#greencap

Greencap - Fire, Ice, Light, and Electricity

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Greencap: Fire, Ice, Light, and Electricity

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Climate change impacts both the natural and social environments significantly. To better predict its potential effects, decision-makers and resource managers need information about future changes in climatic average and variability.

Climate scenarios provide a reasonable picture of the future climate that has been created while examining the probable effects of anthropogenic climate change. Banks and other financial institutions use it to determine the risk of investments made in sectors and business models incompatible with the transition to a zero-carbon economy or major producers of greenhouse gas emissions. A net-zero economy can be achieved by promoting systemic changes with the help of stress testing and climate scenarios.

From high-level climate ‘Pathways’ to policy-based regional ambitions, there is a great deal to take into account in the make-up, including

Global climate goals adopted by nations worldwide

Regional targets are set and monitored by the same governments

Differential pressures on food and energy security

Upstream and downstream supply chain effect

Slower transition rates due to worsening climate outcome predictions

Splitting of climate investments between adaptation and mitigation

Representative Concentration Pathways (RCPs)

The Intergovernmental Panel on Climate Change (IPCC) develops a variety of Representative Concentration Pathways (RCPs) as part of its mandate from the UN. The eventual increase in the average global surface temperature relative to pre-industrial observations reflects pathways through the century toward outcomes.

The main pathways considered are:

1.9 - Endpoint – An increase of 1.5 degrees or less  

2.6 - Endpoint – An increase of 2 degrees or less

4.5 – Endpoint – A 3 to 4-degree rise

8.5 - No action, also called ‘Hot House World’

Network for Greening the Financial System (NGFS)

The NGFS Climate Scenarios have been created to offer a standard place to start when examining climate risks to the financial system and economy. Although they were designed primarily for central banks and supervisors to utilize, they might potentially be helpful to larger financial, academic, and corporate groups.

Several suggestions for the methodological framework have been made based on a preliminary evaluation of the NGFS scenarios, such as:

Consider tail risks

Recognize uncertainty in climate sensitivity

Extend the set of physical risks

Integrate transition and physical risks

Improve the representation of technological change

Improve geographical coverage and sectoral granularity

Consider alternative policy developments

The NGFS should consider that it is unclear how climate policy will develop in the future and that there are already some fragmented processes around the world that do not fit schematic descriptions provided by the scenarios.

Using a hypothetical carbon price as a stand-in for the cost of scenarios and pathways that are either based on regional plans or global outcomes is one of the most crucial strategies the NGFS employs. This makes it possible to compare regional transition routes uniformly.

Sectors covered explicitly by the framework include:

Power

Fuel Supply

Industry

Transport

Buildings

Energy Integration

Each of these sectors' progress toward net-zero is monitored and separated into 46 distinct analytic themes. The "Climate Action Tracker" (CAT), which compares country-level promises to the UN-agreed targets of a 2-degree limit with best efforts toward 1.5 degrees, breaks down existing country-level commitments. Each nation presents its local and global results separately.

The final scenario(s) must incorporate modifications to both the speed of transition and the overall economic impact, which is often stated by changes in GDP.

GreenCap can help…

Greenhouse gas emissions caused by humans are responsible for the increasing global warming, which threatens our planet’s natural balance. With the rising temperatures, investors and policymakers are turning to carbon budgets as a core factor for analyzing the implications of GHG emissions on our well-being. A carbon budget is a cumulative amount of carbon dioxide (CO2) emissions that are permitted through a period of time to stay within a certain temperature threshold.

At the COP21 or the Paris Climate Conference, world leaders decided to keep global warming at 1.5°C-2°C, as per recommendations of the Intergovernmental Panel on Climate Change (IPCC).  

The remaining carbon budget for a 2-degree limit in 2100 is 1150 Gts of CO2, but it is only 400 Gts for 1.5 degrees. CO2 emissions are currently around 42 gigatonnes per annum (Gt/a) and continue to rise.

This carbon budget can be affected by several factors:

Phytoplankton helps the oceans retain CO2, making it a carbon sink. However, rising ocean temperatures are causing a decline in phytoplankton populations. Warmer ocean water absorbs less carbon dioxide from the atmosphere than water that is cooler.

Deforestation, which diminishes the capacity to convert CO2 into carbon-storing biomass is viewed as a serious challenge to the agreed-upon carbon budget. When forests are cut or burned, carbon that has been stored is released into the atmosphere, primarily as carbon dioxide. Carbon sinks such as soil organic matter, dead wood, and living biomass are released into the atmosphere, increasing carbon emissions.

Carbon capture and storage (CCS) or carbon capture and sequestration allow power plants or companies to capture the released carbon dioxide (CO2) before it enters the Earth’s atmosphere. It is stored in an underground geological formation. This process is of significance during the latter part of the century where more CO2 is removed than emitted.  

Reforestation can also help reduce atmospheric CO2 by removing it from the atmosphere acting as a natural carbon sink.  

These factors greatly influence the outcome of the committed carbon budget. Unplanned scenarios like forest fires, loss of oceanic biodiversity, and melting ice caps have forced policymakers to take urgent actions to limit global warming.  

The rising GHG emissions are also impacting different industries and businesses that are part of a country’s economy. All of this will have positive and negative implications on business models and, as a result, credit profiles of banks’ customers. Banks are now adopting climate-based scenarios for Risk management advisory services, as companies are increasingly transitioning to greener solutions.  

These climate scenarios allow risk departments to see the credit-adjusted impact of this transition. Although this impact will occur later, it does not change the overall cost to banks in terms of funding an increasing ‘Risk-Weighted Asset’ capital charge against facilities granted before various climate regulations come into effect. Impacts in terms of dollar costs can be applied by using the official ‘Net Greening of the Financial System’ (NGFS) estimates against each pathway option.

With this system, banks can:

Calculate the impact of each scenario on the loan book's regulatory capitalization

Calculate the cost difference if companies performed proactive, early-stage sustainability actions based on IPCC action recommendations

Calculate the difference in green loan price per sector

Use these capital indicators to set long-term business goals

Track these goals as a part of their day-to-day operations