to measuring and disclosing their investment portfolios’ carbon footprints annually. The fossil fuel divestment movement, which has gained momentum in recent years, thanks to a push by Bill McKibben’s activist group, encourages institutions to divest from oil and gas companies, focusing on the 200 names whose reserves have the biggest carbon footprint.

Besides offering insurance to and advice on financing for renewable energy projects, Munich-headquartered ACS is an incubator for Allianz projects related to climate change. As carbon footprinting won converts and the calls for fossil fuel divestment grew louder, Ruiz-Vergote and her team longed for tools that could bring more nuance to the carbon risk calculation. “We were saying, ‘We can’t simply divest all assets from areas that are carbon-intensive,’” she recalls. “Because that’s a huge part of the economy.”

ACS wanted a model that could account for a company’s capacity to evolve with environmental regulation, thereby taking a view on future carbon risk exposure. So in 2014 the firm joined forces with €435 billion ($493 billion) asset manager Allianz Global Investors, the German branch of the World Wildlife Fund and Hamburg-based research outfit CO-Firm to develop such a tool.


In the first phase of pilot testing, the group trained its carbon risk assessment model on the dairy and cement industries in Germany, California and China’s Guangdong province. It found big differences in the impact that regulations like resource taxes and a price on carbon could have by 2020. For example, the model showed that for portland cement, the world’s most popular type of cement, such rules would lead to a margin loss of 72 percent for producers in Germany, 16 percent for those in California and 8 percent for those in Guangdong.

Last month, with support from the University of Cambridge’s Institute for Sustainability Leadership, a network of pension funds, insurers and asset managers called the Investment Leaders Group released a report documenting the carbon risk assessment model’s next pilot phase. The report focuses on findings across three sectors: electrical utilities, oil refining and natural gas production in the Canadian province of Alberta, Spain and the U.K.

Its results show how widely different sectors’ and geographies’ fates might diverge as regulation tightens. Within utilities, for instance, modeling based on rules that will probably take effect by 2020 projected a 3 percent loss among businesses in Alberta and an 84 percent profit boost for those in Spain. Companies’ fuel mixes — especially the integration of renewables — and regional differences in expected regulation explain the gap.

Meanwhile, regulatory changes might affect two companies in the same country very differently: In its projections, the report slashed one Spanish utility’s profit margin by 74 percent and increased that of a compatriot by nearly 300 percent.

Andrew Mason, an Edinburgh-based responsible-investment analyst at Standard Life Investments and a member of the Investment Leaders Group, acknowledges that expanding the dynamic carbon risk assessment model is an ambitious project. Now that the report has been released, Mason hopes that other asset management firms and analysts on the buy and sell sides will comment on the methodology and help to improve it, so it can be scaled up and made widely available.

Governments demanding that investors reveal carbon risk are starting to seek more subtlety than straight carbon footprinting can provide. Last August France became the first country to introduce mandatory climate-related disclosure for institutional investors, and part of its new law will require investors to report on how their portfolios are exposed to regulatory risks associated with a shift to a low-carbon economy.

Stanislas Dupré consulted on the legislation as founder and director of the 2° Investing Initiative, a Paris-based think tank devoted to aligning the financial sector with the goal of preventing the earth from warming an additional 2 degrees Celsius above preindustrial levels. Backward-looking carbon footprinting won’t cut it as far as the new rules are concerned, Dupré says.

“Obviously carbon footprinting doesn’t allow for a proper risk assessment, so it doesn’t really help in complying with the law,” he explains, adding that his team and the French government will favor the type of approach modeled by Allianz and the Investment Leaders Group.

ACS’s Ruiz-Vergote predicts that regulation like France’s will push more carbon risk assessment–type tools to market. “Carbon footprinting is basically housekeeping; everyone does it,” she says. “Those companies that want to gain a competitive edge will use carbon risk tools.”