Successful completion of the climate-savvy Asset Liability Management/Strategic Asset Allocation (ALM/SAA) pilot project
The financial institutions AP1, a.s.r., OPTrust, Pensioenfonds van de Metalektro (PME) and Philips Pensioenfonds, supported by Ortec Finance as the provider of investment decision technology and solutions,shared insights gained during the pilot’s closing workshop.
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.
The participating financial institutions commented as follows:
Jack Julicher, CEO a.s.r. Asset Management: “Linking scientific climate data to ALM/SAA tooling, is a novel approach to mapping potential future climate impacts on investment performance. a.s.r. is proud of being part of this pioneering development. The results of this pilot will contribute to take informed investment decisions for allocations to asset classes and regions, and therefore to construct a more climate resilient investment portfolio in line with the Paris Agreement and the Spitsbergen Ambition. Furthermore it will enable us to report forward-looking, scenario-based disclosure along the lines of the framework set out by the Task Force on Climate-related Financial Disclosures (TCFD).”
Mikael Angberg, CIO AP1: “The academic focus and forward-looking methodology in this climate study has been key to gain new insights about available datasets and scenario sets, as well as deepen our understanding in this area. This study has been an important step for us and out stakeholders as part of a broader ESG and climate change discussion, as well as discussing how climate change might affect risk and returns in our portfolio that is crucial for our long-term performance.”
James Davis, CIO, OPTrust: “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.”
“Philips Pensioenfonds greatly appreciates the results of the pilot with Ortec Finance to integrate climate risk analysis into ALM-projections. This top-down approach complements bottom-up climate risk analysis and has helped us to gain a better understanding of relevant climate change risks.”
“PME concludes that Ortec Finance has made an important step in connecting climate science to ALM modelling. The analysis and results give very helpful insights into the funds climate-related risks. This is very useful for PME when navigating the investment portfolio into the future. Cooperation remains important in order to deepen insights into climate-related risks.”
The pilot project is 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, The Institute and Faculty of Actuaries, 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. Ortec Finance looks forward to continuing this collaborative effort.
Ortec Finance is currently transitioning to making the climate-savvy scenario sets more widely available in the first quarter of 2019.