OPTrust released the results of the pilot climate-savvy asset liability management/strategic asset allocation (ALM/SAA) project that was a broad collaboration between AP1, a.s.r., OPTrust, Pensioenfonds van de Metalektro (PME), Philips Pensioenfonds and Ortec Finance, along with Cambridge Econometrics and Carbon Delta.
Additionally, I Care & Consult, the Institute for Environmental Studies – VU Amsterdam, the Grantham Research Institute at the London School of Economics, Potsdam Institute for Climate Impact Research, Sustainable Finance Lab, Utrecht University and the University of East Anglia offered their expert feedback in this project.
The goal of the pilot was to integrate quantified physical and transition risks and opportunities associated with different global warming pathways (1.5°C, 3°C, 4+°C) into traditional multi-horizon, real-world scenario sets that drive strategic investment decision-making.
Key insights from the pilot include:
- The pilot has established that it is crucial for investors to consider the macro-economic and systemic implications of different global warming pathways (top-down approach). The currently dominant holdings-based focus (bottom-up approach) fails to sufficiently capture the structural impacts of climate-related risks on the global economy, and how this in turn affects an investors’ overall performance.
- On a shorter-term horizon, navigating the potentially impactful financial aspects of a transition that is likely to be disorderly, is a key risk management priority. Closely monitoring technology, policy, legal and consumer sentiment developments plays an important role in this regard. Having a deep understanding of these developments may even support investors in benefitting financially from the economic opportunities associated with the transition to a 1.5°C pathway that may manifest after any transition shocks have been absorbed.
- For a globally diversified long-term investor, a society-wide transition to stay under 1.5°C warming, even a severely disorderly one, is economically preferable to a 4+°C scenario.
James C. Davis, Chief Investment Officer of OPTrust said, “Taking action on climate change and considering the financial implications is in the best interests of our members at OPTrust. In integrating climate risk into our portfolio construction framework, we continue to explore and develop various climate change scenarios and analyze the impact on the entire portfolio. We are pleased with the results of the pilot project as it helps provide a current state assessment of climate risks to our fund.”
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