Company and scenario analysis in key high-carbon sectors – New reports out now

As part of the Energy Transition (ET) Risk Project funded by the EU Commission’s Horizon 2020 research and innovation programme, Kepler Cheuvreux and the CO-Firm conducted 2°C scenario analysis on company and valuation models for the automotive, cement and steel sectors.

Their analysis found that:

·       The transition to a low-carbon economy generally is a growth story for the automotive, cement and steel sectors. The application of the two transition scenarios, which were developed by the CO-Firm and us, suggest that a more ambitious transition scenario may even lead to stronger earnings growth than a less ambitious one.

·       The key risk drivers differ between the sectors and scenarios applied, namely the evolution of technologies, regional growth stories and policy mechanisms to promote the transition.

·       If companies fail to adapt to the transition to a low-carbon economy, a hit on earnings can materialise in the short to medium term (2020-2025).

·       As the transition to a low-carbon economy will produce winners and losers across sectors and the financial performance varies significantly between companies in the same industry, transition risks should be taken into account at the company rather than sector level.

·       Transition risks are discussed only sparingly in equity valuations and therefore integrated into valuations even less frequently. This is because analysts lack conviction that transition risks affect a company’s investment profile due to low probability, low severity or, most commonly, because they feel that the risk falls outside of their time frame. But critically, scenario analysis can help inform analysts on how transition risks financially affect companies, sectors and regions.

·       Discrepancies exist between company valuations under different transition scenarios and the market consensus baseline. This suggests that the market fails to price in transition risks. Analysts should therefore assign probability weightings to each scenario and begin to factor in the assumptions on the most likely future into their base case.

The full results of the analysis are now available in three reports covering the automotive, cement and steel sectors, while the management summary has recommendations on how to use the analysis. You can find these below. The results are based on the ET Risk Scenario Selector Tool, which provides open-source scenarios designed for financial analysis.

You can also access the reports through the ET Risk project website and the climateXcellence tool.

We have reported on findings and tools developed as part of the ET Risk project in our previous reports. A final analysis of the integration of scenario analysis in credit risk assessments will be published by Trucost, part of S&P Global, later this year.

Your 2° Investing Initiative Team

*The views expressed in these reports are the sole responsibility of the Kepler Chevreux and The CO-Firm and do not necessarily reflect those of the sponsor, the ET Risk consortium members, nor those of the review committee members. The authors are solely responsible for any errors.