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Making the link between financial and climate risks

23 July 2019

Climate Value at Risk and scenario analysis

On 10 May in London, around 20 investors(1) from 11 countries, including La Française, that had participated in a UNEP FI pilot working group on the implementation of recommendations for climate reporting(2) shared the results of their analysis and case studies on the impact of different climate scenarios on their portfolios. The “Changing Courses” report, download here was presented and discussed at the afternoon launch event, in the presence of 300 people and after introductory speeches from the CEO of Aviva UK Life, Angela Darlington and Sarah Breeden, Executive Director at the Bank of England.

Intended to be a tool enabling other investors to gain a better understanding of how to make the link between financial risks and the climate, it provides an overview of methodologies for analysing climate scenarios, then concentrates on the methods used by the pilot working group and tested by investors in order to assess the impact of climate change on their portfolios. It also sets out a number of case studies shared by the 20 original investors and summarises their feedback.

For La Française, participating in this working group has enabled us to remain at the cutting edge of climate finance. As investors, we are exposed to climate risks and opportunities in our portfolios, as the companies in which we invest need to adapt during this transition period towards a low-carbon economy. And measuring the resilience of our portfolios to climate change is a key and complex challenge, based on multiple assumptions that project the impact of climate change on the various companies in a dynamic and forward-looking way. This is an exercise that has so far been too difficult and therefore somewhat out of reach, as the methodologies are in their infancy
and need further work.

That is why we have partnered with other major investors within the working group to share our issues and further our discussions in a structured and meaningful manner. During the test phase for the new Climate Value at Risk (CVaR) tool developed by Carbon Delta, we were able to discuss the assumptions made by Carbon Delta and, as a group, challenge them. We then used this tool to analyse some of our portfolios against various climate scenarios. Although the results still require improvement, the Climate VaR sheds new light on the risks to the climate by taking into account transition as well as physical risks, by including forward-looking elements via the patents filed by companies, and lastly, by enabling the selection – which we think is essential – of a range of climate scenarios based on projections of temperature increases of 1.5°, 2° or 3°. It is an innovative tool that will enhance our fundamental analyses, and which we plan to use in the future in managing our portfolios as one of the elements in our analysis of the resilience of companies to climate change.

We hope that the “Changing Courses” report will bring what we have learnt to a wider audience of investors who share the same concerns and serve to increase the harmonisation of corporate climate reporting, thereby helping investors.

 

(1) Addenda Capital, Afore Citibanamex, Aviva plc, Bentall Kennedy, CDPQ, CDL Group, City Developments Limited, Desjardins, DNB Asset Management, Investa, KLP Kapitalforvaltning, La Française Group, La Salle Investment Management, Link, M&G Prudential, Manulife Investment Management, Nordea Asset Management, Norges Bank Investment Management, Rockefeller Capital Management, Storebrand Asset Management, TD Asset Management
(2) Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), www.fsb-tcfd.org

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