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Quantifying Climate Risk

An S&P Global Perspective


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Representatives of S&P Global, large institutional investors and corporate ESG experts gathered together in New York City this week to consider the challenge of quantifying climate risk for corporations. Beyond a shared concern over the issue of climate risk, there was a diversity of opinions over the best way to quantify climate risk and the best way for investors to act on their environmental concerns.

The session began with remarks from Trucost CEO Richard Mattison who shared a historical perspective on S&P Global’s investment in climate issues, highlighting the 20th anniversary of Dow Jones Sustainability Indices celebrated earlier in the week. According to Mattison, today S&P Global is focused on further integrating ESG factors into all of its products and services. In his words: “ESG is what we stand for, what we do, and where we build new commercial opportunities.” Mattison also announced the launch of a new Trucost dataset on physical risks covering 15,000 companies and over 500,000 assets. The analysis combines asset-level information and future climate change scenarios to help companies and investors understand their exposure to different types of physical risk such as heatwaves, cold waves, wildfires, hurricanes, floods and droughts.


Todd Bridges of State Street Global Advisors began his remarks by quoting Governor of the Bank of England Mark Carney on “avoiding the tragedy of the horizon” ­– the type of short term thinking that ignores the implications of climate change. Bridges pointed out that wealth managers who frequently manage multi-generational horizons for their clients are well-placed to consider the financial implications of climate risk. “Climate risk exists,” according to Bridges, “because of externalities. It is entirely the result of not pricing carbon into the production function.” Markets, according to Bridges, are not efficient. They require some sort of government intervention in order to price in these externalities.

ESG is what we stand for, what we do, and where we build new commercial opportunities.


Bridges emphasized that divestment is one of the worst ways to account for climate risk since it tends to increase broader portfolio risk. Still he encouraged investors to account for climate risk in their investment decisions. State Street has backtested numerous approaches to integrating climate risk into passive portfolios and many of these approaches deliver significant returns for less than 20bps of risk.

Michael Ferguson of S&P Global Ratings pointed out that S&P Global Ratings has been including climate risk exposure into credit ratings for some time. S&P Global Ratings has drawn on that experience in introducing their new ESG Evaluations which use the same group of industry and sectors analysts as the credit rating group. After analyzing the current “cottage industry” of ESG scores, S&P Global Ratings developed their own evaluations to be forward-looking in order to capture companies’ efforts to practice long term planning in the area of climate risk. All companies begin with a base level ranking based on their sectors and regions as captured in the ESG Risk Atlas. Beyond that, analysts use quantitative and qualitative data to understand the subtleties of each company’s unique ESG efforts.

Mona Naqvi, Senior Director of ESG Indices at S&P Dow Jones Indices challenged the media narrative that green washing was a common problem in green investment funds. Naqvi pointed out that new carbon and ESG indices are a new tool for corporate engagement, and may be more effective in changing behaviour than divestment. Using the example of the S&P Global Carbon Efficient Indices that has been used as a benchmark by the world’s largest pension fund, Government Pension Investment Fund for Japan (“GPIF”), Naqvi illustrated how S&P DJI uses Trucost carbon data to divide companies into deciles within their own industry based on their carbon intensity. These deciles are used to weight inclusion in the benchmark according to set formulas and this is made clear to the companies in the index. The result is that a universal asset owner like GPIF will continue to invest in carbon intensive sectors like energy, yet exert pressure on companies to be more carbon efficient compared to their competitors. Naqvi notes that divestment may still be worthwhile for some investors, but also defended engagement as leading to more disclosure and improvements on carbon intensity.

The day ended with a lively panel discussion that shifted to the perspective of corporations, and included representatives from Novartis, Shell, and Europe-based global asset management company DWS. Roman Kramarchuk of S&P Global Platts led the panel while Brian Werner of Trucost provided commentary. James Goudreau, Head of Climate at Novartis discussed the challenges of existing ESG measurement, highlighting short term vs. more forward-looking metrics, as a company that moved from buying carbon credits to investing to permanently reducing their longer term carbon footprint could end up penalized under ESG frameworks. David Hone of Shell spoke about his company’s Energy Transition Report and Net Carbon Footprint ambition. Shell’s approach is to shift its investment and strategies to match the commitment of the wider energy system –as modeled by their Sky Scenario meeting Paris Agreement targets.

Roelfien Kuijpers, Head of Responsible Investing at DWS challenged some of the other panelists to become leaders, rather than followers on carbon neutrality and compliance with the Paris Agreement. “ESG investing and thinking about climate risk is really hard. This is not a check-the-box exercise that anyone can do; it’s highly complex. That’s why it’s highly important that there is data available.” The issue, as always, returns to the importance of measurement and standards when it comes to climate risk.