We have learnt from several sources, including DNV GL’s Energy Transition Outlook, that without greater efforts to decarbonise, the energy transition will not deliver on the targets as specified in the Paris Agreement. Even with rapid technology development, we predict the world will exhaust the 1.5°C carbon budget under the Agreement in 2028 and the 2°C budget in 2051.
Without ambition becoming action, there is the threat of irreversible breakdown of natural eco-systems and ensuing losses for investors. In this context, the investment community is under pressure to deliver on substantially increased requirements for transparency in terms of climate change and environmental and social governance – but delivering this ‘greener’ portfolio brings uncertainty.
In the transition to a cleaner, lower carbon future, there needs to be an approach that addresses the energy transition risks. This includes policy measures, technology uptake and social changes that will disrupt existing businesses and their underlying models and revenue streams. The physical risks, such as the impact of increasing temperatures and severe storms on physical infrastructure, productivity levels and on global supply chains, also need to be considered.
To decipher this decarbonisation challenge in the investment sector, DNV GL has developed a Climate Risk Management Framework which combines data and insight from various sources, including the annual Energy Transition Outlook, Technology Outlook report, the Climate Geo-Enhanced Assessment of Risks (C-GEAR) tool and traditional risk management services.
Future fit for an evolving market
The framework can be used by companies and investors to assess their exposure to climate change and to provide confidence to stakeholders that climate risks are reflected in their business and investment strategies. With decades of experience of managing risk, as well as our research and innovation work, we can present the risks and opportunities from the investment case, bolstered with a deep understanding of the engineering challenge.
By accessing modular outputs or the complete suite of activities, we can assess whether an organisation is ‘future fit’, with a focus on climate strategy design and implementation. Using our trusted data and insight, we work closely with the company to define future scenarios that are compatible with their business and help them understand the changes that they would need to make to meet a 1.5°C or 2°C future.
To examine the company’s portfolio of assets, these models are used alongside the C-GEAR physical climate modelling tool. This uses downscaled climatic data spanning from 2015 to 2099, as well as additional catalogues containing several types of environmental variables, parameters and damage functions.
For example, DNV GL’s methodology can clearly demonstrate, in both the short and long-term, the increasing potential for damage to physical infrastructure, such as an LNG plant, as a result of climate change. From experience, the analysis can review factors such as the impact of sea level rise, temperature and volatile weather systems and how much damage is likely to occur in any given period.
Investment decisions need to be continually reviewed in this dynamic environment. Stakeholders are increasingly demanding transparency on environmental and social governance (ESG) issues, and we have recently seen a rise in calls from major investors for boards to address climate change and other ESG issues. The Task Force on Climate-related Financial Disclosures (TCFD), was established in 2015, and in their 2019 report concluded that progress on climate-related disclosures was disappointing and as a result, are pushing for increased availability and quality of such disclosures. Using DNV GL’s Climate Risk Management Framework, companies and investors can demonstrate, through independent assessment, their compliance with the goals of ESG and TCFD.
With insight from our extensive family of clients and customers, we have pooled more than half a century of experience in providing technology and commercial risk services, combined with our engineering capability and capacity, to review and advise on impending investment decisions.
It’s important to consider the climate change impact and risk, but also the opportunities that are arising in the energy transition. For all companies, there are clear business advantages to consider climate change related risks in their strategies. Such considerations can ensure efficient use of resources, build adaptive capacity and resilience, open new markets and enhance reputation.
Graham Bennett, Vice President and Head of Energy Transition, UK at DNV GL – Oil & Gas
Download a complimentary copy of DNV GL’s Energy Transition Outlook 2020 report here.