Strategy and risk management Our climate-related How we assess the risks Assessing transition risks risks and opportunities As they are most widely available to us, we’re currently using the following modelling tools, methodologies and We have started to monitor the risks forecasts to consider transition risks: We’ve embarked upon identifying within our investment portfolios using the types of climate-related risks and a number of di昀昀erent ESG tools and • International Energy Agency (IEA) opportunities that could impact our carbon-speci昀椀c datasets. Although we scenarios (from its Energy Technology investments. still have a way to go, we have worked Perspectives report) available through hard this year to access more data on the Transition Pathway Initiative (TPI) Most of our material exposure ESG and climate metrics. and the Paris Agreement Capital to climate-related risks exists in Transition Assessment (PACTA) tools As a result, we have ESG data available downstream ‘昀椀nanced emissions’ through our portfolio management • The PRI’s Forecast Policy Scenario in our investment value chain. As a system for 70 per cent of the Fund’s under its Inevitable Policy Response result, we’re focusing our strategy and net asset value. Within this coverage, risk management on these 昀椀nanced we also have carbon emissions data for • MSCI ESG’s Portfolio Climate Value-at- emissions, as recommended by the approximately 30 per cent of the total – Risk (VaR) Greenhouse Gas Protocol Scope 3 Calculation Guidance. the lower carbon coverage re昀氀ects the For more detail on these methods, see di昀케culty in assigning sovereign carbon page 15. emissions. To drive further visibility, we’ve chosen to focus on each asset class in turn and in a way that works Certain risks can have di昀昀erent best for each. likelihoods or magnitude of impact, depending on the We also expect our external fund asset class. managers to understand and integrate Some examples of the risks material climate-related risks into their we’ve identified include: analysis and investment process. Where possible, we ask them to provide carbon footprinting and scenario analysis of • Transition – risks that may The impact of climate We believe that a disorderly transition transition risks, consider exposure to impact company earnings in Scenario A, or Late Action: physical risks and engage with issuers, the shorter term, e.g. policy on our strategy to net zero is likely to have a di昀昀erent if feasible. We discuss how we have risks arising from carbon impact on assets than an orderly A sudden disorderly transition to worked with our managers on this on pricing or taxes. transition. We also feel it is prudent to a temperature rise of below page 9. consider a failed transition scenario too. 2°C by 2100. • Technology – risks and It’s extremely complex to identify and For our listed corporates, we’ve Scenario B, or Early Action: opportunities as companies assess climate-related impacts on our decided to assess the risks posed An orderly transition in line with develop, or don't adopt, business plans, strategy and 昀椀nancial by global warming across the three the Paris Agreement that limits Taking action: We have worked superior technology to build planning. To overcome the barriers, hard this year to access more industry-based solutions. we have chosen to use a wide range of di昀昀erent climate exploratory scenarios global warming to 1.5°C or below metrics and techniques. We also remain recommended by the Bank of England’s 2°C by 2100. ESG, carbon emissions and other • Physical – risks in the medium adaptable to using the most advanced 2019 Stress Test Methodology and climate data. to long term that may impact and relevant analytical tools currently its subsequent 2021 Climate Biennial Scenario C, or No Additional assets, e.g. infrastructure and available. Exploratory Scenarios. Action: property in certain locations. Although 2100 is further out than our Continuation of current trends, Our scenarios expected liabilities, we acknowledge with little-to-no transition, • Opportunities – there are Although the DWP’s climate risk that the transition and physical leading to at least 3–4°C rise in opportunities within some temperature by 2100. asset classes, e.g. sustainable proposals guided that two scenarios risks under di昀昀erent scenarios are forestry assets that offer a should be included as a minimum, we likely to impact our assets much viable nature-based solution to have chosen to select three scenarios sooner, depending on whether – climate change mitigation. under which to carry out stress testing or when – policy action is taken. of our assets.