Climate Scenario Analysis Chair: Louise Pryor 29 May 2020 - - PowerPoint PPT Presentation

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Climate Scenario Analysis Chair: Louise Pryor 29 May 2020 - - PowerPoint PPT Presentation

May 29, 2023 244 likes •567 views

Climate Scenario Analysis Chair: Louise Pryor 29 May 2020 Introduction Claire Jones 29 May 2020 Climate change is a material, systemic financial risk. Scenario analysis is an important tool to study it. Given the importance of forward -

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Climate Scenario Analysis

Chair: Louise Pryor

29 May 2020

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Introduction

Claire Jones

29 May 2020

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Climate change is a material, systemic financial risk.

29 May 2020 3

“Given the importance of forward- looking assessments of climate- related risk, the Task Force believes that scenario analysis is an important and useful tool”

Technical supplement: The use of scenario analysis in disclosure of climate-related risks and opportunities, June 2017

Scenario analysis is an important tool to study it.

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Two papers to help actuaries and others

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Model overview

Lisa Eichler

29 May 2020

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Combining financial- and climate scenario analysis

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Source: Ortec Finance, 31 March 2020

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Integrating climate risk into financial scenarios

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Source: Ortec Finance, 31 March 2020

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Integrating climate risk into financial scenarios

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Source: Ortec Finance, 31 March 2020

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Integrating climate risk into financial scenarios

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Source: Ortec Finance, 31 March 2020

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Integrating climate risk into financial scenarios

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Source: Ortec Finance, 31 March 2020

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Zoom-in: How do systemic climate risk factors work through the model?

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Source: Ortec Finance, 31 March 2020

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Narratives at a glance

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Timeframe: 2060 (annual timesteps) Geographic coverage: 29 countries Sector coverage: 11 sectors

Source: Ortec Finance, 31 March 2020

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What would the World look like? Paris versus Failed Transition scenario sets

Comparison of Technology Trends

World share of electricity generation (change over time)

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Source: Ortec Finance, 31 March 2020

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What would the World look like? Paris versus Failed Transition scenario sets

Comparison of Extreme Weather Risk Levels

Total number of extreme weather events (change over time)

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Source: Ortec Finance, 31 March 2020

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Modelling results

Nick Spencer

29 May 2020

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Key Features of macroeconomic & financial results

  • Results are presented relative to "uninformed" baseline
  • Focuses on impact of climate pathways
  • "First-order" of macro-economic & financial assumptions drop out
  • GDP projected to 2100 but Financial Markets to 2060
  • Climate impacts are divided between transition, gradual physical and extreme

weather

  • Plus for financial markets: the pricing shock when longer term impacts priced in
  • Plus for disorderly transition: a financial sentiment shock (and GDP shock)
  • Asset classes show %return vs baseline & the impact attribution

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Climate Impacts on GDP

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Figure 4: Climate-adjusted GDP growth across regions and climate pathways (cumulative difference to climate-uninformed baseline pathway)

Source: Ortec Finance, 31 March 2020

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Climate Attribution: UK GDP

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Figure 15: Percentage difference in the level of UK GDP explained by the various climate risk drivers (difference to climate-uninformed baseline pathway)

Source: Ortec Finance, 31 March 2020

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Climate Impact on Global Equity Returns

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Figure 7: Global equity return percentage difference to baseline

Source: Ortec Finance, 31 March 2020

40% 50% 60% 70% 80% 90% 100% 11 0% Paris Orderly Paris Disorderly Failed Transition

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Climate Attribution: Global Equities

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Figure 8: Global equity returns (year-on-year) per climate pathway – contribution analysis by climate risk factor

Source: Ortec Finance, 31 March 2020

  • 16%
  • 14%
  • 12%
  • 10%
  • 8%
  • 6%
  • 4%
  • 2%

0% 2% 4% 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056

Paris orderly

Transition Gradual physical Extreme weather Pricing shock transition Pricing shock gradual physical Pricing shock extreme weather Total

  • 16%
  • 14%
  • 12%
  • 10%
  • 8%
  • 6%
  • 4%
  • 2%

0% 2% 4% 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056

Failed transition

Transition Gradual physical Extreme weather Pricing shock transition Pricing shock gradual physical Pricing shock extreme weather Total

  • 16%
  • 14%
  • 12%
  • 10%
  • 8%
  • 6%
  • 4%
  • 2%

0% 2% 4% 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056

Paris disorderly

Transition Gradual physical Extreme weather Pricing shock transition Pricing shock gradual physical Pricing shock extreme weather Sentiment shock Total

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Climate Impact on Inflation

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Figure 5: Climate-adjusted CPI (annualized difference to climate-uninformed baseline pathway)

Source: Ortec Finance, 31 March 2020

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Climate Impact on Bond Yields

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Figure 6: Climate-adjusted 20-year nominal yields of UK government and investment grade bonds (annualized difference to climate-uninformed baseline pathway)

Source: Ortec Finance, 31 March 2020

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Climate Attribution: Investment Grade Bonds

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Figure 24: Climate risk factor contribution analysis for UK investment grade bond spreads under all climate pathways

Source: Ortec Finance, 31 March 2020

  • 0.4%
  • 0.2%

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056

Paris orderly

Transition Gradual physical Extreme weather Pricing shock transition Pricing shock gradual physical Pricing shock extreme weather Total

  • 0.4%
  • 0.2%

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056

Failed transition

Transition Gradual physical Extreme weather Pricing shock transition Pricing shock gradual physical Pricing shock extreme weather Total

  • 0.4%
  • 0.2%

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056

Paris disorderly

Transition Gradual physical Extreme weather Pricing shock transition Pricing shock gradual physical Pricing shock extreme weather Sentiment shock Total

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Case study

Andrew Claringbold

29 May 2020

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Funding level projections: 5th, 50th and 95th percentile outcomes

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Baseline Paris Orderly Failed Transition Paris Disorderly

Source: Ortec Finance, 31 March 2020

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Funding level projections: Median outcome relative to baseline

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Paris Orderly Failed Transition Paris Disorderly

Source: Ortec Finance, 31 March 2020

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Initial Observations

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Baseline

  • All scenarios worse than baseline
  • Take 3-9 years longer to reach target

Differences

  • Paris disorderly has most adverse impact
  • Funding level 20% below baseline in 2040

To 2030

  • Driven by investment returns until risks reduced
  • But would you reduce target returns if behind?
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Further comments

  • Other plausible scenarios

– Markets crash earlier (eg CISL, Unhedgeable risk: How climate sentiment impacts investment, November

2015)

– Real interest rates fall further (eg Aon, Climate Change Challenges: Climate change scenarios and their

impact on funding risk and asset allocation, September 2018)

  • More volatility

– More uncertainty may lead to increased volatility, which has not been fully captured – This becomes increasingly important as schemes mature

  • Residual risk

– Captures reduced investment risk from investment in bonds but does not capture risks from changes in annuity pricing

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So what?

Investment Employer resilience Risk management

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Make changes to investment strategies and their implementation Engage with employer to understand how resilient it is to climate change and which scenarios it is most exposed to Factor risks into funding and investment strategies and plan in advance how to react should they start to materialise

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Questions for the panel

Chair: Louise Pryor

29 May 2020

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29 May 2020 32 The views expressed in this presentation are those of invited contributors and not necessarily those of the IFoA. The IFoA do not endorse any of the views stated, nor any claims or representations made in this presentation and accept no responsibility or liability to any person for loss or damage suffered as a consequence of their placing reliance upon any view, claim or representation made in this presentation. The information and expressions of opinion contained in this presentation are not intended to be a comprehensive study, nor to provide actuarial advice or advice of any nature and should not be treated as a substitute for specific advice concerning individual situations. On no account may any part of this presentation be reproduced without the written permission of the IFoA.

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