13 Pension Protection Fund Climate Change Report 2021/22 STRATEGY AND RISK MANAGEMENT CONTINUED How we assess the risks and opportunities Assessing transition risks Identifying and exploiting • Real estate CASE STUDY Our climate transition scenarios As they are most widely available to us, we’re currently opportunities Construction and buildings account We continue to consider three main using the following modelling tools, methodologies A decarbonising economy presents for nearly 40 per cent of energy and Investing in an urban climate transition scenarios when and forecasts to assess the risks to our portfolios of investment opportunities as well as process-related carbon emissions stress-testing our assets. We believe transitioning to a zero-carbon global economy. risks. We are especially focused on and therefore play a core role in resilience fund 9 that a disorderly transition to Net seeking opportunities where real assets global e昀昀orts to decarbonise . Zero is likely to have a di昀昀erent • MSCI ESG’s Portfolio Climate Value-at-Risk (VaR) – can contribute positively to the global According to the IEA, in order to More than half of the world’s population live in cities impact on assets from an orderly see further detail and advances in the MSCI ESG transition to Net Zero, as well as o昀昀er meet the target of carbon neutrality but urban infrastructure and resilience are increasingly transition. We also feel it is prudent Climate VaR tool on page 23 adaptation and resilience to the impact by 2050, all new buildings and 20 being tested by rapid urbanisation and the impacts of to consider a failed transition • IEA scenarios (from its Energy Technology of a warming climate: per cent of existing ones would climate change. To address this, we invested this year scenario too. Perspectives report), available through the open- need to be zero-carbon-ready as alongside world-leading organisations in a new urban • F orestry 10 source Transition Pathway Initiative (TPI) and the soon as 2030 . resilience fund. The fund will look to invest in 昀椀ve Paris Agreement Capital Transition Assessment Sustainable forestry is one of the areas (see below). The fund is seeking to align with the • Paris Disorderly, or Late Action: (PACTA) tools few viable, nature-based solutions R eal estate accounts for just under Paris Agreement alongside having dedicated resilience A sudden disorderly transition to deliver carbon sequestration six per cent of the total NAV of our objectives, which will measure its contribution to the • The PRI’s Forecast Policy Scenario under its Inevitable and help mitigate CO emissions. investment portfolio. In line with UN SDGs (with a carried interest linked mechanism to a temperature rise of 1.5°C or Policy Response 2 our overall approach to climate below 2°C by 2100. Well-managed and certi昀椀ed forests to resilience / impact objectives). As such it will also Every tool complements each other but we are primarily also contribute to biodiversity risks, consideration and assessment seek to qualify for Article 9 fund status under the • Paris Orderly, or Early Action: using MSCI Climate VaR to inform our climate risk and help adapt to climate-related of transition and physical risks Sustainable Finance Disclosure Regulation (SFDR). An orderly transition in line management across the listed portfolios as its coverage physical risks such as 昀氀ooding and in our Real Estate portfolio are The fund’s 昀椀nancing model is novel in combining with the Paris Agreement that is comprehensive. We use TPI and PACTA to support this soil erosion. Over the year, our a vital part of our approach. As institutional capital with that of development 昀椀nance limits global warming to 1.5°C with additional analysis on speci昀椀c high-impact sectors. investments in forestry have grown our real estate investments are institutions, enabling it to meet di昀昀erent risk pro昀椀les or below 2°C by 2100. by 20 per cent to approximately predominantly managed externally, whilst ensuring stability. The manager will track a suite As mentioned earlier, we have also started asking our £1 billion. As well as reporting our focus is on ensuring robust of metrics related to the carbon footprint of assets, • Failed Transition, or No Liquids managers to report transition scenario analysis on certi昀椀cation progress, all of monitoring and oversight of our labour standards and community development. Our Additional Action: Continuation as part of the enhanced TCFD data we require from our external fund managers now managers’ capabilities. See page 26 investment is targeted towards OECD countries. of current trends, with little-to- them, to compare and contrast with our own results. provide some data on carbon for more detail. no transition, leading to at least sequestration across our forestry • Opportunities through The fund’s investment focus 3–4°C rise in temperature by 2100. Assessing physical risks assets. See page 27. low-carbon technologies We continue to inquire how our fund managers are • Infr astructure We use the MSCI Climate VaR tool • Urban mobility and related services assessing physical and adaptation risks across our Sustainable infrastructure is an to identify how listed companies • Energy transition and adaptation of portfolios, especially among our real assets. attractive opportunity, both helping exposed to opportunities from low- existing services Physical risk analysis is one area where we have to reduce the carbon emissions carbon technologies might bene昀椀t seen slower progress over the year than intended, related to economic development our portfolios in the future under • The built environment (schools, hospitals, mainly due to a lack of usable external tools and the and providing communities with various scenarios. public/community infrastructure) additional resource required. However, we have seen greater resilience to the impacts of T echnology opportunities are improvements in the MSCI Climate VaR tool to further climate change. identi昀椀ed based on a company’s • Smart city solutions incorporate physical risks over the year, and we have We invest with infrastructure current green revenue estimates • Circular economy and resource management been leveraging this in our assessments of our Equities, managers that take a diligent and and low-carbon technology Global Credit and UK Credit portfolios – see page 24. robust approach to measuring capacity. MSCI estimates current climate risks and who are able green revenues based on a to report on their progress. This Sustainable Impact classi昀椀cation of year, we invested in a pioneering the company’s products and uses urban resilience fund to support patents as a proxy for low-carbon 9 “The buildings and construction sector accounted for 36% of 昀椀nal technology capacity. MSCI allocates energy use and 39% of energy and process-related carbon dioxide cities in delivering critical resilience (CO ) emissions in 2018, 11% of which resulted from manufacturing future green revenues (and future 2 infrastructure projects – see case building materials and products such as steel, cement and glass”. Global study, right. green pro昀椀ts) to each sector and Status Report for Buildings and Construction 2019 – Analysis - IEA then each company gets a share of 10 “buildings remain o昀昀 track to achieve carbon neutrality by 2050. the revenues based on its current To meet this target, all new buildings and 20% of the existing building market share and its modelled stock would need to be zero-carbon-ready as soon as 2030”. Tracking patent share. Buildings 2021 – Analysis – IEA