To help companies assess exposure to evolving regional carbon-pricing mechanisms, Trucost, which is part of S&P Dow Jones Indices, has launched the Trucost Corporate Carbon Pricing Tool. The tool’s insights are designed to help companies better understand the potential business case for more sustainable products and business models, such as prioritizing regional investment in ‘green’ technology, resource efficiency or different product strategies.
Carbon regulation is increasing and business as usual is not an option if companies want to stay competitive in the shift to a low-carbon economy. Carbon prices are already implemented in 40 countries and 20 cities and regions, and average carbon prices could increase more than sevenfold to $120 USD per metric ton by 2030.
Identifying a credible set of internal carbon prices in light of confusing regional regulations that affect different business activities can, however, be a challenge. The Carbon Pricing Tool aims to simplify the process by distilling global data on carbon regulations and providing financial risk trajectories.
“Companies are trying to make sense of the pace at which legislators in different countries, states and cities are implementing carbon regulations,” Libby Bernick, Global Head of Corporate Business of Trucost, said in a statement. “Because these regulations could drive up the cost of fossil-fuel-based energy and carbon-intensive raw materials, increasing operating costs and reducing profit margins, companies need robust data and analytics to help inform financial decisions over investments in energy efficiency, low-carbon innovation and renewable energy. Trucost’s Carbon Pricing Tool provides a solution for companies that want to get ahead of carbon regulation and continue to grow their businesses.”
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The tool combines a company’s greenhouse gas emissions and financial performance data with Trucost’s regional carbon-pricing information to provide insights on carbon-pricing risks out to 2030. Trucost has curated a global database of current carbon regulations, emissions trading schemes, fuel and other taxes and potential future carbon-pricing scenarios designed to achieve the goals of the Paris Agreement to limit global warming to 2°C or less.
The tool models the progressive closure of the spread between carbon prices today and in the future, considering science-based scenarios and climate change commitments. It also comes preloaded with available competitor data, allowing companies to benchmark and compare financial risk exposures.
Trucost’s Libby Bernick
Internal Carbon Pricing
New Metrics '17.Sustainable Brands spoke with Libby Bernick, Global Head of Corporate Business, for more details.
SB: The launch of the Corporate Carbon Pricing Tool comes on the heels of a lawsuit against Australia's Commonwealth Bank in response to 'inadequate' climate change risk disclosure, which could set new precedents for both risk disclosure and litigation. How do you see the tool fitting into this new world order and do you expect these recent events to accelerate its uptake?
Libby Bernick: There are a host of regulatory, physical and market risks that companies face; many are described in the recommendations by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. But there are also many opportunities from the shift to a low-carbon economy, including energy security or revenue from low-carbon technologies, products and services. The Corporate Carbon Pricing Tool helps companies understand these risks and opportunities by providing insights into how carbon prices could increase in the future under a range of business scenarios and in different regions around the world, and what this could mean for its business.
There is mounting pressure on companies to disclose their climate risks and how they manage them. The investment community is increasingly expecting companies to provide forward-looking disclosures that tell a data-rich story about how companies are integrating climate risk into business governance and strategy, most recently underscored by the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. By quantifying current and future financial risk exposure to regional carbon-pricing mechanisms, the Corporate Carbon Pricing Tool enables companies to stress test company financials, apply shadow pricing in financial decision-making and prioritize low-carbon innovation where it most matters.
SB: Beyond making it easier for companies to access information about current and future carbon pricing risks, what does Trucost hope to achieve with the new tool? What inspired its development?
LB: For almost 20 years, Trucost has been providing data and tools to help companies and investors understand environmental risk in financial terms. In this way, Trucost enables everyone, from CFOs and product development teams to pension fund trustees and investment analysts, to integrate environmental risk management in financial decision-making and ultimately inform more sustainable capital allocations. The Corporate Carbon Pricing Tool is very much a continuation of that mission. It’s a tool that is accessible and easy to use, either at an asset level or across a corporate enterprise. This means it can be applied globally but provide robust local-level insights to inform the business casefor investing in low-carbon strategies by estimating internal carbon prices that shadow current and forecast regional carbon-pricing mechanisms.
SB: The forecasts embedded into the tool for carbon taxes, emissions trading schemes, fuel taxes, and future carbon-pricing scenarios are based on the goals outlined in the Paris Agreement, which are grounded in science. What added benefit does the inclusion of benchmarking data offer?
LB: Companies want to understand how the risks they face from increasing carbon prices compare to their peers. For many businesses, this can be an important factor driving companies to reduce carbon emissions so they stay competitive. Equally, some companies see an advantage in stealing a march on their competitors by taking a leadership position on climate change. The Corporate Carbon Pricing Tool provides companies with the benchmarking data they need to inform these strategic decisions.
SB: What information/data do companies already need to have in order to make the most of the tool?
LB: The tool is designed to be easy to use, with minimal information required by the user. Companies need to input data into the tool on their business activities and operating locations, as well as their greenhouse gas emissions data where it is available. Additional information, such as revenue and operating expenditure, is optional but provides a company with deeper insights on current and future financial implications of carbon regulation risk on operating costs and margins.
LB: Trucost has already developed methods to price other social and environmental risks, including, for example, water scarcity and pollution risks. Based on experience and customer feedback from the initial rollout, as well as policy and marketplace developments, we will evaluate how to expand the tool, taking into account the range of risks that are mispriced by markets.