This is Dana Perkins, and you're listening switched on the BNEF podcast. With around ninety percent of global emissions covered by some sort of net zero target, the transition to a less polluting, greener economy is somewhat inevitable. What's more hotly debated is the magnitude and speed. So as the transition takes place, asset values will invariably shift, and some industries and companies will be more exposed to this risk
than others. On today's show, we discuss some of the ways BNF is approaching transition risk across various sectors of the economy. The show gets into two pieces of data analysis at BNF. One is the Clean Energy Exposure Ratings, which help us to look at clean energy specifically and assess the percentage of a company's revenues that come from
clean energy. We also discuss the Transition Risk Assessment Company Tool, which helps us understand company specific transition risk and leverages climate scenarios, company level financial data, and key transition assets across nine sectors to help us navigate what these tools are telling investors and the industries undergoing transition. I speak with two members of b and EF's sustainable finance team specifically focused on transition risk, Tiffin Brandily and Mike Daily.
We discuss methodology and how to go about ranking a company's clean energy revenue. We also discuss the transparency of revenues generated by different industries, including oil and gas, and how to assess just how clean their energy portfolios really are. We also discuss which sectors are most exposed to transition risk and why. If you want to receive alerts on your device when future episodes of this podcast are released,
make sure to subscribe. And if you give us a review on Apple Podcasts or Spotify, that is going to make us more discoverable by others. But right now, let's jump into our conversation with Tiffin and Mike about clean energy exposure ratings and transition risk. Tiffin, thank you for joining today, thanks for having us. And Mike, thank you for joining.
Yeah, thank you very much for having me.
So we've got two analysts here today to talk. Well, we're going to talk about data, but it's the story that the data tells, and I think it makes the most sense for us to start in a bit of a chronological order in terms of what's happening now versus how is this impacting the future and how companies think about the future. So, in the spirit of what's happening now, let's start with our clean energy exposure ratings and definitionally, Mike, what are these?
So, the Keen Energy Exposure ratings are a classification on a company's revenue where we use a combination of BNF data sets like EV sales or country level generation to determine whether or not those revenue streams are in fact clean full you in on what our model can do is that we've ever saying like over fifty thousand companies and from those we've identified over eight thousand companies with some level of keleen energy exposure. So we think about
what that kind of means. In twenty twenty two, those eight thousand plus companies tracked more than two point five trillion dollars in clean energy revenues and that's about two point six percent of global GDP. With the exposure ratings,
there's two parts what we're offering. We're offering the clean energy exposure percentage as well as the exposure ratings, So the percentage of themselves take those company revenues and it tells you what percentage of a company's revenues are from clean energy sources, whereas the exposure rating is a less
granular view. So this is where we group companies into a one to A four buckets, where an A one type rating means that what more than fifty percent of a company's revenue is derived from clean energy, and an A four is where less than ten percent of that revenue comes from clean energy.
This is going to lean very heavily towards some industries over others. So what are thees that we tend to find in that A one categorization?
So our A one companies on the peer player side, we've mostly seen our renewable manufacturers and developers, I guess fit into these sort of categories, So typical companies that we've seen a lot of. It's been in the automotive side. Companies like Tesla feature quite strongly.
That's because it's on a percentage term, right, So a Tesla is inherently itself an electric vehicle. But how about companies like BW where they're definitely looking at that space, definitely involved in selling quite a few electric vehicles, but also have their internal combustion vehicles. That's where you end up finding them further down the track on a two, a three, or a four.
Right, yeah, exactly. I think the automotive industry is going to be something super exciting to watch over the next ten years because it's very much a divided market. On the one side, you have your pure player electric vehicle companies like Buid and Tesla. But then on the other side you have your more traditional auto makers, which are you know, they're playing catch up, right, and they've also
committed to some pretty bold pledges. I think BMW Over the past year, I guess we've seen their EV sales increase from about thirteen percent up to about twenty five percent. Companies like Volvo have gone from about twenty five percent up to thirty eight percent, and these companies are looking to either partially or fully electrify their EV sales by by twenty thirty. So that's going to be something really interesting to watch.
So from one year to the next, you're going to see companies, well you're mentioning a bunch of them moving kind of up the rankings into more exposure. But can this also be used as a way to identify from one year to the next if companies are moving in the opposite direction and deemphasizing. Is that a use Is that a proper use case?
You think it'll definitely point out or expose I guess companies that are not committing to their pledges. One company that I've kind of noticed has a pretty strong pledge as well, that was to fully electrify their sales by twenty thirty. But what I've seen in the past year is that the EV sales have not increased at all, or their percentage of EV sales of about five percent. Yeah, the company was in ascent for lack of you know, exposing them.
Okay, we'll see maybe over the next couple of years how they move from one category to the next. Let's talk a little bit more about these industries, and thank you for going into some detail on the automakers. But how what sort of trends do you end up seeing from one industry to annex to the next in terms of which ones seem to have more versus less exposure.
Definitely noticed a few trends. When we look at the top twenty largest revenue generators from last year, electric utilities has come out on top. They've definitely had more of like a mix to their portfolio. Right, their mix will consist of, you know, some of the long established clean technologies like nuclear or large hydro, as well as some of the more fast growing ones like wind and solar. So electric utilities i'd say have topped with the automotive
industry coming in second. I think it was Tesla have raised about eighty one billion dollars last year in clean energy revenues. You know, ninety five percent came from the ev stuff and five percent from their their solar type industry. So definitely trends in terms of industries clean energy exposure, and for the actual model that we built, we've factored
that in. Right, We've got different methodologies for how we're approaching the automotive industries versus the electric utilities, versus the renewable energy developers, et cetera.
Are there any geographical trends that you end up seeing across these industries and do you see it being emphasized more on certain continents or perhaps even more granular level in certain countries.
Yeah.
I think one of the things that we identified pretty early on is we tracked the most clean energy revenues from APAC, and that was mostly from China and their dominance of unclean energy supply chains. I think it was particularly in the solar as well as the energy storage type industries. I think it was Emia came in second, but there was a huge gap between the revenues in APAC and EMEA, and then the US came in in last. So there are some u notable trends I think geographically
we've seen. I'd say, like when we talk about the type of sectors, different regions had different strengths in the sectors that they were covering. So like on the APAC side that was more as I mentioned, like solar and energy storage, whereas the US there was more stuff around biofuels and electrified transport, and in Amea we saw many legric utilities from the nuclear side adding to that level of clean energy exposure.
We've seen well, and we're going to go to transition risk in a second, but before we get there, let's talk a little bit about one sector in particular that is very much in transition. So you've already established the electric vehicles and automotive that moves you hire up the ranking, and then in utilities you're seeing a lot of this electrification.
But let's talk specifically about oil and gas, who in many respects, a lot of these companies are referring to themselves as energy companies in a much more holistic way because that's their plan is to be a much more diversified business. Where do you find the oil sector on this list and are they moving around? I guess which categorization do they tend to fall into?
The short onswer is oil and gas companies have dominated the A four type rating, so that's less than ten percent clean energy exposure. But one of the huge difficulties that we've seen with these majors is through transparency in the company revenue reporting. What they tend to do is that they tend to group these revenue segments into phrases which make them sound a lot cleaner than they really are.
So two examples that kind of jump to mind. Shell has reported on their Renewables and Energy Solutions type division, which mostly includes electricity generation, marketing and trading of power and pipeline gas. And another example is Repsol reported on their commercial and renewables activities, but these mostly include the sale of electricity and gas and the sale of oil
products and liquified petroleum gases. So for this whole piece, Like, our main goal for the exposure ratings is not to blame these oil majors, but more to point out the nuances that we're seeing across industries and how we're able
to cater in our methodology. We've got an awesome team of BNF sector experts who are doing the research on these companies to make sure that exposure ratings are reflecting accurately, not purely based on what's being reported, but also adding that additional layer to make sure that we are accurately I guess, mapping out the energy transition.
Yeah, because what I expect to see is movement across these categories and that this particular data set and this analysis will become increasingly useful over time as we think about net zero targets and how these companies in transition really change. I mean, that is the definition of a transition, right Like, that is what we're here to talk about, is change within the oil and gas space and the
company specifically exposed here. What I'm hearing from you is you've really got to look at the specific activities and take a look under the hood, if you will, to understand what's happening. Oftentimes, you also end up finding because
these companies are so big, so many different activities. Do you look at the company as one company and it's this percentage of activities as you've already outlined, or would you for any sort of let's say publicly listed oil company, would you actually have multiple different subsidiaries in the ranking evaluated differently because the business unit looking at hydrogen is going to be very different than the business unit that is doing oil exploration.
Yeah, I'd say when we're evaluate companies, we're looking at that company, right.
Like saying a holistic sense, well.
Not just in realistic sense, but at every level. So if we're looking at a subsidiary company and we're looking at their exposure, you may have a subsidiary such as like Brookfield Renewables right where we're evaluating them on their cleenage exposure and they would rank very highly, right, But at the parent level they're involved in a bunch of other operations where at the parent level they wouldn't have
I guess as much clean energy exposure. So at every level, we're trying to gauge what level of exposure those companies have.
And you mentioned disclosure being really important, So the question I have is on this same industry. Do we get much information from national oil companies.
I mean, we do, and we don't. One of the things that that we're leveraging, right is an in ours team that looks at industry type taxonomies and classifying those revenue streams to specific industries and sub industries and subjectivities. So we're leveraging a lot of that. But I would say when it comes to the oil industry, we are doing a lot of research at a company by companies level to make sure that we are capturing the best
sort of view on that company. And this is also one of the reasons why we do have both exposure rating and the percentage, because often we don't have that level of granularity, in which case we're happy to say it's in a four type company, but we may not necessarily be able to distinguish the split between the gas portion versus the electricity type generation portion.
It doesn't tell the whole story. So that's why you look at it in a couple of different ways.
Yeah, yeah, exactly, exactly.
Also, then let's pivot a little bit to the transition risk part of it, which is really around well, how things are going to play out for some of these companies in the future if they don't move themselves necessarily up this ranking. So Tivin, can you explain what the transition risk analysis is that we do on our side?
Sure, So, first of all, transition risk is the risk arising from climate policies, technology disruption, are shifting consumer patterns and if you think about the discipline of transition risk,
we have to go back to twenty fifteen. That time Mark Corney was Governor of the Bank of England and he gave a speech at Lloyd's in London and the speech was called The Tragedy of Horizon, essentially explaining that the financial markets have a very short term view on returns and risk while climate change is essentially a problem for the next generations.
Which is a very famous speech in the takeoff of the Tragedy of the Commons right exactly.
And in this speech he provided two recommendations. Number one was around disclosure, making sure that corporates and financial institutions have provided enough transparency on their activities and that would have a financial market to price the risk in the transition. So that's what we discussed about with Mike. And the
second recommendation was around stress testing. So you got to remember that twenty fifteen were still in the aftermath of the suprime crisis, and we're just one year away from the European Death Crisis twenty fourteen, and so central bankers are still thinking about how to strengthen the financial system from a micro prudential perspective, so that's financial institution level, but also from a macro perspective, and that is the
resilience of the whole financial system. And so at BNF we've worked on a tool so Tracked is BNF's Proprietary Transitioners Risk Tool, and it is looking at the revenue projections for more than eleven thousand companies across ten climate scenarios.
And so what we're looking at is really trying to understand the whole sensitivity of revenues to the temperature outcome of the scenario, all the way up from three degrees of warming by twenty one hundred this is for the baseline scenarios, all the way down to one point four, one point five, one point seven degrees for the New Energy Outlook and the NGFs scenarios, and so you have this whole temperature sensitivity on revenues, but also each scenario
has its own characteristics in terms of which technologies are deployed to solve the climate equation, and so the tool allows investors to explore these risk and opportunities across NGFs
and BNF scenarios. So trying to understand whether they have exposures to China where the transition is going very fast, to the US, where we've seen recently policy package being passed into Congress, or to Europe where first of fil demon is already going down, and so it's very important to understand what exposures these firms have in their balance sheet.
Now.
The third element in order to build our transition risk research is really to look at the changes in the
demand for commodities and products in different climate scenarios. And so if you consider baseline scenario where the world would be headed to two degrees or three degrees of warming by twenty one hundred, what you'd have is essentially the flattening of oil, DeMont, gas, DeMont and other commodities, while in net zero transition scenario you would have demond destruction coming from oil gas and so this would have impact on the holy ecosystem of companies in the oil and
gas sectors, but also in mining.
What time horizon are you looking at when you're evaluating the risk and how far into the future can somebody look when they're thinking about this analysis.
So we're looking at from now to twenty to fifteen. And obviously the issue is that most of the financial products have a short lifespan, so that might be two years, might be five years, maximum ten twenty years. But most of what we call physical risk, which is the risk arising from extreme weather events, these are likely to materialize over the next twenty thirty, fifty sixty years. And so
this is coming back to mcconnie's speech here. How the real question is how do we price climate risk as a whole into the decisions that the finance industry is making today.
I imagine there's a good deal of overlap with the industries that you're covering Tiffin and the ones that Mike is looking at from the clean energy exposure space, and I'm thinking in particular of oil and gas. But really, well, let's take a step back and which industries have you started with your analysis looking at, because well, presumably you've selected them because you think perhaps there's the most to find out regarding their exposure to this risk.
I think oil and gas utilities and automakers are the name of the game in terms of transition risk, and they are very interesting developments that are happening right now. So in September twenty twenty three, you've had the International Energy Agency IE that published a report saying that peak them on for fossil fuel, what's going to happen prior to twenty thirty. So this is a view that we've had a been a for the past three years, and we're calling oil picked them on by twenty twenty eight.
And in other words, we were saying transition risk for the oil and gas sector organ to materialize within this business cycle. So this is not a matter of twenty fifty. It's very much a matter of today's board decisions and how fast these companies might diversify away from these revenue sources. Twenty twenty two, we've had very high commodity prices and this is kind of hiding some of the risks inherently
that they are. So we see this from the baseline scenarios all the way down to the net zero scenarios, where you would have essentially two percent of the market or three percent of the market removed on a yearly basis, So net zero scenario is very stressful and it would remove an equivalent amount of oid production as BPM share produced combined in a single year. So it's a very fast transition. And obviously the main cost for this is fuel economy standards on the one side, and on the
other side, the outtake in electric vehicles. Now, there's a few markets that are very interesting to look at. China obviously is one of them. Sinopec, which is China's biggest fuel distributors. They've announced this year that they think peak demand has happened in terms of gasoline. So gasoline is let's say, the most vulnerable fuel out of the barrel, mainly because it is concentrated in lighter duty segments in the automotive market. And so this is not an obscure
research house that is saying this. This is the largest a fuel distributor in China, and so this is very meaningful. From now on, the oil and gas industry in China has to deal with demand destruction. This is something that might be surprising for many people, but actually for electric vehicle analysts' experiencing this for a while in markets that are more heads in terms of their electric vehicle deployment.
So if you think about Norway that has subsidized evs for a long time, since twenty fifteen, the gasoline demand in Norway has dropped by twenty five percent, and so this is something that will play out as governments and consumers shift towards and electrified transport.
How about the data that we get regarding the company's activities, in particular for private companies, I imagine it's exceptionally hard, But all in all, are you able to get the information you need in order to make a fair assessment of rest to these companies?
Yes, sore are different ways to slice this question. But you have a global data team at Bloomberg that looks at any type of disclosure, whether it's from a public company or private company. They would go out there and log whatever financial report they find, and then a team would classify revenues in standardized categories, and we use these categories to project our transition risk analy this forward looking
at the revenue at risk across different climate scenarios. And so in terms of of these data sets, private companies might be captured, but the vast majority of the companies we have transparency on are really in the public domain.
This is going to be an easier transition for some companies and industries in particular than others. So which industry is fair better than others when it comes to looking at well, what are the outputs and what is it telling us?
So I think utility is really an interesting case because you have this shift from cool gas more traditional forms of a power generation towards solar, wind batteries, power grids as well. Is we see a lot of upside on great businesses. This is mainly because the world has to electrify. If we consider the fastest transitions or the net zero scenarios, we see electric heat pump deployment driving more electrictic consumption.
We see electricals obviously driving more electrictic consumption, and also low temperature heat in industry, and so this means there's a lot of demond created for electricity and utilities, and most of the risks are concentrated around cold gas and
the rise of carbon pricing in cet and locations. So we would cover that and build the NAZIS on the back of our new energy outlook, which is our climate scenarios or the scenarios from NGFs to the Network for Greening the Financial System, which is an alliance of central banks that has published open source scenarios.
I'm definitely approaching this very much from the perspective of the companies themselves that are exposed to risk. But what I'd like to better understand, and I think oftentimes the questions you get asked have and really revolve around the financial industry and how they're looking at this information. Can you go into some more detail on how the finance universe is actually looking at these risk ratings.
So in the finance industry, they are two drivers for transitionerskinazis number one is the regulatory driver, mainly because central banks are rolling out all these climate stress tests. So in the past two years we've seen thirty five different stress tests being conducted globally looking at climate risk. And these stress tests are mainly constructed around the NGFs scenarios, which are these open source scenarios that incorporate both physical
risk and transition risk. And so the players that are under the scope of regulations are mostly on the sale side. From the perspective of the byside, you will need also a solution to understand how to adjust portfolios to match these strategic goals of the company.
Okay, so Tiffin, I'm going to ask you to pick one industry that you found most interesting in terms of the findings and explain what it's telling us about where this industry is going.
So transition risk results for automakers and the automotive industry were actually quite different from what we thought we would find, and this is because the automotive supply chain is relatively complex. So you have these very large international automakers that are structuring large ecosystems of autopaths manufacturer around them, and you really have to do the analysis bottom up to understand
the activity of each company. Now, a company that is manufacturing gearboxes is very much at risk in the transition because electric cars don't have gearboxes. It's the same for exhaust systems for example. However, if you consider tile manufacturers, now the impact on them will be a bit more nuanced and they will not be strongly impacted by the shift to evs essentially, and so the idea is really building the analysis bottom up, understanding what each businesses do.
And we have more than eleven thousand companies in the tool, but understanding the relationship in terms of the supply chain between an auto maker that might be transitioning or might not, and which autopats manufacturers they are connected to.
Sticking with the application for the financial services industry, Mike, how is the clean energy exposure reading information really used by that community?
I would say, I mean, there's a few points can that jump to mind. One is the cleanage exposure ratings. They help investors and lenders uncover their exposure to businesses that are driving value creation in the low carbon economy. That was a bit of a mouthful, but essentially it helps reveal companies that are leading the transition today and those that are likely to capture future transition opportunities. So another really interesting point is around like how it adds
value in terms of portfolio construction. Right, So one example is we have the Bloomberg Gold and Sacks Clean Energy Index that leverages the clean Energy Exposure ratings. So the exposure ratings not only our key criteria in terms of which companies make it into the index, but they also define the portfolio weights of those companies within the index.
And something that I'm really excited about is the portfolio tool that we've launched with the exposure ratings piece, and what that portfolio tool does is that it rolls up the clean energy revenues of the company up to the index or the ETF. And one trend that popped out almost immediately is that top equity indices like the smp S and MSCI World had very low exposure to clean energies of roughly only three to three and a half percent, and we saw very similar trends when we look at
at top or major esg ETFs. Another element of the portfolio tool is that it's pretty customs, So if you're looking to build out your own custom index, you know that's something you can do where you can evaluate the clean energy exposure that you would have on the companies within that index.
Because the work that both of you are doing really is geared towards not necessarily. I mean, while one of the use cases is for the companies themselves to see where they fall, really it has to do with helping the financial community look at everything in one place and take into consideration so many different variables at one time, and then I guess which in definition is a ranking?
How about other ways of ranking companies? We are recording here from Europe and one of the things that was very hotly talked about last year was the EU Green Taxonomy for sustainable activities. Is that something that I guess has any interaction with your work? And where are the commonalities and differences in terms of how they might complement one another.
Yeah, yeah, I think that's a question You're asked a lot. Is you know, what are the differences between the EU taxonomy work versus dead creenerage exposures. They're both based on revenues. I would say the EU taxonomy is a far more complex type classification and it defines which economic activities are lined with net zero trajectories by twenty fifty. And what the EU Taxonomy does is that it requires organizations like large companies or investment firms to report the share of
their operations that are environmentally sustainable. Right. And there's two elements to this. There's the eligibility share as well as the alignment share. The eligibility share tries to answer the question of is the company's economic activity eligible to the Green taxonomy, But being eligible does not necessarily mean being
green under the EU taxonomy. There's three other elements. Right, The economic activity has to substantially contribute to an environmental objective such as climate mitigation or circular economy or biodiversity, as well as conformed to that do no such harm under any other environmental object active and last year, it also needs to respect minimum social safeguards. In contrast our
exposure rate. Things are looking at company reported revenues and enhancing up with various benef data sets to figure out what percentage of those revenues are are clean. And I guess the main point in doing so is to get an accurate or a fair sense of how these companies are performing ahead of the energy transition.
So we've spent a lot of time talking about holistically how we approach this, all of these different things that one has to consider when making assessments of companies and entire industries. In fact, we've gone into some specific industries as well, and we spend a lot of time here at BENF thinking about this. You gentlemen, have lots of
people to collaborate with. But I want to know is how seriously do you think this sort of information, both current exposure and future risk is really being taken in the outside world. And I'm going to give you I'm going to hold your feet to the fire. And I'm going to say on a scale of one to ten, with ten being people all are looking at this in the financial services community very seriously, or in one being they're aware it exists but haven't incorporated it yet.
I'm going to give it a four actually, and the reason is because the finance industry is looking at transition risk currently from a carbon pricing perspective. So the analysis is essentially saying, let me know what is the carbon footprint of a company, and I'll multiply this by a
fictive carbon price. Now, actually carbon prices are only covering a quarter of global emissions, and there are a lot of free allowances in Europe and in China, and so you end up with a meaningful carbon price with maybe about you know, ten to fifteen percent of global emissions.
And so what we do is very different. We're building everything from the bottom up, looking at the exposure of each company regionally, sectors low carbon data sets, and then projecting the changes in the MOND to understand how companies will be impacted. So I think there's room for improvement.
I would probably give the exposure to company cleaner revenue of about a three. It is a newer type space that we're starting to analyze right and from my perspective, I haven't really seen financial institutions, you know, leverage the exposure ratings in the way that I think it can add a lot of value, particularly like the index creation. Since we launched this model, this is something that we're sharing a lot more with clients now. We're starting to
get a lot of feedback. I think clients are starting to understand the value of identifying clean revenues within a company, and we're starting to see indices in ets being built off on the back of them. So I would say a three now with the view that by the end of the year getting it up to about a five or a six.
It's only fitting that we ended a show about ratings with a rating from each of you. So there we are. Thank you very much for joining today.
Brilliant, Thank you so much for having us.
Bloomberg ne Ef is a service provided by Bloomberg Finance LP and its affiliates. Recording does not constitute, nor should it be construed as investment advice, investment recommendations, or a recommendation as to an investment or other strategy. Bloomberg ne EF should not be considered as information sufficient upon which
to base an investment decision. Neither Bloomberg Finance LP nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability as a result of this recording is expressly disclaimed