Climate-Related Stress-Testing and Net-Zero Valuation

This paper proposes a methodology for quantifying the climate-related transition impacts on energy-intensive companies. In this study, we use a publicly available dataset created by the Bank of Canada that combines the scenarios developed by the MIT Economic Projection and Policy Analysis (EPPA) model with the results from two macroeconomic models (ToTEM and BoC-GEM-Fin) to illustrate price and production patterns for 10 emission-intensive sectors across 8 aggregated regions. Our focus lies on mapping the trajectories of future sectoral revenues and operating expenditures (direct and indirect costs) to company-level impacts. We align these indicators with the top-down approach used by the European Central Bank to measure issuer-specific exposure to transition risk. By incorporating company-level data, such as revenues in sub-activities and direct emissions, we are able to compute issuer-level financial statements that are particularly relevant to define equity scenario-based valuation ratio and corporate credit risk. By examining the narrative established by the Network for Greening the Financial System (NGFS) – which includes current policies, nationally determined contributions, net-zero targets, staying below 2°C, and delayed transition – we assess the added value of employing such models for asset allocation. The conclusions drawn from our case study analysis suggest a significant heterogeneity within sectors and demonstrate that the diversification of corporate revenues in sub-activities leads to distinct valuation patterns.

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MIT Joint Program on the Science and Policy of Global Change Massachusetts Institute of Technology:

Henry CHEN, Research Scientist at the MIT
Sergey PALTSEV, Deputy Director of the MIT

Amundi:

Théo LE GUENEDAL, Quantitative Research, Amundi Technology
Yassine DERBEL, Innovation Lead, Amundi Technology
Matthieu KEIP, Innovation Lead, Amundi Technology
Rami MERY, Innovation Lead, Amundi Technology
Benjamin DUVAL, Quantitative Analyst, Amundi ESG Data and Solutions
Mathieu JOUANNEAU, ESG Methodology & Solution Climate Expert
Tegwen LE BERTHE, Head of ESG Scoring & Methodology
Frédéric LEPETIT, Head of Equity Quant Portfolio Strategy, Amundi Investment Institute