Climate risks

Other measures are suitable for this, which have a more forward-looking character. 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. 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

We see in the report that climate developments have a potential downside impact on the value of investments: the aggregated Climate VaR is -4.3%. Translate that back to a potential impact on a 1-year basis, it is of limited magnitude. A 4.3% direct fall in the pension fund’s investments is comparable to the impact of a negative equity return of around 10%.

Based on the Implied Temperature Rise (ITR) measure, the portfolio outperforms the benchmark: 2.4 degrees for the portfolio and 2.6 degrees for the benchmark. Based on this measure, the portfolio is currently not in line with a net zero ambition. Last year, the portfolio also showed an ITR of 2.4 degrees.