In 2021, we screened our investment portfolio for the first time using the concept of ‘dual materiality’. On the one hand, this allows us to assess the risk that climate change poses to our investment portfolio, and, on the other hand, the impact our investments have on global climate change.
We assess our investments on three aspects:
- Physical climate risk
→ the degree to which an asset is at risk of being affected by physical climate-related risks, such as extreme weather conditions, shifts in drinking water supplies or temperature increases. The physical climate risk score has three dimensions: climaterelated hazards and exposure, vulnerability and lack of adaptive capacity.
- Climate transition risk
→ the degree to which an asset faces specific risks related to the transition to a low-carbon economy. The risk is determined by the type of vulnerable asset classes and the timing of the exposure. Climate transition risk indicates the level of risk associated with a particular asset linked to the decarbonisation of the economy, based on macro trends and the dynamics of the national economy where the asset has its office.
- Climate transition opportunity
→ the extent to which an asset is in a good position to manage transition risks to a low-carbon economy. We see this as an opportunity, namely the ability to adapt to consequences and challenges. This indicator captures the economic resilience to such a transformation through four micro-, meso- and macro-economic dimensions.
At VP Capital, this is the first time we have undertaken this kind of risk exercise, and we are still looking at how we can use these insights to better direct our activities. More insight on the company or fund level would be useful to better assess risk assessments in advance. Climate risk, transition risk and transition opportunities will eventually be part of our due diligence process, as these types of risks will increasingly impact financial valuations. We aim to further explore the relationship between risk, return and impact in 2022.
