Carbon Risk Management
‘Carbon Risks‘ and ’Financed Emissions‘ of financial securities and portfolios – quantification, management, and reporting based on capital market data
Climate change is a fact. The awareness for global climate risks of most governments worldwide has already led to various legislation and regulation, which promote the development of the economy towards a “Green Economy”. At the same time, the awareness for environmentally friendly investments of several capital investors increases steadily. Right now, a huge amount of assets is reallocated – from investments in the “Brown Economy” to investments in the “Green Economy”. Both developments have far-reaching and currently hard to predict consequences for the economy and lead to massively changing and ever more volatile assets. An often cited example thereof are “stranded assets”, which even might result in the risk for a financial market bubble, the so-called “carbon bubble”. Therefore, it is of elementary importance for all financial market actors to adequately quantify, manage, and report the opportunities and risks that arise with regard to the transition of the economy towards a “Green Economy”.
The Chair of Finance and Banking at the Faculty of Business Administration and Economics of the University of Augsburg undertakes this task since 2015 within the scope of the research area “Carbon Risk Management” (CARIMA). A capital market based procedure is developed that allows for the quantification, management, and reporting of carbon risks for companies and respective financial securities and portfolios. The foundation is build by a Carbon Risk Factor, which mirrors “carbon induced” risks and opportunities for potentially all financial securities and portfolios.
The project CARIMA, sponsored by the German Federal Ministry of Education and Research, should not only close existing gaps in research. CARIMA should also support potentially all individuals and institutions to face these new economic risks and opportunities properly – and recognize them justly in the first instance, respectively. For this reason, we collaborate with our practice partner, the Verein für Umweltmanagement und Nachhaltigkeit in Finanzinstitutionen e.V. (VfU). We use the dialogue with all areas of the financial industry, regulatory authorities, governments, and rating agencies. By this continuous exchange with the financial practice and by parallel publications in journals we are going to make the concept of the Carbon Risk Factor transparent and open to access, so that all financial market participants can profit from it.