24 Pension Protection Fund Climate Change Report 2021/22 METRICS AND TARGETS CONTINUED 18 Climate Value-at-Risk 2021 results by asset class Physical risk Technology opportunities In terms of physical risk, all three Technology opportunities are likely Equities This is because the model projects Equities Climate VaR portfolios are primarily exposed to to bene昀椀t our portfolios most in a Our Equities portfolio would see higher uptake of electri昀椀cation in the extreme heat, tropical cyclones and disorderly transition (1.5°C and 2°C) the greatest Climate Value-at-Risk transportation sector in a disorderly 60% coastal 昀氀ooding, although the sectors and least in a hot house world. Equities under a 1.5°C disorderly transition, world, and Food & Staples do not have k 37.8% most at risk do di昀昀er for each portfolio. see the highest potential bene昀椀t, many technology opportunities to s 50% followed by a 2°C disorderly i Below, we depict the top three sectors with Technology VaR contributing transition. Within our Equities book, compensate for their transition risk. t r40% that contribute the most to Physical up to a positive 15 per cent in a e a 21.0% u VaR within each asset class. 1.5°C disorderly scenario. The UK Energy and Materials are the most l exposed sectors in an orderly or Although year-on-year comparisons a 30% Credit portfolio is minimally exposed e v are di昀케cult, we are pleased to see t 1.7% failed transition. However, Food & a 20% 0.5% 7.2% to technology opportunities so its a reduction of 11 per cent for the m i Staples Retailing and Transportation l 18.2% 18.2% 18.2% 18.2% 18.2% Biggest contributing sectors expected Technology VaR is very close Equities Climate VaR year-on-year, l c a 10% to zero. are most at risk in a disorderly world. t to physical risks by portfolio based on the 1.5°C disorderly transition o T 0 scenario combined with the aggressive 3ºC 2ºC 1.5ºC 2ºC 1.5ºC Taking a more detailed sector physical scenario (which are the worst- hot house orderly orderly disorderly disorderly overview, the sector best positioned case scenarios). Food & for technology opportunities is Heavy Aggressive physical risk Transition risk Staples Manufacturing in the Equities portfolio, High Tech Manufacturing or Heavy Manufacturing in the Credit portfolio Credit or failed transition, but Household & Credit Climate VaR Equities and – depending on the scenario – Overall, Climate VaR is lower for Personal Products is most at risk in Rail in the UK Credit portfolio. Credit than for Equities, ranging a disorderly world. This is potentially 20% Telecoms Utilities For all this analysis, it is important to from 7 per cent to 18 per cent under due to higher electricity prices, value k stress that results are modelled and chain costs that the sector must s 10.3% our 昀椀ve scenarios. Transportation i 16% often based on estimates. and Energy are the most exposed absorb and low exposure to low- t r e a12% carbon technologies. u 5.3% sectors in Global Credit in an orderly l a e v 0.2% 2.4% t 8% Real a Estate m 7.3% 7.3% 7.3% 7.3% 7.3% i l l c4% a t o T 0 3ºC 2ºC 1.5ºC 2ºC 1.5ºC Credit hot house orderly orderly disorderly disorderly Aggressive physical risk Transition risk Banks Energy UK Credit However, on a relative basis, the 1.5°C UK Credit Climate VaR Climate VaR for our UK Credit disorderly transition poses the largest portfolios is substantially lower – threat to the portfolio by some margin, 4.0% Food remaining below 4 per cent even mainly arising from Transportation k 2.7% followed by Telecoms sectors. s for a 1.5°C disorderly transition. This i3.0% is likely due to the high allocation to t r e a u Financials in the portfolio. l UK a2.0% Credit e v t a 0.6% Trans- m 0.2% i l1.0% portation Telecoms 18 The Climate VaR of a company, in any given l c 1.0% 1.0% 1.0% 1.0% 1.0% scenario, is simply the present value of the a t o costs impacts in that scenario divided by T 0 the current enterprise market value of the 3ºC 2ºC 1.5ºC 2ºC 1.5ºC company. The enterprise market value is hot house orderly orderly disorderly disorderly computed as the sum of the market values of a company’s equity and debt. The book Aggressive physical risk Transition risk value of debt is used to proxy the market value of debt at the company level.