Initiative
Bloomberg New Energy Finance (BNEF)

Bloomberg New Energy Finance (BNEF) has developed a Carbon-Risk-Valuation-Tool

Burgess COMMENTARY

Peter Burgess

BLOOMBERG CARBON RISK VALUATION TOOL

Open PDF ... BNEF_WP_Carbon-Risk-Valuation-Tool_131125

In the last two years, the issue of ‘stranded assets’ has started to loom larger and larger, particularly in relation to the idea that climate change policy could induce the stranding of some conventional assets.

Here we introduce a first-cut tool that helps illustrate the potential impact of stranding on a company’s earnings and share price.

● Investors are trying to understand what the valuation impacts of stranded assets could be on their holdings and whether these are material risks or not.

● The Bloomberg Carbon Risk Valuation Tool (CRVT), available on the Bloomberg Professional Service at XLTP XCO2, offers a starting point to illustrate the potential impact on earnings and share price of companies, particularly those in extractive industries, under carbon pollution constraints.

● The tool offers five pre-built scenarios, plus the ability to adjust assumptions. The scenarios provide the ability to apply some of the ways in which stranded asset risks could manifest themselves. The five are:

o 5% annual decrease in oil prices starting from 2020 relative to the futures price;

o $50 a barrel for oil from 2020;

o $25 a barrel for oil from 2030;

o 80% decrease in EBIT fading in from 2020 and peaking in 2035: Prompt Decarbonization; and

o 80% decrease in EBIT fading in from 2030 and peaking in 2035: Last-Ditch Decarbonization.

● We hope the tool will illuminate further ways that can help our clients more efficiently meet established and emerging disclosure requirements and standards, from the Asset Owners Disclosure Project through to the Sustainability Accounting Standards Board.

● The CRVT is in its first iteration and we are seeking feedback from users so we can improve its functionality and take further steps towards the development of a decision-useful tool.

● In the longer term, as new data and methodologies become available, our aspiration is to expand the tool beyond carbon, so that it incorporates other environment-related risks that could strand assets.