IIGCC puts forth guide for investors on climate scenario analysis

By Georgina Wade

The Institutional Investors Group on Climate Change (IIGCC) latest report, Navigating climate scenario analysis: A guide for institutional investors, offers a practical guide to applying the principles of scenario analysis in understanding climate risks and opportunities in portfolios.

Recognising climate change as a potential systemic risk to the financial system, the IIGCC says that investors must access and evaluate the material risk implications for their assets. Made up of seven sections, the report pulls from recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), with the aim of establishing a consistent global standard for climate-related financial risk disclosures, covering both corporates and the financial sector.

In a five-step framework aimed at helping asset owners and managers use scenario analysis, the guide highlights how different climate scenarios could affect future returns and identify new investment opportunities. Amongst others, the document also features the methodologies developed by Acclimatise with UNEP FI and 16 commercial banks to assess physical climate risks to bank’s loan portfolios.

As Stephanie Pfeifer, CEO of IIGCC, explains: “Perhaps the most important conclusion of the guide we’ve published is that the journey is often the destination. Many benefits of scenario analysis for investors come through undertaking the process, experimenting with methodologies and learning about the ways in which climate change drives financial impacts. For some investors, the exercise can affect strategic asset allocation, for others, it is about evolving their understanding of risk and opportunity for parts of their portfolio.”

Case studies throughout the guide demonstrate that several investors are emerging as ‘early adopters’ of scenario analysis, despite the TCFD reporting that no asset managers surveyed have described how their strategies might change under different climate-related scenarios.

With climate change on our doorstep and the physical impacts becoming increasingly clear, there is an added urgency to ensure that investors are including climate change in their risk management processes. Christina Olivecrona, Sustainability Analyst at AP2, said: “The publication of the IPCC’s 1.5°C report […] was a powerful reminder that the physical impacts of climate change are not a distant and theoretical risk, but a present one. Investor methodologies in this area lag the corporate sector and we believe this area will need more attention from investors going forward.”