Escalating carbon emission and climate change tension has attracted much-needed attention and action. Portfolio Decarbonization Coalition (PDC) initiative by United Nations Environment Program (UNEP) and United Nations Environment Program Financial Initiative (UNEP FI) to work with the institutional investors towards measuring and disclosing carbon footprint of the portfolio and taking action to reduce the investment from high carbon-intensive companies, has brought the focus on the investment community. A review of literature suggests that the emergence of carbon risk from an investment perspective is real now. In the light of the PDC initiative and changing investment regulatory framework, the present paper tries to address the need for constructing the carbon risk concept by identifying the carbon risk factors and its impact assessment at a company or asset level and at an institutional investor level. The paper majorly focuses on how identified key non-physical carbon risk factors impact the financial performance drivers of the firm, which in turn affect the valuation of the firm for investment decision-making process. Eventually, the endeavor is to contribute by building the platform upon which the theoretical framework for the same can be constructed.

Rarely does it happen that a person himself is working hard to remove his life support system. Since industrialization till date that is the case: the insatiable and growing greed of human beings has led to increase in carbon dioxide (CO2) emissions by more than 150 times since 1850, according to World Resources Institute (2014). As many as 195 countries have agreed to adopt the first universal climate agreement at Paris Climate Change Conference in 2015 under the United Nations Framework Convention on Climate Change (UNFCCC, 2015).

Carbon risk is broadly understood as the set of risks which are directly or indirectly stemming from rising carbon emission and climate change at large. Physical carbon risk (like flood, calamities, etc.) and non-physical carbon risk (like regulatory risk, etc.) can impact the companies and institutions financially or otherwise. As the Portfolio Decarbonization Coalition (PDC) initiative (UNEPFI, 2016) arrives and investment regulatory framework changes loom large over institutional investment industry, the need is rising for constructing the carbon risk concept and its impact on a company from an investment perspective and also on the institutional investor as an entity. However, extensive literature suggests that not much of work is done towards specifically building the concept of carbon risk and its long-term impact on the valuation of a company, especially from the institutional investor’s perspective for investment decision process.

An attempt is made in this paper to investigate and fill this gap by contributing towards identifying the key non-physical carbon risk factors and assessing the impact on valuation of the firm through financial performance drivers. This may assist institutional investors in the typical stock selection and portfolio management process by taking non-physical carbon risk factors into consideration. Eventually, the paper tries to lay a foundation on which broader theoretical framework for incorporating carbon risk factors for investment decision-making process can be constructed. The rest of the paper is structured as follows: it delineates the review of the related literature, followed by a discussion of the carbon risk at an institutional investor level. Subsequently, it outlines the methodology applied for impact assessment on the firm, followed by a discussion on carbon risk factors at a company or asset level, and a brief highlight of the carbon risk management. Finally, it offers the closing remarks.

Financial Risk Management Journal,Carbon Risk and Impact Assessment ,Escalating carbon emission , climate change tension , Portfolio Decarbonization Coalition (PDC),United Nations Environment Program Financial Initiative (UNEP FI).