Climate risks

Climate risks can be divided into:

• Transition risks due to climate change are most likely to affect the value of our investments. Climate policy measures (e.g. taxes), technological innovation and market demand may shift (suddenly), leading to stranded assets in investment portfolios or the gradual depreciation of fossil fuel-related sectors.
• Physical risks from climate change are likely to affect the value of our investments. Assets (often uninsured) and supply chains will be affected by climate change-related severe weather events and rising sea levels. Loss of property, disruption of infrastructure, human resource issues and loss of food production are just a few examples.

We use MSCI Climate Value at Risk (CVaR) measures from MSCI for this purpose. Based on a temperature reduction trajectory, Climate VaR estimates the impact on market valuation in relation to aggregated transition and physical cost and earnings projections on a 15-year horizon.

Climate developments have a potential downward impact on the value of investments with an aggregate Climate VaR of -7.5%. Translate that back to a possible impact on a 1-year basis, it is of limited magnitude. A 7.5% direct drop in investments is comparable to the impact of a 0.5%-0.75% drop in interest rates or a 10%-15% drop in equities. Climate VaR in emerging markets equity funds is significantly larger than in developed markets equity funds.

Based on the Implied Temperature Rise (ITR) measure, the portfolio outperforms the benchmark index: 2.4 degrees for the portfolio and 2.5 degrees for the benchmark index.

We look at the aggregate Climate VaR, as well as the sub-elements Policy Risk, Opportunities and Physical. We also look at the Implied Temperature Rise measure, which maps how companies are adapting to global temperature targets.