Metrics and targets – continued How we calculate MSCI VaR Reporting PACTA and Bank of England Company alignment assessments forward-looking TPI and our Equities portfolio TPI MQ distribution in our Climate VaR portfolio analysis, available climate stress tests We’re also starting to monitor the scenario analysis The TPI tool uses publicly disclosed Equities portfolio via MSCI, allow us to select from a range The PACTA transition monitor tool carbon performance trends and target information collected by FTSE Russell We reviewed our Equities portfolio’s of transition risk scenarios and two assesses exposure to climate transition setting of companies through: and validated by the Grantham distribution of MQ scores, and physical risk scenarios. This gives us risk and has been adapted in part for Research Institute at the London the portfolio is mainly exposed to an idea of the transition and physical TCFD scenario analysis. It analyses the • TPI’s Carbon Performance alignment School of Economics. The TPI companies with a higher MQ score risks to which the portfolios could be portfolio’s company holdings and their assessments We use a variety of tools that o昀昀er database covers more than 400 of of 3, 4 and 4*. We 昀氀ag holdings exposed, under di昀昀erent circumstances: capacity plans in line with an economic • Science Based Targets initiative (SBTi) di昀昀erent ways of running forward- the world’s highest emitting listed that receive a MQ score of lower looking analysis on our portfolios. companies across 16 business transition limiting global warming to 2°C tool for 昀椀nancial institutions Some tools are still in their infancy, and than 3 from the TPI for additional • Physical risks (Aggressive scenario) above pre-industrial levels. It covers the • Our own pilot project on portfolio most only cover the listed corporate sectors. These companies represent review, as it means the company The top three physical risks that most climate-relevant sectors: power, alignment space and consider transition risks. approximately 16 per cent of global may not be taking adequate action our Equities, Credit and UK Credit oil & gas, automotive, steel, aviation, However, even though we can’t get market value and a much larger share on its climate-related risks. Our portfolios are all estimated to be most cement and coal. We have found there are still substantial comprehensive assessments across of global greenhouse gas emissions. stewardship provider also uses the exposed to are coastal 昀氀ooding, limitations to using open-source tools TPI assessments when forming voting extreme heat and tropical cyclones. While initially mandatory for insurance for portfolio-level analysis. One example entire portfolios, the 昀椀ndings can still TPI ranks companies by two recommendations for our companies. is the delivery of these datasets is help inform our conversations with our measures, based on their public • Risks under a 1.5°C scenario companies, the Bank of England climate fund managers. Under this scenario, the Equities and stress test tool also allows other usually a simple spreadsheet with only disclosures. Firstly, it ranks how well one company identi昀椀er provided, so company management deals with Credit portfolios have roughly equal 昀椀nancial institutions – including asset Scenario analysis tools climate transition VaR and physical owners – to assess the vulnerabilities mapping the dataset to our portfolios climate change risks from 0–4* (MQ). Taking action: This informs of their portfolios to adverse climate can be extremely onerous. Another we’re using A score of 0 means no recognition our engagement and VaR. The UK Credit portfolio, however, change and energy transition scenarios. is the limited scope that they often or action, and 4/4* means climate voting strategy. It will also has a di昀昀erent exposure; the physical provide, either in focusing on just one change has been deeply integrated be a consideration in the VaR is nearly three times greater than We have started using the PACTA asset class, or on a small subset of into business operations. It also looks construction of our new the transition VaR. tool, but acknowledge that it only companies/industries. We introduce here some of the analysis tools we are using in our monitoring to at how e昀昀ective they are at achieving climate-aware index for the • Risks under a 2°C scenario covers a relatively small 10–12 per help us understand how our portfolios carbon reduction in line with the highest risk sectors. The UK Credit transition VaR almost cent of the portfolios across the might be impacted in the future, as a Paris Agreement, compared to any doubles when moving from a 1.5°C subset of sectors. However, it provides result of climate change. emissions reduction targets they’ve to a 2°C scenario. There are smaller helpful granularity on the current Taking action: We will review set (Carbon Performance). increases for Equities and Credit. This and projected technology mix of the corporate carbon performance is largely driven at the Scope 1+2 level, underlying companies for the next 昀椀ve and targets to challenge rather than Scope 3. years and compares this with what our managers on their own mix is required to align with certain assessments and engagements, TPI MQ distribution in our Equities portfolio • Aggregate warming potential scenarios. particularly in higher-risk sectors. temperature gauge 140 The Climate VaR reports also provide 120 an aggregate warming potential Setting targets temperature gauge for the portfolios. 100 This year’s assessments indicated a lower temperature gauge for both the 80 Equities and Credit portfolios versus We’re currently reviewing what targets their benchmarks. we feel are most appropriate to set for 60 our portfolios. Number of companies40 Taking action: We are using these We will most likely start o昀昀 with 20 findings to inform our discussions disclosure and coverage-related targets 0 with our managers and to initially, as we’re keen to drive better MQ=0 MQ=1 MQ=2 MQ=3 MQ=4/4* understand their strategy on how corporate reporting as a starting point best to manage these risks. for more accurate risk management. TPI’s MQ score Once we have outputs from our portfolio alignment project, we will also consider how setting alignment-based targets might be appropriate.