“The climate change topic in the financial sector is still in its very nascent phase,” said David Lunsford, one of the co-founders of Carbon Delta, a boutique analysis group focused on climate risk. “There is definitely bad data out there, and I feel strongly about it. The fact is that if you look at industrial activity and the reporting of greenhouse gas emissions you find major flaws.”
The earliest models of climate risk took a company’s emissions of carbon dioxide and multiplied that by a hypothetical carbon tax to gain an estimate of the impact of climate-related policies. However, this approach has largely been discarded, because carbon pricing has so far been lower than expected in most countries, and because it does not take physical risk into account.
“Carbon footprinting is a useful exercise, but it is not a risk metric,” said Mr Lunsford. Groups like Carbon Delta incorporate emissions estimates, along with regulatory analysis and patent data to calculate the potential impact on companies’ market cap from different levels of global warming.
“It’s very difficult to calculate the costs or the profits from a climate change scenario [like 2C or 3C] but that is where the whole industry is headed eventually,” he added.