The effects of climate change, both direct and indirect, pose significant economic risks and opportunities. While estimating their impact is challenging, projections indicate substantial economic losses and potential gains. In 2022, an analysis by Deloitte predicted that a 3-degree Celsius rise in global temperatures could result in economic losses of $178 trillion over the next 50 years. Transitioning to a low-carbon economy, meanwhile, could unlock $43 trillion of economic gains within the same time frame.
Governments globally are initiating policies to facilitate the transition to net-zero economies and address climate-related risks. Similarly, businesses are evaluating physical and transition liabilities and opportunities. Banks and insurers are altering their businesses to address better climate-change-related liability risk in their lending and underwriting decisions. Asset owners are seeking to understand how climate change may affect the value of their assets, and asset managers are increasingly analyzing their investments’ climate risks and opportunities.
This heightened focus on climate-related risks underscores the importance of having accessible, reliable, climate-related data to measure and analyze, which is key to understanding and effectively incorporating climate factors as a component of investment strategies.
Applications of climate-related data in the investment process
Climate-related data are integral to investment processes. They serve various purposes, such as risk assessment, asset valuation, and shareholder engagement. These data are utilized not only by asset managers or lenders but also by service providers in the financial ecosystem:
- Credit rating agencies that incorporate climate risk exposure into credit ratings
- Index providers that offer climate-themed indexes and often calculate climate-related metrics for conventional indexes
- Valuation service providers that consider climate factors when valuing private assets
- ESG rating providers that integrate climate-related data into their ESG ratings and scores
- Sell-side research providers that are increasingly including climate-related information in their analyses
- Climate-related data and research providers that offer company-specific climate data, market research, and thought leadership on climate-related topics
In 2022, PwC found that both the data used as inputs for climate analysis as well as the level of incorporation differed significantly between service providers. This variability, coupled with limited transparency, makes comparisons difficult.
Challenges in accessing necessary climate-related data
Market participants have access to climate-related information from various sources, including company disclosures, datasets, and other industry publications. However, obtaining comprehensive, reliable, and comparable climate-related data remains a challenge due to inconsistent disclosures and limited regulatory obligations.
Climate-related data are typically available in raw, processed, and analyzed forms, each presenting its own set of challenges:
- Raw data comes directly from companies, often through regulatory filings or sustainability reports. However, there’s a lot of variation in what’s disclosed and when.
- Processed data involves estimating or modeling to fill gaps, providing more comprehensive information, especially for smaller companies or those in emerging markets. Nonetheless, reliability isn’t guaranteed when using data providers.
- Analyzed data, like ESG company ratings, are based on processed information. However, these can vary significantly among rating agencies due to different metrics used in their formulation.
Regulators are starting to tackle transparency and comparability concerns regarding ESG ratings. Some have issued or are in the process of issuing regulations or voluntary codes of conduct for ESG rating agencies and data providers. Notably, the GCC region and the UAE have been actively involved in initiatives to improve climate-related disclosures and promote sustainable investment practices.
The UAE
The UAE Climate Change Plan 2050, for instance, aims to reduce carbon emissions and enhance resilience to climate change impacts. As part of this plan, the UAE is implementing measures to improve climate data collection and reporting mechanisms, including the UAE Ministry of Climate Change and Environment’s open data model. This model supports planning, development, policymaking, and decision-making processes by providing relevant information, data, statistics, and studies related to environmental, agricultural, and economic aspects.
Saudi Arabia
Similarly, Saudi Arabia’s Saudi Vision 2030 includes ambitious goals for economic diversification and sustainable development. The country has launched the Saudi Green Initiative and the Middle East Green Initiative to tackle environmental challenges and promote sustainable practices, leveraging an open-data system. Additionally, GCC member states are collaboratively working on initiatives like the Gulf Cooperation Council Unified ESG Reporting Framework, which aims to standardize environmental, social, and governance (ESG) reporting practices across the region. This reflects a growing recognition of the importance of standardized and reliable climate-related information in investment decision-making.
Navigating climate data disclosures and the implications
While progress has been made in enhancing climate-related data disclosures, consistency and comparability remain challenges. Mandatory reporting requirements are being introduced in various jurisdictions, but differences in materiality and verification further complicate comparability.
For now, investors should exercise judgment in utilizing available data effectively while being mindful of its limitations. They should apply the same rigorous data interpretation, checks, and management techniques they employ with other incomplete or estimated datasets. Despite the ongoing challenges, investors should not be discouraged from using climate-related data until regulations and standards can offer more comprehensive solutions.
Paul Moody is the managing director at CFA Institute.
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