The report follows the basic structure of the recently released UNEP FI/WRI CAR framework, a multi-stakeholder and multiyear process to develop a common terminology and language surrounding CAR assessment and management. It first summarizes the framework, which identifies carbon risk factors and explains how companies and financial institutions can assess their exposure, evaluate financial impacts, and manage risk. Importantly, the framework separates the risk that carbon-intensive companies are exposed to ("operator carbon risk") from the risk that is passed on to lenders and investors with a stake in these companies ("carbon asset risk"). Exposure and risk evaluation have to be done at the asset level by companies (operators of those assets) and at the portfolio level by owners of our financial intermediaries to those operators. Risk is then managed using several options: disclosure, diversification, divestment (avoidance), and engagement. UNEP FI/WRI had over 200 participants in the webinar launch of its Framework.
This report now looks at the evidence for action by operators (disclosure) and investors (divestment and engagement) in particular (there is limited evidence of action by financial intermediaries at this stage) in relation to these issues in the fossil fuels and utility sectors. It also analyzes how recent market volatility, a primary risk factor in the CAR framework, may be contributing to such action. It focuses on the evidence of action in four spheres: market action, corporate disclosure and engagement, and direct investor action (divestment and portfolio exposure and stress testing).