Climate Risk quantification for financial institutions: A UK pension scheme case study
Climate change will fundamentally impact how economies perform as a whole. It will affect macroeconomic variables such as GDP growth, and in turn have a significant influence over the resulting performance of asset classes and industry sectors. This is why regulators are increasingly demanding climate-informed decision-making, and more and more financial institutions carry out climate scenario analysis to gain a better understanding of their current climate risk exposures.
In this context, Ortec Finance and the Institute and Faculty of Actuaries (IFoA) published two papers that discuss the impact of climate change on the long-term economic and financial outlooks and consequently portfolio climate risk exposures of pension funds. The quantitative results presented throughout the two papers are based on ClimateMAPS, a top-down climate scenario-modelling tool developed by Ortec Finance in partnership with Cambridge Econometrics.
The paper ‘Climate scenario analysis for pension schemes: A UK case study’ applies these climate-informed economic and financial scenario sets to run a forward-looking assessment of climate-related financial risks and opportunities for an illustrative portfolio of a UK defined benefit pension scheme. The case study modelled impacts on the assets and liabilities over the next 40 years. Main results include:
- The funding risks for the pension scheme are greater under all three climate pathways than under the climate-uninformed base scenario.
- Funding levels reduce by up to 20% compared to the climate-uninformed base scenario by the year 2040.
- If the investment strategy is not changed, nor a recovery plan introduced, the time taken to reach full funding is increased by 3-9 years.
The paper ‘Climate scenario analysis: An illustration of potential long-term economic & financial market impacts’ examines the changes in long-term economic and financial outlooks across the three different climate pathways calculated by ClimateMAPS. Even though the climate pathways used are set up as plausible futures rather than extreme stress scenarios, the impacts are severe. For instance, under the Failed Transition pathway, we expect UK GDP to be 60% lower than under a climate-uninformed baseline scenario by end of this century, with similar expectations for global GDP developments. Financial market impacts are also significant, with permanent declines in median cumulative equity returns of 50% relative to baseline by 2060.
Read both full papers via the download form below. This download also includes a URL to the recording of our successful webinar on these papers, which we presented together with the IFOA working party.
For any questions on the papers, or to continue the conversation, please contact one of the authors:
Luca Bongiorno, Consultant Climate & ESG Solutions. Luca.Bongiorno@ortec-finance.com +31107005394
Lisa Eichler, Co-Head Climate & ESG Solutions. Lisa.Eichler@ortec-finance.com +31107005498
Bert Kramer, Senior Consultant Climate & ESG Solutions. Bert.Kramer@ortec-finance.com +31107005647