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Assessing Climate-Related Risks
B Sc. Business Administration
Ida became acquainted with right. open and the XDC Model during a position at GLS Bank and brought this knowledge with her to a position at Weleda AG . Inspired by the XDC Model’s innovative approach of measuring a company’s climate impact, Ida and Weleda decided to explore how it could be applied to Weleda’s climate risk assessment as part of Ida’s Bachelor thesis.
As the financial impact of climate change continues to increase, so do the requirements on companies to incorporate climate risk in their risk management. Following the guidelines of the European Commission and the Task Force on Climate-related Financial Disclosures (TCFD), climate risk is comprised of:
- inside-out risks related to a company’s climate impact
- outside-in risks related to physical effects of and transitional responses to climate change
- the interrelation between the two perspectives – also called the double materiality.
To facilitate the assessment of climate-risk exposure, companies are recommended to make use of dedicated tools and methodologies. Using Weleda as a practical case, the goal of Ida’s thesis was to evaluate how the XDC Model can be used in corporate risk management to identify and assess climate-related risks from a double materiality perspective.
- In a first step, Ida used the XDC Model to assess Weleda’s climate impact – and thereby the inside-out risks.
- To assess the outside-in risks, a forward-looking scenario analysis was carried out in which potential physical and transition risks and their financial impact on the business were evaluated in different future scenarios.
- The results of the scenario analysis were in turn used to draw conclusions about the effects that potential outside-in risks might have on a company’s climate impact and resulting inside-out risks.
- Based on the case study, a critical assessment of how the XDC model can be applied to corporate risk management was made.
Ida’s research findings show that a set of conditions need to be fulfilled to successfully apply the XDC Model in corporate risk management:
- A sufficient granularity of the sector classification that is used to identify the sector-specific reduction potential and thus the target benchmark (Target XDC) for a company’s climate impact. An accurate Target XDC is a prerequisite for assessing a company’s inside-out risks.
- A clarity in terms of which Scope 3 emissions that companies in specific sectors should account for to ensure consistency when assessing a company’s climate impact and the Target XDC for its sector.
- Sufficient resources and competence for the considerable research that scenario analysis entails. This is especially true for sectors with agricultural supply chains, where location-specific climate sensitivities of raw materials need to be considered.
Not surprisingly, Ida’s findings touch upon well-known challenges related to climate impact assessment and climate risk management – the lack of standards for emission accounting, for scenario analysis, and for climate impact- and climate risk assessment.
Such standards should be defined by science, which is why two further research projects that build on Ida’s findings have been initiated within the right. open community.
Lützenkirchen, L. (2020). Assessing climate-related risks – Applying the X-Degree Compatibility Model in corporate risk management. B.A. Thesis. Alanus University of Arts and Social Sciences.
Quality of Climate Change Scenarios
B. Sc. Economics and Business Administration
Goethe-Universität Frankfurt am Main
With a strong interest in the interaction between the climate system and the economy, Lennart’s position at right. based on science during his studies turned out to be a great opportunity to explore the current state of models that attempt to capture this dynamic interplay as part of his bachelor thesis.
Understanding how the interaction between the climate system and the global economy will develop in the future is fundamental to the design of effective mitigation policies and thereby the attempt to prevent dangerous levels of global warming. A common approach for analysing this is through the modelling of a set of relevant scenarios: scenario analysis. However, designing these scenarios is no trivial exercise and different modelling approaches often provide different answers to the same question.
To contribute to improving the robustness of these modelling approaches and their results, Lennart’s goal with his thesis was to identify a framework of quality criteria. Such a framework could be used by governments, central banks, investors, amongst others, to assess to what extent their modelling approach provides relevant information about the actual impact of the climate system on the global economy.
To develop the framework of quality criteria, Lennart first conducted an extensive review of literature, as well as the state-of-the-art of economic and climate models, scenario frameworks and their corresponding databases.
These insights were then used to assess a set of models that integrate global warming into macroeconomic modelling.
Based on the outcome of the assessment, a framework of quality criteria could be developed.
Lennart´s research findings show that current modelling approaches fail to fulfil several of the identified quality criteria, and thus are not able to provide reliable projections for how the climate system impacts the global economic development. Examples of criteria that need to be fulfilled include:
- the consideration of a wide set of relevant scenarios
- the use of a well-proven climate model
- the consideration of cross-sectoral and international interdependencies
- the quantification of the uncertainty in key parameters
Lennart’s research findings clearly demonstrate some fundamental limitations of modelling the future interaction between the climate system and the economy. However, they also provide a comprehensive overview that can guide future work on improving the projections. In his new position as an economist in right.’s model development team, Lennart will surely develop related research topics that future right. open researchers will be invited to explore.
In practice, the findings imply that current analyses are often too simplistic. Improving their quality necessitates innovative, complex, and comprehensive approaches. As long as this is not feasible, any estimations about the impacts of climate change on the economy need to clearly state the core assumptions and be interpreted very carefully.
Schweser, L. (2020). Discussing Approaches to Integrating Climate Change Scenarios into Economic Analyses. B.Sc. Thesis. Goethe University Frankfurt.
Climate Impact of Buildings
Climate Impact Analysis
M.Sc. Industrial engineering with technical field civil engineering
Technical University Darmstadt
During her studies, Mareike gained the sense that sustainability was not sufficiently addressed in the real estate sector. Through a guest lecture with right. open, she realized the XDC Model’s potential to increase the transparency of the climate impact of single buildings, and decided to dig deeper into the challenges faced by this sector to become aligned with a <2 °C world.
With residential and commercial buildings accounting for ca 17% of the global energy-related emissions (Schäffner, 2020), a tool that enables the assessment and management of a single building’s climate impact is an important step in the transition towards a <2 °C economy. Mareike’s goal with her research was hence to develop the XDC Model so it could be applied on asset-level in the real estate sector, thereby meeting the increasing demand of credit providers, real estate companies, and consultancies conducting due diligence on buildings.
When assessing the XDC of an economic entity, such as a company, the proportion between the generated value and the emissions required to generate this value is defined – the Economic Emission Intensity (EEI). This EEI is scaled up to a global level to assess what quantity of emissions would reach the atmosphere if the world operated as emission intensively as the economic entity in question. The parameters used in this calculation are Gross Value Added (GVA) and CO2e.
To be able to apply the XDC Model to a single building, Mareike’s challenge involved:
- Defining which building-related CO2e emissions to include in the Analysis.
- Identifying an equivalent parameter to GVA but for a single Building.
- Developing a method for scaling up the building-adjusted EEI to global levels to calculate a total quantity of emissions.
Mareike’s resulting methodology focused on the energy-related emissions of a building and used the building area (sqm) as an alternative parameter to GVA.
Scaling up the adjusted EEI to global levels to calculate a total quantity of emissions was possible, however entailed some challenges that need to be resolved before a final tool can be presented to the real estate sector. In addition, Mareike suggested further areas to explore:
- the inclusion of further building-related emissions such as emissions generated through the contruction of a Building.
- the development of a Target XDC as a benchmark for a single building to be <2 °C compatible.
- the expansion of the methodology from residential and commercial buildings to further building types.
The relevance of Mareike’s research sparked an unmet interest among right.’s stakeholders in the real estate sector. Together with the European consultancy firm d-fine as the technical implementation partner, the residential real estate company Vonovia and the GLS Bank, right. has initiated a pilot project to develop a software tool for the Temperature Alignment of real estate, based on the XDC Model.
Schäffner, M. (2020). Die Klimawirksamkeit einer Immobilie – Entwicklung einer Bewertungsmethodik nach dem XDC-Modell. M.Sc. Thesis. Technische Universität Darmstadt.