January 19, 2023 | Boulder, Colorado— Entelligent today announced the general release of T-Risk version 2.1.0, the latest update to the company’s flagship climate transition risk score. The update — which further strengthens T-Risk’s predictive value for climate-aware investing and risk management — makes Entelligent the first climate data provider to integrate the most current scenarios published by the Network for Greening the Financial System (NGFS).
NGFS is one of a small group of global standard-setting entities that are influencing decision-making by financial institutions worldwide. Its newest scenario recommendations, known as NGFS Phase III (aka NGFS 3), are expected to be influential in climate decision-making and compliance policies at financial institutions and central banks worldwide.
The release of T-Risk 2.1.0 is the most recent in a continuum of innovation and IP development by Entelligent, building on its patented SmartClimate® methodology, to advance the critical field of climate-sensitive investment and risk management.
A key aspect of the new release is a change in the T-Risk methodology’s primary Integrated Assessment Model (IAM), from MESSAGEix to the Global Change Assessment Model (GCAM). The migration to GCAM and NGFS 3 resulted from a shift in Entelligent’s near-term outlook for the pace of the energy transition — which was in turn necessitated by secular economic shifts that emerged in the wake of the Covid-19 pandemic.
Benefits and Impacts
Migration from NGFS 2 to NGFS 3 scenarios. As global market participants coalesce around common policies and standards, alignment with NGFS 3 adds significant value for risk and asset managers seeking to account for the impact of the Net Zero transition on their holdings.
Full incorporation of post-pandemic economic shifts. With the integration of GCAM’s most recent update (June 2022), the T-Risk model accounts for the global economic upheaval that came in the wake of the Covid-19 pandemic. The implications of this change include:
- A revised oil price forecast to 2025, which is expected to increase in a Paris scenario relative to current policies. This forecast differs from prior ones, which assumed oil prices would decrease slightly in the medium term. As a result, companies in industry sectors with high exposure to oil pricing, for instance, Energy, are likely to see lower T-Risk scores starting with the release of T-Risk 2.1.0 in Q1 of 2023.
- Approximately 8% and 7% increases in oil and coal prices respectively, and 5% and 25% declines in natural gas prices and renewables supply respectively, versus our prior forecasts. The increase in price of carbon-intensive fuels (coal and oil) and the reduction in price for less carbon-intensive fuels (natural gas) and supply for renewables reflects the reality of a delayed transition, continued drawdown of the carbon budget and therefore a required acceleration of the transition pathway.
- An increased carbon price across both orderly and disorderly scenarios, required to induce accelerated de-carbonization. The previous Net Zero 2050 scenario (NGFS 2) suggested a global average carbon price of USD $145 per tCO2 in 2025, compared to $258 per tCO2 under current assumptions (NGFS 3).
Improved predictive power. GCAM is a truly global model with very high spatial and temporal resolution. As such, it enables more accurate forecasting and granular comparisons among companies and sectors, and their relative sensitivities to energy factors.
Improved data quality. Continued refinements to T-Risk’s outlier removal and noise reduction processes — including by removing unlisted stocks — yields cleaner, more interpretable data sets.
Migration of climate scenario assumptions. T-Risk 2.1.0 adopts the GCAM integrated assessment model as its primary model input, to better reflect Entelligent’s most current perspective on climate scenarios, including the updated framework of the Network for Greening the Financial System (NGFS 3)
Simplification of outlier handling. To reduce outliers, T-Risk 2.1.0 includes upstream liquidity filters and eligibility criteria. Downstream Gauss rank transformation has been introduced to smooth out tail distribution, and improve interpretability.
Excluding inactive equities. Only securities that are listed in the most recent rebalancing quarter are scored.
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