Imperial College has devised a tool to help investors capitalise on the low carbon transition, without sacrificing returns.
Imperial College Business School in collaboration with Impax Asset Management developed the Smart Carbon Portfolios model.
The asset allocation model captures the potential impact of carbon pricing on fossil fuel stocks and found that portfolio construction can “hedge against a form of energy transition risk,” for institutional investors.
Charles Donovan, director of the Centre for Climate Finance and Investment at Imperial College Business School, said: “For the oil and gas sector, the heat is on.
“Pressure is mounting on the industry heavyweights to respond to the strategic challenges posed by an energy transition. Everywhere you look, there are signs this transition is accelerating.
“Our research reveals some names are far better placed than others. In pulling investment from a range of oil and gas producers, Norway’s sovereign wealth fund sent a shot across the bow for the industry. Investors will need to place their bets, and soon.”
The model is one of several new tools financial researchers at Imperial are developing that allow investors to hedge against escalating risks, while sacrificing virtually no ex-ante financial gains.
The Smart Carbon Portfolio is statistically indistinguishable from relevant unhedged portfolio benchmarks, said Imperial.
Impax Asset Management chief executive Ian Simm said: “Companies and investors are under increasing pressure to use forward-looking scenario analysis to assess their climate change risks.
“This research goes beyond the generic guidelines and demonstrates, in a practical way, that scenario analysis can be used not just to assess risk, but effectively manage it as well.”
In further work in the area, Imperial College Business School has produced a framework to help investors differentiate levels of preparedness among oil and gas majors for a low-carbon energy transition.
The research found that transition preparedness varies significantly across the sector, with European oil and gas majors outperforming their North American counterparts.
European-based firms adopt early innovations and material strategic options for transformation in response to stakeholder pressures, found Imperial.
The framework consists of a set of 15 parameters based on key dimensions identified by the Financial Stability Board’s Task-force for Climate-related Financial Disclosure.
The new parameters go beyond existing rule-based indices, which fail to adequately consider governance, strategic planning and risk management policies within these businesses.
The new framework considers companies’ investments in new lines of business and tangible efforts to re-shape business models in response to declining demand in the power and transport sectors.