During my Sustainable Investing Research Consulting Project with our client this semester, I had the opportunity to work on a case study evaluating climate change issues facing portfolio investments. Our team analyzed three companies – Airbus, John Deere, and NIKE – and their respective industry's strategic actions to reduce emissions through mitigation, adaptation, and collective action. We drew specific observations from this analysis to apply in investment management.
One of the most significant findings of our analysis was that the most material climate risk facing the portfolio companies was the construct of their value chain. Scope 3 emissions of CO2 were materially higher than scope 1&2 emissions, but the ability to leverage their influence in reducing emissions was limited. While Airbus and Deere's end markets were material emitters, it was NIKE that may be more at risk, as its supply chain was fragmented, its end market was not a substantial emitter, and the economic incentive for upstream suppliers to address emissions may be more diffused.
Our team also developed a two-market general equilibrium model to quantify the second-order risk facing each case study company, which goes even above and beyond from what the client expects initially. This evaluation was augmented through scenario and stochastic analysis, allowing us to calculate a risk-adjusted return for each company. Our analysis suggested that Airbus presented the most attractive climate risk-adjusted return compared to John Deere and NIKE. We found that NIKE's position exposed it to the most significant climate risk, evidenced by the migration of its "Return-to-Risk Ratio" from 1.02 to 0.33, a 67% decline compared to Airbus's 60% decline and John Deere's 57% decline. On an absolute basis, Airbus's probability of expected return was 8.5%, compared to John Deere's 6.8% and NIKE's 6.9%. This quantitative financial analysis is the highlight from our project, and I learned a lot from my colleagues who are very experienced in this type of analysis in previous careers.
I also learned that effective communication and collaboration within a team are essential to producing high-quality work. Our team's ability to work together effectively and communicate with the client was crucial in delivering a comprehensive analysis of the companies' climate risk profiles. We worked separately on the three case studies, but we conduct frequent check-ins to update progress, and share common findings to arrive to final conclusions. I believe that the skills and insights I gained from this project will be valuable in my future endeavors in sustainable investing. Also, the connections we build as a team is so invaluable, and I believe we’ll still be in touch for many ways even after the end of the project.