Measuring Climate Finance Risks -- the Ukraine Effect

The horrific situation in Ukraine continues to intensify. In addition to the unacceptable human cost, deepening economic sanctions this week expanded to include US and UK boycotts of Russian energy exports. The cost of carbon-based energy is set to skyrocket globally in the coming days and weeks. In short order, the war may accomplish a goal that many policymakers and activists have long sought: a pricing framework that makes renewable energy more economically attractive.


Climate finance policy may never be the same again.

A wartime emphasis on renewables as a mechanism for achieving energy independence from Russia and other autocratic energy exporters will generate gently escalating pressures for securities issuers -- particularly green bond issuers -- to provide more rigorous disclosures regarding emissions and sustainability initiatives.

Regulators and a broader range of investors will be on high alert to identify and disincentivize greenwashing not only on climate grounds but also on geostrategic and moral grounds related particularly to Russia.


Regulatory standards regarding securities disclosures typically take years to develop. The situation in Ukraine could easily spark accelerated regulatory policy shifts regarding greenwashing and other sustainability issues.


Spotting those shifts amid a noisy news cycle will be challenging


The risk for investors both in the pre-trade and risk management contexts are considerable even if they do not generate front page headlines.


During 2022, the SEC’s ESG Task Force is expected to increase investigative and enforcement actions regarding both public-facing corporate disclosures on sustainability initiatives as well as the due diligence that investment fiduciaries perform. In Europe, with ESG bond markets growing by +19% in 2H21 alone, the premium at which long-dated green bonds trade points the way towards increased due diligence and alpha opportunities as firms adopt a more systematic and rigorous approach to scrutinizing sustainability claims.

Increased access to ESG ratings and physical climate-related data points are a necessary but not sufficient condition for measuring, managing, pricing, and hedging risks regarding regulatory shifts.
This unique policy risk class requires objective data derived from the language of the public policy process.

Our award-winning alternative data can help investors measure and manage their exposure to these latent risks that present predominantly in verbal form.


The CRRM3 database has been generating objective quantitative data regarding a wide range of sustainability issues – including, but not limited to, greenwashing – since early 2020. The data presents as a multivariate time series that shows shifts in policymaking among the leading regulatory and legislative officials, updated daily. Episodic spikes that roughly correspond to the rhythm of policy processes in Europe and the United States on this issue.


The “greenwashing” time series for the last 6 months shows policymakers globally returned from year-end quiet periods ready to resume significant activities. We expect the situation in Ukraine will intensify sustainability policy initiatives in Europe in parallel with related enforcement activities in the United States.



The Use Cases and Workflows -- Alerting

Strategic investors can generate micro-targeted alerts and signals regarding increased policy activity regarding the specific term “greenwashing.” Activity regarding sustainability policy will likely remain under-reported during at least 1H2022 due to the war in Ukraine. Consequently, automated data-driven alerts provide savvy investors with informational advantages often measured in days and weeks rather than hours, leaving them plenty of time to adjust their investment strategy and scenario analysis.


Event-driven investors can additionally pair the CRRM3 dataset with major external inflection points that are known in advance (e.g., EU summits, G20 meetings, SEC Congressional Testimony) to identify potential future shifts in public policy regarding greenwashing specifically or sustainability disclosures more generally.


The Use Cases and Workflows -- Risk Exposure Assessments

PolicyScope data has also been mapped to 300+ economic sectors using 4-digit NAICS codes. The mapping accelerates the ability of sectoral analysts to spot when technical regulatory policy activity spikes, changing the risk profile for existing and potential future investments: They can see the relative distribution of policy risks across economic sectors and industries.

 

About BCMstrategy, Inc.: The company helps portfolio managers and strategists anticipate market volatility related to public policy/headline risk by delivering quantitative volume-based objective data drawn directly from the public policy process paired with data generated from media coverage from fact-checked journalism publishers like Dow Jones and ThomsonReuters. The full data set is available exclusively through the Bloomberg Enterprise Access Point. Volatility signals related to cryptocurrency policy, CBDC policy, climate finance policy, and monetary policy are available via API. Charts, graphs, and verbal data are available through the V3 PolicyScope Data app on the Bloomberg Terminal at: {APPS PLCY <GO>}.