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Apply Carbon Financial Risk Metrics to identify Responsible Investments that reward investors while saving the planet

Bruce Menzies's picture
Chairman and Co-Founder Predict Ability Ltd (PAL)

Bruce Menzies is Chairman and co-founder of PAL. He founded Global Digital Systems Ltd that won the Queen’s Award For Enterprise 2011. Bruce is co-author of six books on geotechnics and geology,...

  • Member since 2018
  • 23 items added with 43,271 views
  • Dec 21, 2018

December 2018 - with populist riots against carbon taxation in France, and a weak agreement at COP24 in Poland, ESG-based Responsible Investment propositions can take the heat out of climate change and reap financial rewards too.


Done well, Responsible Investment is a virtuous circle, rewarding investors for choosing corporations who are ESG (Environmental, Social and Governance) compliant and whose good governance boosts profits.  As Janet Brown, of FundX Wealth Management, writes in[1]:

“ESG investing — which accesses companies based in part on their environmental, social and governance policies — is a fast-growing segment of the financial landscape. Importantly, socially-responsible investing is not just a strategy to feel good about how your money is investing. [Many experts]  argue that an ESG strategy also leads to better returns.”


Genuine ESG-based Responsible Investments need the authority of accreditation, standardisation and regulation, and to be founded on scientifically robust financial metrics. Predict Ability Ltd (PAL) has these metrics today. As illustrated in the images below, they include:

  • VaR Carbon Value-at-Risk: Figure 1
  • CLEAR (Carbon Liability to Earnings and Assets Ratio): Figure 2
  • GGG (GDP Growth Grids) that summarise the outcomes of modelling the impact of climate change on the economic futures of cities and countries: Figure 3
  • City liability metrics showing global map of climate risk: Figure 4
  • Energy source metrics using CIW (carbon intensity weighting): Figure 5


All of these metrics are enabled by PAL’s carbon price, itself scientifically derived from the actual loss and damage costs attributable to manmade climate change triggered by burning fossil fuels - past, present and future - since 1750. Being analytically precise, rather than politically influenced, this carbon price forms an impartial framework for a comprehensive range of Carbon Financial Risk Metrics that matter.


They identify, measure and quantify Carbon Risk at global, regional, city and corporate levels, giving it a real Dollar price – we deal in Dollars per tonne of CO2, not simply tonnes of CO2.


Bolstered with these new metrics, the case for ESG-accredited Responsible Investment offers a profitable and sustainable investment strategy, and is poised to become a highly effective vehicle with which to tackle climate change in the absence of global policy accord, while acknowledging citizens’ resistance to carbon taxes.


And yet there are other, powerful considerations: in the wings, environmental lawyers are gnawing away[2] and one day will likely create a fossil fuel’s ‘tobacco moment’[3]. Just one significant win would pile the heat onto institutional investors to further divest from fossil fuels. As Alice Garton of ClientEarth says, “…[as an executive in an energy company] whatever you might personally think about climate change, in your professional work your legal duties require you to assess and act on risk”.


It’s time to apply those Carbon Financial Risk Metrics to identify and give accreditation to ESG-based Responsible Investments that can tackle climate change and reward investors.



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Figure 1 PAL’s Carbon Value at Risk (VaR) assesses the long-term impact of climate change related losses on a portfolio. We allow for a range of outcomes, including business as usual and rapid decarbonisation. Using reported emissions we chart the year-by-year changes.



Figure 2 Carbon Liability to Earnings Ratio (CLEAR) is the ratio of a company’s direct greenhouse gas (GHG) emissions liability to company earnings. Covering a range of time-scales this single metric can be used to assess the climate vulnerability of portfolios as shown in this sample from the FTSE100.



Figure 3 PAL’s GGG (GDP Growth Grid) for Mexico for two climate scenarios: Paris and BAU (Business As Usual), for various combinations of climate sensitivity (a measure of the impact of emissions) and decarbonisation costs. The white box shows the range of most likely outcomes based on historic GDP data. Each tile represents a scenario based on the parameters shown at the edge of the grid; a tile is red if the economy peaks before 2100



Figure 4 Global Climate Risk Map showing Dollar values of cumulative climate risk for over 500 cities worldwide. This snapshot shows the risks at play in Southern US, Mexico, Central America and northern South America. The massive eastern US risk is on the horizon.




Figure 5 Carbon price projections using the PAL’s universal carbon price PAL-UP for Mexico. Superimposed are the carbon intensity weighted (CIW) prices for coal (in Mexico), gas, oil and low carbon sources (e.g. wind, nuclear). Incorporating CIW into financial risk analysis yields valuable insights into when to engage (invest) or disengage (divest) from a range of energy sources.


Bruce Menzies, Chairman, Predict Ability Ltd (PAL)

© Copyright Predict Ability Ltd 2018. All rights reserved.

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