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Applying a climate framework to capital markets


In August of this year, the Intergovernmental Panel on Climate Change released the first contribution to the Sixth Assessment Report on Climate Change. The assessment, which focused on the physical impacts of climate change, was sobering. To quote: It is unequivocal that human influence has warmed the atmosphere, the ocean and the land. Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred.1 Add to that these key observations and projections: Since the late 1800s, Earth’s temperature has risen by about one degree, and since 1970 global warming has increased rapidly, with surface temperatures rising faster than any other. another 50-year period in the past 2,000 years. Given this alarming rate of temperature increase, the IPCC estimates that even assuming aggressive global action to reduce emissions, temperatures are expected to rise another 1.5 ° C by 2040 and the level of the sea by 0.35 m by 2050.

These statements and figures can be overwhelming. One way to understand these statistics is to consider them in the context of what appears to be an endless cascade of recent extreme weather events such as floods, wildfires, heat waves, and tropical storms. According to the IPCC report, below a level of warming of one degree, the level at which the Earth has already reached, a 10-year extreme weather event (i.e. Worse, for a 50-year extreme weather event, an event that might recall scenes from a Hollywood disaster movie, the increased probability is 4.8 times.

So what once seemed to be anomalous weather events are now increasingly the norm. In the past, unusual tail events are no longer low probability events. Sadly, this is the “new normal” and tackling climate change has never been so urgent.

It is with this sense of urgency that the AIIB and the asset management company Amundi have developed a toolkit enabling investors to apply a climate framework to capital markets aligned with the Paris Agreement, the only agreed international legal framework that obliges countries to reduce carbon emissions to tackle climate change.2

The first part of this toolkit is the AIIB-Amundi Climate Change Investment Framework launched in September 2020. The framework describes the three main actions to combat climate change: mitigation activities to reduce emissions of carbon, adaptation activities to adapt to climate change and financial contribution. activities aimed at orienting fundraising activities towards reducing carbon emissions and strengthening climate resilience.

Part two is the Asia Climate Bond Portfolio, a $ 500 million bond portfolio that is guided by the Framework, and thus provides a living case study of its application. This portfolio, managed by Amundi on behalf of the AIIB, invests specifically in emerging market corporate bonds linked to infrastructure, favoring performing companies on climate indicators and encouraging laggards to improve their performance.

The third part is a market development program that will develop further research on the AIIB-Amundi investment framework for climate change. Here, the AIIB asked three major climate finance research organizations – Fitch, Carbon Trust and Climate Bonds Initiative – to test the application of the framework to the analysis of sectors, companies and green bonds, respectively. The results of this research will be published in early 2022, but we already have some interesting ideas.

Fitch applied the framework to the analysis of eight sectors in the emerging Asian region: energy, telecommunications, transportation, utilities, healthcare, automotive, basic industries and technology. He found that there were wide variations in the availability of data on the three pillars of the Framework (mitigation, adaptation and financial contribution). He also found that because more sectors had made efforts on mitigation, it was easier to quantify and score those efforts. In contrast, adaptation efforts have been slower, and because these efforts are more country and location specific and therefore largely subjective, Fitch found them more difficult to quantify, score, and compare. Finally, Fitch found that proper analysis of climate performance requires adding financial capacity as an additional pillar of the Framework.

Carbon Trust applied the framework to the analysis of specific companies in the emerging region of Asia. They found that Asian companies made progress in mitigating their direct emissions – for example by improving the energy efficiency of their direct operations – but were at an early stage in tackling their indirect emissions – for example adopting very low emission vehicle fleets for transport. and freight. They also found that companies have struggled to define their financial contribution to climate, due to the lack of a common definition of what constitutes “green”.

Finally, the Climate Bonds Initiative, which applied the framework to bond issuers, found that the framework complements the use of its taxonomy of climate-aligned activities, which is used to identify green bonds labeled as credible. For example, the use of the framework was particularly useful in identifying untapped opportunities in unlabeled green bonds, by identifying issuers that were contributing to the transition, based on the analysis of the company’s green revenue streams. .

All in all, it looks like the framework has stood up to scrutiny well, but as the intermediate research reading and the final research results can confirm, much more work will be needed to fill many of the gaps. identified. These gaps relate to both the actions that can be taken by companies and sectors to reduce their carbon emissions and improve their climate resilience, but perhaps more importantly, the gaps in how government policies could best encourage or promote better overall climate performance. Recent extreme weather events and the latest IPCC report are appeals to all to address the existential challenges posed by global warming and climate change. To that end, we would do well to heed scientists’ warnings to quickly reduce our carbon emissions and prepare for the physical effects of climate change. As the saying goes, warned is warned, but we are only warned if we act in advance.

1 IPCC. 2021. Climate change 2021: the basis of physical science. https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM.pdf

2 AIIB. 2021. Annual report 2020. https://www.aiib.org/en/news-events/annual-report/2020/our-investments/detail/amundi-climate-change-investment-framework/index.html


AIIB – Asian Infrastructure Investment Bank published this content on September 17, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on September 17, 2021 01:31:02 PM UTC.


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